Bank guarantees are a familiar presence in construction contracts. They are seen to be “as good as cash” and the holders of bank guarantees call on the guarantees when there is a dispute with a contractor or subcontractor providing the bank guarantee.
Bank guarantees are often expressly stated to be paid on demand without any condition precedents. The Court will generally not restrain payment of the bank guarantee, but there are a few circumstances where the Court may grant an injunction against calling of the bank guarantee. They are:
A contractor may seek to restrain the calling of a bank guarantee in circumstances where:
- the beneficiary may be calling on the security fraudulently; and / or
- where it can prove that the issuing bank knows that a demand for payment has been made or will be made will be fraudulent.
Unconscionable conduct contrary to the ACL
Secondly, the contractor must demonstrate that the Principal’s call on the bank guarantee was “unconscionable” under the ACL. The ACL provides two grounds of pursuing unconscionable conduct:
- unconscionable conduct within the meaning of the unwritten law (ACL, s20); and
- engaging in unconscionable conduct in connection with the supply or possible supply of goods or services or the acquisition or possible acquisition of goods or services from a person (s21 ACL)
A breach of a contractual promise to not call upon the bond
Alternatively, there may be “clear words” in the underlying contract which limits the principal’s rights to call on the bank guarantee. In Pearson Bridge v State Rail Authority (1982) 1 ACLR 81 it was held that the following clause prevented a call on the guarantee due to the word ‘if’ which signified that only in certain circumstances the Principal could call on the Security.
“If the Principal becomes entitled to exercise all or any of his rights under the contract in respect of the security the Principal may convert into money the security that does not consist of money.”
(Pearson Bridge v State Rail Authority (1982) 1 ACLR 81)
Injunctive Relief to Prevent Calling of the Security
To be successful in obtaining injunctive relief to prevent a call upon a bank guarantee, there must be the following:
- A serious question to be tried regarding a party’s entitlement to recourse to security. Importantly the Court does not readily favour a construction that is inconsistent with that commercial purpose.
- The Balance of convenience favours recourse to Bank Guarantees.
“The purpose of the Bank Guarantees, and the provisions in the Subcontract relating to them, would be defeated if JKC is restrained from calling on the Bank Guarantees until the dispute concerning extensions of time and liquidated damages has been resolved by arbitration”
(CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd  WASC 112)
In summary, it is very difficult to prevent a bank guarantee from being called upon.
If you would like to discuss this article with us further, please contact Brett Vincent, partner, or Mark Lucchitti, Senior Paralegal, on (02) 9261 5900.