Introduction
On 2 March 2022, the Supreme Court of Western Australia delivered judgment in Lanskey Constructions Pty Ltd v WesTrac Pty Ltd [2022] WASC 90, dismissing an interlocutory injunction obtained on an urgent basis seeking to prevent a call on bank guarantees given under a construction contract.
The case reflects a classic battle of wills: a principal not wanting to be restricted in calling on its security and a contractor who, in a pre-emptive strike, effectively asks the Court to add new terms to the Contract which have the effect of restricting the principal’s ability to have recourse to its security.
Background
In April 2020, WesTrac Pty Ltd (WesTrac) engaged Lanskey Constructions Pty Ltd (Applicant) to design and construct an industrial facility in Welshpool, Western Australia. Under the amended AS4902 form of contract, Applicant was required to provide security in the form of unconditional bank guarantees to the value of 2.5% of the Contract Sum. Relevantly, WesTrac was entitled to call on the guarantees, to meet any ‘bona fide claims’ that it had against Applicant arising out of, or in connection with, the Contract.
On 8 February 2022, WesTrac issued a letter of demand seeking payment of liquidated damages (LDs).
Applicant disputed WesTrac’s entitlement to liquidated damages on the basis of an alleged discussion between its State Manager and an Executive Manager of WesTrac on 11 January 2021, to the effect that liquidated damages would not be levied.
Applicant also said that the alleged agreement was confirmed in later email correspondence which stated that (emphasis added) ‘no LDs would apply whilst trying to finalise the works at Welshpool, and conversely, Applicant would not seek any delay costs’.
In the context of a dispute about those issues, Applicant issued a letter to WesTrac requesting it to provide an undertaking not to call on the bank guarantees and noting Applicant’s intention to lodge an urgent application for injunctive relief should the undertaking not be provided. WesTrac did not give the undertaking sought.
In the afternoon of Friday, 25 February 2022, and in the absence of the undertaking sought, Applicant obtained from the Court an urgent return date for an ex parte hearing to prevent WesTrac from calling on the remaining bank guarantees. On the first return date, at 8.30am the following Monday, WesTrac applied for and was granted leave to oppose the application and the matter was heard on a final basis that afternoon.
Judgment
In considering the parties’ submissions, Justice Hill affirmed the established test for the assessment of interlocutory injunction applications as:
- whether there is a serious question to be tried; and
- whether the balance of convenience favours the grant of the injunction.1
Serious Question to be Tried
Justice Hill considered the terms of the Contract and observed that WesTrac’s right to draw on the bank guarantee was designed as a risk allocation measure to render Applicant, rather than WesTrac, ‘out of pocket’ for any ‘bona fide claim’ prior to the final resolution of the dispute.2 Her Honour accepted the submission that the Contract set a low threshold to have recourse to the payment, conferring a ‘wide discretion which is constrained only by the need that it act honestly’.3
Justice Hill found that a ‘bona fide claim’ does not necessarily equate to an entitlement and requires only that a demand be made in good faith under honest and genuine belief 4 in circumstances where such a claim is not ‘specious, fanciful or untenable’.5 In reaching this conclusion, Justice Hill rejected Applicant’s submission, made in reliance on Ideas Plus Investments Ltd v National Australia Bank Ltd [2006] WASCA 215,6 that ‘reckless indifference to the truth’ should prevent a claim from being ‘bona fide’.7
Applicant submitted that, by reason of the alleged oral agreement of 11 January 2021, WesTrac did not have a ‘bona fide claim’ and that, in the circumstances, WesTrac’s demand was unconscionable. In particular, Applicant submitted that there was no evidence adduced by WesTrac to support its bona fide claim for liquidated damages. Tactically, WesTrac did not lead any evidence about the alleged oral agreement.
Justice Hill rejected the submission that because WesTrac had not led any evidence its claim was not a ‘bona fide claim’ or that it was otherwise ‘unconscionable’. Her Honour found that it is a defendant’s prerogative to contest whether a plaintiff had established a prima facie case and is entitled to put the plaintiff to proof while not being obliged to adduce any evidence of its own.8
In order to be satisfied that Applicant had a prima facie case that WesTrac did not have a ‘bona fide claim’ in respect of liquidated damages (and have grounds to grant the interlocutory injunction), Justice Hill stated that she would need to be satisfied that:
- the parties had entered into an oral agreement on 11 January 2021;
- that the agreement prevented the defendant from making any claim for liquidated damages; and
- there was no serious argument in respect of either of these matters.9
Her Honour concluded that Applicant had not established that it had a strong prima facie case of WesTrac having acted in bad faith in making its claim for liquidated damages.10 In making this assessment, her Honour found that on the evidence before the Court, WesTrac’s claim for liquidated damages cannot be said to be unarguable, specious or not made in a good faith or bona fide capacity.11
Justice Hill ultimately determined that there was no basis for granting an injunction.12 Her Honour found that Applicant ‘s failure to sufficiently establish a prima facie case that there was a serious question to be tried was enough to dismiss the application itself.13
Balance of Convenience
However, her Honour also considered the balance of convenience and Applicant’s submission that an injunction should be granted because of a risk of reputational damage for Applicant if WesTrac was permitted recourse to the bank guarantees.
Justice Hill found that any reputational risk that arises in circumstances where a bank guarantee is presented for payment was a risk assumed by Lanskey and inherent in the commercial use of bank guarantees.14
Her Honour also agreed that, if there was reputational damage, Applicant could mitigate the risk by tendering a cash sum equal to the amount of the bank guarantees, consistent with the offer made by WesTrac on the Sunday evening before the hearing.15
Her Honour concluded that the balance of convenience did not favour the grant of an injunction.16
Conclusion
Her Honour’s decision is significant because of the findings about reputational damage. Reputational damage is often submitted as warranting an injunction to restrain the call on a security. Her Honour found that reputational damage is an inherent part of the risk assumed by a party advancing a bank guarantee under a construction contract. This is consistent with the broader approach that Courts are taking to security clauses as being a risk allocation tool.
Lanskey v WesTrac affirms the following principles:
- the tactical advantage sought to be obtained by an urgent injunction can be met with resistance and means to avoid any asserted adverse reputational consequences, and runs the risk of being brought on for hearing at the first return date;
- if the plaintiff has not established a basis for an injunction there is no need for a defendant to tender evidence to the contrary; and
- her Honour’s interpretation of ‘bona fide claim’, and dismissal of a different, or lesser, standard of ‘reckless indifference to the truth’ (which was not established in any event) offers guidance as to when a dispute will be considered to meet this threshold.
This article was written by Lucas Keogh Partner, Clancy Lambe, Solicitor and Alexander Lalor, Law Graduate.
1 Lanskey Constructions Pty Ltd v Westrac Pty Ltd [2022] WASC 90, [26] (Hill J).
2 Ibid [36].
3 Ibid [40].
4 Ibid [39].
5 Ibid [41].
6 Ideas Plus Investments Ltd v National Australia Bank Ltd [2006] WASCA 215, [93] (Steytler P).
7 Lanskey Constructions Pty Ltd v Westrac Pty Ltd [2022] WASC 90, [44] (Hill J).
8 Ibid [47].
9 Ibid [48].
10 Ibid.
11 Ibid [53].
12 Ibid [54].
13 Ibid [56].
14 Ibid [58].
15 Ibid [60].
16 Ibid [61].
