WA Supreme Court on restraining the enforcement of performance bonds

By 20/02/2016Contract
performance bond

The plaintiff applied for an interlocutory injunction to restrain the defendant from realising a performance bond given in connection with a contract for the completion of engineering work on the Roy Hill Iron Ore project in Western Australia. The case is Laing O’Rourke Australia Construction Pty Ltd v Samsung C&T Corporation [2016] WASC 49 (17 February 2016).

Whilst the decision turned on its own facts it contains a helpful summary of relevant legal principles.

Legal principles (at [21]-[25])

  1. The usual principles governing the grant of interlocutory injunctions apply in the case of a performance bond, subject to the following considerations.
  1. As the enforcement of a performance bond will generally have the practical effect of granting final relief, it is desirable for the Court to evaluate the strength of the plaintiff’s case for final relief, as an aspect of the balance of convenience. In other words (at [135]) the applicant must demonstrate a prima facie case of sufficient strength to engender confidence that it would succeed if the matter went to trial, in order to tilt the balance of the risk of injustice in its favour.
  1. If a performance bond is intended to operate as a device for allocating the risk of being out of pocket pending the final determination of a dispute between the parties, such intention informs the task the Court must undertake in resolving whether or not to grant an injunction restraining the beneficiary of the bond from converting it into money:

[I]f it be the case that the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute … [s]uch a contractual provision fundamentally alters the context in which the Court must exercise its discretion by changing the complexion of the status quo and raising the prospect of substantial injustice if the purpose of the provision is defeated. That is, the status quo in such circumstances becomes what the parties have agreed as to which of them should bear the financial risk pending the final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon.” (Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [31] per Osborn and Ferguson JJA)

  1. The general rule is that an injunction restraining the conversion of a performance bond will not be granted.
  1. The exceptions to the general rule are as follows:
  • the Court will restrain the party in whose favour the bond has been given from acting fraudulently;
  • the party in whose favour the bond has been given may be restrained from acting unconscionably in contravention of applicable statutory provisions against such conduct;
  • if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be restrained on normal principles relating to the enforcement by injunction of negative stipulations in contracts.