Lend Lease Services Pty Ltd, contracted to construct a refined sugar plant for Sugar Australia Pty Ltd, granted performance bonds totalling just over $4 million. Alleging delayed completion, failure to comply with the principal’s lawful directions and other breaches, Sugar gave Lend Lease a five-day notice of its intention to call on those bonds to cover its losses. Lend Lease applied for an urgent interim (temporary) injunction to restrain Sugar from cashing in the bonds before the alleged breaches had been determined on the evidence after a trial.
The Victorian Supreme Court granted Lend Lease the injunction, saying no payment would be available under the bond unless and until Sugar proved that it was entitled to the damages which the bonds were there to secure. Sugar appealed to the Victorian Court of Appeal which allowed Sugar’s appeal, reversed the Supreme Court’s decision and discharged the injunction. Sugar was then free to call on the bonds without first having to prove its underlying claims against Lend Lease.
In allowing Sugar’s appeal, the Victorian Court of Appeal reaffirmed the following principles stated in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd  3 VR 812:
1. Performance bonds give principals security for payments which contractors might owe them under a construction contract at some future point in time when the contractor may no longer be able to make those payments.
2. Performance bonds also shift the risk of being out of pocket while the parties are waiting for determination of a dispute under a construction contract, from the principal (which has to make progress payments in the meantime) to the contractor (which receives those payments in the meantime).
3. It would defeat these purposes if performance bonds were not payable until determination of the very claims they are designed to secure.
4. However, before having recourse to the bonds, the principal must have a genuine claim against the contractor and cashing in the bonds must not cause overwhelming injustice to the contractor.
5. This means that a contractor’s application to restrain a call on its performance bond will be denied if:
(a) the principal has an arguable claim against the contractor which could possibly succeed at a trial;
(b) recourse against the bond is reasonable in light of that arguable claim; and
(c) there is no reason in justice why the Court should prevent the principal’s recourse to the bond (for example, significant reputational damage to the contractor, a real risk that the principal will be unable to compensate the contractor for losses resulting from the pay-out should the principal’s claims fail and no real inconvenience to the principal if recourse to the bond monies were refused).
This decision should give principals renewed confidence that their right to cash in a contractor’s bank guarantee to secure a genuine claim under a construction contract will not be restrained except in the most unusual circumstances.
This is only general information and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.