Calling on security



A party may have access to the security where the contract allows for that to occur.

Even though security provided may be unconditional, there are often restrictions in contracts which may prevent or restrict the ability to call on the security.


EXAMPLE



AS 2124, clause 5.5:



A party may have recourse to retention moneys and/or cash security and/or may convert into money security that does not consist of money where:
(a)
the party has become entitled to exercise a right under the Contract in respect of the retention moneys and/or security; and
(b)
the party has given the other party notice in writing for the period stated in the Annexure, or if no period is stated, five days of the party's intention to have recourse to the retention moneys and/or cash security and/or to convert the security; and
(c)
the period stated in the Annexure if no period is stated, five days has or have elapsed since the notice was given.

In the example, there are three conditions that must be satisfied before a call can be made on the security: firstly, the principal has an entitlement to do so, secondly, notice has been given, and finally, that the notice period has elapsed.

Importantly, if the contract requires a principal to show an 'entitlement', and not just a 'claim', to be paid by the contractor, no call on the security can be made until the entitlement has been established.


If the contractor wishes to prevent the principal from calling on the security, it may bring court proceedings seeking an injunction to restrain the principal. It is also possible (but much more difficult) to obtain a 'mandatory' injunction, which in circumstances such as these might be sought to require a principal who has already made a demand and received payment to place the money obtained into a separate bank account.

It is generally difficult to obtain court orders granting an injunction stopping the security from being called unless:


  • the contract contains a restriction on the principal's right to call on the security;
  • there is a genuine dispute over whether the principal is entitled to money from the contractor; and
  • the 'balance of convenience' is to leave the security intact until that dispute is resolved.

CASE STUDY



Ceresola TLS AG v Thiess Pty Ltd & John Holland Pty Ltd

[2011] QSC 115



Facts


  • The principal applied for an injunction against the contractors to restrain the contractors from calling on performance security.
  • The principal had contracted to supply the contractors eight tunnel forming machines for use associated with the construction of major infrastructure.
  • The contractors submitted that due to the unconditional nature of the bank guarantee, there was no contractual restriction on the call.

Result


  • The court dismissed the application on the grounds that there was no proper basis for the grant of an injunction.
  • The court held that clear words are required to prevent the beneficiary of an unconditional bank guarantee from calling on that guarantee.
  • The court further held that in the absence of any allegation of fraud or unconscionabililty, there was no reason on a proper construction of the agreement to deprive the contractors of the opportunity to call on the unconditional bank guarantee.

CASE STUDY



Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd

(1999) 15 BCL 158



Facts


  • The owner (Kheng) asserted a right to damages arising from the contractor's (Reed's) failure to rectify defects and attempted to call on a performance bond for those damages.

Result


  • The court granted an injunction in favour of the contractor because the owner did not, at that point, have an entitlement to payment of damages, only a genuine claim to damages.

However, the approach of different courts has been inconsistent and often contradictory. That is, generally because an injunction is a 'discretionary' remedy, and different courts will take different views on what the critical and decisive issues are in the cases before them.

CASE STUDY



Australian Gasfields Ltd v Kvaerner Process Systems Pty Ltd

[2001] WASCA 320



Facts


  • After practical completion of a gas plant, Australian Gasfields asserted that the plant was unreliable which had led to substantial lost production.
  • The contract provided that the principal could deduct 'debt and moneys due' from the contractor's security.
  • Australian Gasfields attempted to call on the security to satisfy its claims for losses arising from lost production.

Result


  • The court refused to grant an injunction.
  • The security had been provided as a risk management device and the party having the benefit of the security (the principal) should be able to call upon it for a genuine claim irrespective of the strength of the claim.

Often, the real issue is whether the principal should or should not have access to the security before the dispute between the parties has been resolved.

CASE STUDY



Walton Construction (Qld) Pty Ltd v Venture Management Resources International

[2010] QSC 31



Facts


  • The principal sought access to security when the contractor failed to pay an amount certified by the superintendent for defective work/materials.
  • The contractor applied for an injunction restraining the principal from accessing the security because:
  • the superintendent failed to comply with the certification process under the contract; and
  • the superintendent was unlicensed and therefore the certification had no effect.

Result


  • The court granted the injunction.
  • There were serious issues to be tried in respect of process compliance and the performance of the unlicensed superintendent.
  • It was in the balance of convenience to leave security intact until the dispute was resolved.

back to top | next page