Lanskey Constructions Pty Ltd v Westrac Pty Ltd [2022] WASC 90

Tom French |  Penny Bond |  Conor McCavana

Key takeout

• A contractual requirement that a call on security be based on a bona fide claim requires the caller to do no more than demonstrate that it acted honestly and had a proper foundation for its claim.
  
• Where the security is a risk allocation measure pending the final determination of the parties’ rights, the court must consider the agreement as to who should bear the financial risk pending final determination.

Facts

This case concerned an application by Lanskey Constructions Pty Ltd (Lanskey), who was the contractor,  to prevent Westrac Pty Ltd (Westrac) from having recourse to an unconditional bank guarantee provided by Lanskey.

Lanskey and Westrac entered into an amended AS 4902-2000 for Lanskey to perform works for the Westrac Capacity Expansion Project in Welshpool (contract).

Under the contract, Lanskey provided to Westrac bank guarantees, capable of conversion into cash at any time (security). Westrac was entitled to have recourse to the security in four circumstances, which relevantly included to meet any bona fide claim that Westrac had against Lanskey under the contract. 

Lanskey failed to provide practical completion by the dates for practical completion under the contract. Westrac claimed payment of liquidated damages (LDs) under the contract and reserved its right to have recourse to the security.

Lanskey disputed Westrac’s claim for LDs on the basis that it alleged that a Westrac employee had orally agreed that LDs would not be levied by Westrac (oral agreement). Westrac denied that it had waived its contractual entitlement to LDs.

Lanskey’s application for an injunction

Lanskey sought an injunction restraining Westrac from calling on the security on the following three bases:

• If Lanskey’s injunction was not granted, its rights may be lost on a final basis whereas there would be no prejudice to Westrac if the interim injunction was ordered.
  
• In light of the asserted oral agreement, Westrac did not have a bona fide claim against Lanskey.
  
• Westrac did not file sufficient evidence challenging the asserted oral agreement.

Westrac defended Lanskey’s application on the following three bases:

• Westrac’s claim was bona fide given that Westrac had disputed the oral agreement in correspondence with Lanskey.
  
• Lanskey had not established a prima facie case that Westrac’s call on the security was unconscionable, particularly given that any call on security was conditioned only on an assertion of a right (notwithstanding any dispute).
  
• Damages were an adequate remedy and therefore the balance of convenience did not favour the injunction being granted.

Decision

The court refused to grant the injunction preventing Westrac from having recourse to the security. In reaching its decision, the court reiterated two general principles:

1. The court was required to find that there was a serious question to be tried and that the balance of convenience favoured the grant of the injunction.
   
2. The court would not restrain payment under an unconditional obligation unless there had been: (a) fraud; (b) unconscionability; or (c) breach of a contractual promise.

In respect of whether there was a serious question to be tried, the court’s starting position was to consider the reference to bona fide claim in the security clause. A party will have a bona fide claim if it made a demand in good faith with an honest and genuine belief that it was entitled to the amount demanded under the contract. The belief must be more than subjective and requires a real foundation. 

On the evidence provided in respect of the oral agreement, the court was not satisfied that Lanskey had established that Westrac did not have a bona fide claim for LDs.

The court noted that Westrac had a wide discretion under the security clause and, based on the evidence presented – namely that there was a dispute between the parties in respect of the oral agreement – it was not satisfied that Westrac’s claim for LDs was not a good faith demand.

The court was also not satisfied that the balance of convenience favoured the granting of the injunction. The security clause was a risk allocation measure by which the parties had agreed that Lanskey would be ‘out of pocket’ pending final resolution of any dispute between the parties, and the injunction would defeat the purpose of that agreed risk allocation.

Further, while Westrac’s call may result in Lanskey suffering additional costs and reputational risks, Lanskey had agreed to those risks when it agreed to provide the security under the contract. The court noted that Lanskey could have tendered an amount equal to the security to Westrac to avoid the call on the security in any event.

The case is a reminder about the court’s treatment of unconditional security clauses and the threshold for establishing a bona fide claim. It is important for parties to consider the risk allocation provided in security clauses, as that risk allocation will be informative to the courts if there is a dispute.