Saipem Australia Pty Ltd v GLNG Operations Pty Ltd [2017] QSC 294
This case considered the operation of section 67J of the Queensland Building and Construction Commission Act 1991 (Qld) (QBCCA).
The law
Section 67J of the QBCCA provided that a party to a building contract can recover a security or retention amount owed under the contract, provided they give written notice of their intention to do so etc.
Subsection 2 qualified that in order to be compliant, the notice must be given within 28 days after the contracting party becomes aware, or ought to reasonably become aware, of their right to retain or obtain the amount owed. Section 67E of the QBCCA rendered any term of a building contract which does not comply with section 67J unenforceable.
The Facts
Saipem and GLNG Operations entered into an agreement for the construction of a gas transmission pipeline.
Saipem advised GLNG operations they were experiencing cash flow problems. In order to assist, GLNG Operations agreed to certain advance payments, ‘Milestone Advance Payments’. The contract provided for two bonus payments if the work was completed within a specific time window (the ‘bonus window’).
The contact expressly outlined that GLNG Operations was able to set off or deduct any amount due payable to Saipem under or in relation to the Contract or the Works, in respect of the Milestone Advance Payments. Clause 60.5 required Saipem to provide bank guarantees to GLNG Operations for an amount equal to the Milestone Advance Payments (“Milestone Advance Security”).
The Dispute
After completion the work, a dispute arose between the parties regarding the extension of the bonus window. GLNG Operations called on repayment of the balance of the Milestone Advance Payments, and Saipem sought to set off its liability to repay against its asserted entitlement to the bonus payments.
Saipem applied to court to prevent GLNG Operations from calling on the milestone payment security.
GLNG Operations argued that section 67J should be read down in order to be limited to only payments under building contracts for building work.
The court rejected the proposition that section 67J of the QBCCA precluded reliance on the Milestone Advance Security. The court saw no reason to limit the provision, noting at [36] that “a building contract need not be a contract which is exclusively concerned with building work”.
Complex arguments ensued.
The Decision
The Court noted that Saipem did have a case for equitable set off.
In determining the application for the injunction the Judge addressed the question of the balance of convenience and held that bank guarantees had the commercial purpose of being regarded equivalent to cash.
The court referred to the decision in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd emphasising that the purpose of bank guarantees in contracts was to provide security for any valid claim against the contractor, and to allocate risk between the parties pending the resolution of any dispute against them.
This Judge outlined the general rule that a court will not enjoin the issuer of a performance guarantee or bond noting that these principles in conjunction with the commercial background of the contract, absent clear wording, do not allow for a construction inconsistent with an agreed allocation of risk in a contract.
Thus, in light of the parties’ agreement on the allocation of risk regarding who would be out of pocket in the case of a dispute, his honour held that the balance of convenience lay in GLNG Operations favour, and the injunction was not granted.
Effect of the decision
This decision confirms the highly regarded nature of bank guarantees by the courts. It provides authority for the the proposition that the courts will not allocate risk in a contractual dispute in a manner which is adverse to that as represented in the contract.
This publication considers legal and technical issues in a general way. It is not intended to be legal advice. Any legal advice is qualified on the basis that the reader should immediately confirm the information relied upon with Merlo Law. We look forward to being of assistance.
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