Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98

What the court decided

Lend Lease agreed to build a new refined sugar plant for Sugar Australia at Yarraville, under a contract substantially adopting a standard form [4]. The contract required Lend Lease to provide two unconditional bank guarantees, together $4,190,000 [73]. Under general condition 5.2 (GC 5.2), the security was available to the principal whenever it "may claim (acting reasonably) to be entitled to" payment of monies or an indemnity, reimbursement of monies paid to others or other monies [76]. Each party purported to terminate the contract in 2011 [82]. On 8 August 2014 Sugar Australia gave notice of its intention to have recourse to the guarantees, for completion and defect costs [83]. The primary judge granted Lend Lease an interlocutory injunction restraining recourse before the trial or further order [86].

The primary judge considered that the construction of the clause was best left to the trial (or a separate question) [88]. In his view there was a serious issue to be tried on the construction of the clause and, if "acting reasonably" involved an objective analysis, on whether Sugar Australia was acting reasonably [92]. He also found a serious issue to be tried about whether the recourse notice was valid, and held that the balance of convenience strongly favoured an injunction [93], [95].

In the Court of Appeal, Kaye JA concluded that the appeal should be allowed and the primary judge's order set aside [239]. Osborn and Ferguson JJA, in joint reasons, agreed with his conclusions and with his reasons, subject only to the matters set out in their own reasons [3], [69].

Kaye JA said that ordinarily, on an application to restrain recourse to security given under a building contract, a court should decide a contested issue of law that is a necessary step to its conclusion, unless that is not practicable or appropriate [111]. Here, resolving the construction was a necessary prerequisite to deciding whether there was a serious issue to be tried about whether Sugar Australia had acted reasonably [122]. He held that the failure to construe the clause was appellable error in the exercise of the judge's discretion [128].

Osborn and Ferguson JJA treated the judge's decision to leave construction to the trial as discretionary, not to be lightly disturbed [57], [59]. They said the ordinary practice in such a case is to construe terms that bear on basic issues and can be construed without further evidence [53]. In their view the clause was bespoke and raised no issue of general practice and importance [61]. They held that the matters the judge relied on did not outweigh the considerations favouring the ordinary practice [64]. They said the judge was bound to construe the clause "at least on a provisional basis" if its commercial purpose was to be given effect [38].

Osborn and Ferguson JJA held that GC 5.2 was intended to allocate risk until a dispute was resolved, a consideration of fundamental importance in assessing whether an injunction carried the lower risk of injustice [67].

On construction, Kaye JA held that the clause did not require Sugar Australia to establish an entitlement, and a claim to one was sufficient [141]. The words "acting reasonably" did not in express terms require the claim itself to be reasonable, or require it ultimately to be proven, and focused on Sugar Australia's conduct when it made the claim [142]. He rejected the submission that the words required no more than subjective good faith [143]. He held that the clause required Sugar Australia to be acting reasonably in an objective sense, on the information and facts it then knew or reasonably ought to have known [144]. Osborn and Ferguson JJA described the qualification as requiring only a claim made acting reasonably, "not that it ultimately be judged objectively valid" [37]. Kaye JA also held that a claim to an indemnity was not confined to liabilities Sugar Australia had already incurred or paid [149].

Kaye JA found a serious issue to be tried as to whether Sugar Australia acted reasonably in claiming the cost to complete and several defect items [197]. The question whether it had done so in claiming the increased cost of the works remained to be resolved at trial [169]. A controversy about the events leading to Lend Lease's show cause notice was not sufficient by itself to show that Sugar Australia was not acting reasonably, because the clause allocated that risk to Lend Lease [171]. The serious issue on that claim arose from material going beyond such a controversy [172], [174]. Kaye JA found no serious issue to be tried for some defect claims, including two items concerning leaking buildings and recladding [192], [195], [197]. On his summary those claims totalled $1,999,951, so the primary judge erred in restraining recourse at least for that amount [230].

Kaye JA rejected the challenge based on the misnaming of Lend Lease, and held that including amounts arguably beyond the contractual limit of liability did not invalidate the notice, at least to the extent the claims were within the limit [225], [229].

On the balance of convenience, Kaye JA said the evidence of reputational damage was substantially assertion, and that by agreeing to the clause Lend Lease had assumed the risk of a call [233]. An undertaking by Sugar Australia's major shareholder to repay the security answered the risk that it could not meet an award of damages [234], [235]. Lend Lease had not shown that the balance of convenience favoured retaining the injunction for an amount in excess of $1,999,951 [237].

Why it matters

For a security clause in this form, the decision indicates that, on a contractor's application to restrain the principal's recourse, the court should ordinarily construe the clause at the interlocutory stage where that can be done without further evidence, rather than treating competing constructions as a serious question to be tried.

On this clause, "acting reasonably" was read as an objective standard, applied to what the principal knew or ought to have known when it made its claim, and not as a requirement that the claim be proven. Because the clause was held to allocate to the contractor the risk of being out of pocket pending resolution, a controversy underlying the claim was not enough by itself to show that the principal was not acting reasonably.

The findings about which claims raised a serious issue were made on the interlocutory material and did not decide whether the principal in fact acted reasonably. The Court treated the clause as bespoke, so the construction may not carry over to a differently worded security clause.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.