Descon Group Australia Pty Ltd v 35 Merivale Pty Ltd [2023] QSC 276

Sian Keast  | Mark Wheelahan | Aidan Kleynhans

Key takeout

If a contract requires certain preconditions to be fulfilled before the right to call on insurance bonds or bank guarantees is activated, a beneficiary can be restrained from having recourse to the security if those preconditions are not satisfied. This is the case even where:

• the security is described as unconditional as between the beneficiary and the third party security provider; and/or
• the security is understood as being for the purpose of allocating the risk of being out of pocket pending the resolution of a dispute.

In this decision the preconditions had been satisfied and the court dismissed the contractor’s application to restrain the beneficiary’s recourse to the security.

Facts

35 Merivale Pty Ltd (Merivale) entered into a contract with Descon Group Australia Pty Ltd (Descon) for the construction of a residential apartment building (contract).

The contract provided that Descon was to provide security in the form of unconditional and irrevocable insurance bonds from Vero Insurance (Vero).

Under clause 5.2 of the contract, Merivale was entitled to have recourse to the bonds in circumstances where:

• a debt arising under the contract remains unpaid after the time for payment (or if there is no time for payment specified, then after 5 business days after demanding payment); or
• a claim to payment by the Principal remains unpaid after 5 business days after demanding payment.

After construction work fell behind schedule, the parties reached a commercial solution which led to the execution of two side deeds. Relevantly, the First Side Deed contained clause 9.1(d) which stated that the security provided under the contract must be:

‘capable of being called upon immediately and without notice or reference to, or the consent of, the Builder where:

• work has been taken out of the hands of the Builder or the Building Contract has been terminated…’

Disputes

Disputes arose between the parties. Descon made significant progress claims, while Merivale considered that Descon owed it $3,557,275.

Citing delay and other breaches of Descon’s obligations, Merivale issued a show cause notice. Descon purported to show cause, but nonetheless Merivale invoked clause 39.4 of the contract which provided that:

‘If the Contractor fails to show reasonable cause by the stated date and time, the Principal may by written notice to the Contractor … take out of the Contractor’s hands the whole or part of the work remaining to be completed…’

Descon became concerned that Merivale would call on the insurance bonds, and sought an interlocutory injunction restraining Merivale from calling on the insurance bonds, and a freezing order to the same effect.

Decision

The court refused to grant Descon the injunction or freezing order which it sought.

The security provisions

Davis J observed that while the insurance bonds were unconditional as between the Principal and Vero, the contractual terms between Merivale and Descon required preconditions to be met before Merivale’s right to call upon the bonds was enlivened.  

Merivale argued that the security provisions should be understood as a risk allocation device, which gives effect to an agreement as to which party shall be out of pocket pending resolution of a dispute. It alleged that allowing an interlocutory injunction would defeat that agreed objective. 

The court observed that while a purpose of risk allocation is relevant to the proper construction of the contract, it is not determinative. It noted that clauses 5.2 and 9.1 each provided express contractual preconditions to Merivale’s recourse to the bonds, which equally represent a bargain reached by the parties. The security provisions could not be understood as preventing Descon from mounting a claim for injunctive relief where it establishes a prima facie case that the contractual preconditions have not been satisfied.

Interlocutory injunction

To be granted an interlocutory injunction, Descon was required to establish that:

• there was a prima facie case that Merivale was not entitled to call on the bonds; and
• the balance of convenience favoured the grant of the injunction.

Prima facie entitlement

Descon argued that it had provided a show cause response, and thus Merivale was not entitled to take the contract out of its hands under clause 39.4. The court held that Descon’s response to the allegation that the build was behind time was weak. It found that Descon was unable to adduce any evidence to throw doubt on Merivale’s evidence of delay, and was therefore unable to make out a prima facie case that Merivale did not have the right to take the contract out of its hands. It follows that Descon was unable to make out a prima facie case that Merivale did not have the right to call on the bonds pursuant to clause 9.1(d) of the First Side Deed.  

Balance of convenience

Even if Descon had made out a prima facie case, the balance of convenience favoured Merivale. While both parties had money claims against each other, Merivale had a certified claim while Descon’s progress claims were not certified at the time the contract came to an end (and therefore not payable).

Freezing order

The main considerations for the grant of a freezing order are:

• the strength of the claimant’s case;
• risk to integrity of prospective court process of execution enforcement; and
• the interests of justice.

Noting that Descon was unable to make out a prima facie case and that there was no evidence to suggest that Merivale would be unable to meet any damages award (in the event that it was ultimately unsuccessful), the court refused to grant a freezing order.