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Saipem Australia Pty Ltd v GLNG Operations Pty Ltd

 

[2017] QSC 294

 

SUPREME COURT OF QUEENSLAND

 

CITATION:

Saipem Australia Pty Ltd v GLNG Operations Pty Ltd [2017] QSC 294

PARTIES:

SAIPEM AUSTRALIA PTY LTD

(applicant)

v

GLNG OPERATIONS PTY LTD

(respondent)

FILE NO/S:

SC No 7659 of 2017

DIVISION:

Trial Division

PROCEEDING:

Application for interlocutory injunction

DELIVERED ON:

8 December 2017

DELIVERED AT:

Brisbane

HEARING DATE:

27 October 2017

JUDGE:

Holmes CJ

ORDER:

1. The application for an injunction is refused.

2. The applicant is to pay the respondent’s costs.

CATCHWORDS:

CONTRACTS – BUILDING, ENGINEERING AND RELATED CONTRACTS – THE CONTRACT – CONSTRUCTION OF PARTICULAR CONDITIONS – SECURITY AND RETENTION FUNDS – where the applicant contracted with the respondent to build a pipeline  – where cl 5.5(a) of the contract provided for the respondent to use the proceeds of performance securities to recover any debt due from, or loss resulting from default by, the applicant – where the respondent alleged that the pipeline was defective and removed the rectification work from the applicant – where the respondent sought to recover the costs of rectification from the securities – where cl. 34.6 of the contract provided that the costs of rectification work would become a debt due and payable on notice being given and could be recovered from the securities – whether the costs were recoverable immediately on being incurred

EQUITY – EQUITABLE REMEDIES – INJUNCTIONS – INTERLOCUTORY INJUNCTIONS – SERIOUS QUESTION TO BE TRIED – BALANCE OF CONVENIENCE – where the applicant contracted with the respondent to build a pipeline – where cl 5.5(a) of the contract provided for the respondent to use the proceeds of performance securities to recover any debt due from, or loss resulting from default by, the applicant – where the applicant sought an interlocutory injunction to restrain the respondent from using the security proceeds – whether s 67J of the Queensland Building and Construction Commission Act 1991 applies to unliquidated amounts so as to require notice of the proposed use of the securities and the amount of the costs within 28 days of their being incurred – whether, if so, notice was given – whether a notice given in breach of s 67J is invalid – whether the exception in s 67J(4), where work is taken out of the contractor’s hands, applied – whether there are serious questions to be tried – where the applicant contended that it would suffer reputational damage if the respondent called on the securities – where the applicant covenanted not to seek  to restrain the respondent from using the security proceeds – where the balance of convenience lies.

Queensland Building and Construction Commission Act 1991 (Qld) s 67J, s 67E(3)

Beyfield Pty Ltd v Northbuild Construction Sunshine Coast [2014] QSC 12

Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No. 2) [2016] 1 QdR 254

Monadelphous Engineering Pty Ltd & Anor v Wiggins Island Coal Export Terminal Pty Ltd [2014] QCA 330

COUNSEL:

R A Holt QC and P Somers for the applicant

S Doyle QC and M Lyons for the respondent

SOLICITORS:

Clayton Utz for the applicant

Ashurst Australia for the respondent

  1. HOLMES CJ: The applicant, Saipem Australia Pty Ltd, seeks an interlocutory injunction restraining the respondent, GLNG Operations Pty Ltd, from calling on performance securities (bank guarantees) given by Saipem under a contract to build gas transmission pipelines. Saipem contends that s 67J of the Queensland Building and Construction Commission Act 1991 prohibits GLNG from calling on the bank guarantees, because it has not complied with requirements which that section imposes for giving notice before doing so.  GLNG contends that s 67J does not apply; or if it does, GLNG has complied with it.
  2. It was common ground that there was a serious question to be tried as to whether there were defects in the pipeline requiring rectification; that question is currently the subject of arbitration. Saipem says that there are other serious triable issues: as to whether GLNG was precluded from recourse to the bank guarantees because of a failure to give notice within time under s 67J, with related questions of whether that provision applies to claims for unliquidated amounts, and whether a notice given in breach of it is invalid; and as to the meaning of an exception contained in s 67J(4), where “work has been taken out of the hands of a contracted party”.
  1. It is not necessary that I reach a concluded view on the questions of construction involved, but rather that I make some assessment of the strength of Saipem’s arguments about them in considering both whether they raise serious questions to be tried, and where the balance of convenience lies in this case. Other balance of convenience considerations are raised: the effect of recourse to the securities on Saipem’s reputation and the effect of Saipem’s covenant in the building contract not to seek to restrain GLNG from seeking that recourse.

The Queensland Building and Construction Commission Act

  1. Section 67J provides:

67J Set-offs under building contracts

  1. The contracting party for a building contract may use a security or retention amount, in whole or in part, to obtain an amount owed under the contract, only if the contracting party has given notice in writing to the contracted party advising of the proposed use and of the amount owed.
  2. The notice must be given within 28 days after the contracting party becomes aware, or ought reasonably to have become aware, of the contracting party’s right to obtain the amount owed.
  3. If, because of subsections (1) and (2), the contracting party is stopped from using a security or retention amount, the contracting party for the contract is not stopped from recovering the amount owed in another way.
  4. This section does not apply if, under the contract—
    1. work has been taken out of the hands of the contracted party or the contract has been terminated; or
    2. the security or retention amount is to be used to make a payment into court to satisfy a notice of claim of charge under the Subcontractors’ Charges Act 1974.
  5. In this section—

amount owed, under a building contract, means an amount that, under the contract, is a debt due from the contracted party for the contract to the contracting party for the contract because of circumstances associated with the contracted party’s performance of the contract.

use of security or retention amount includes the act of converting securities into cash where the securities are held as negotiable instruments.

 

  1. Section 67E(2) of the Act deals with inconsistencies between building contracts and the Act, while s 67E(3) deals particularly with inconsistencies between contract provisions for security and provisions of the Act.

67E Operation of pt 4A

  1. However, if a building contract, or a provision of a building contract, is inconsistent with a provision (the Act provision) of this part applying to the building contract, the building contract, or the provision of the building contract, has effect only to the extent it is not inconsistent with the Act provision.
  2. Without limiting subsection (2), a building contract is unenforceable against the contracted party for the contract to the extent that the contract provides for retention amounts or security in a way that is inconsistent with a condition to which the contract is subject under division 2.

Section 67J is contained in Division 2. “Condition” includes a limitation or restriction.[1] Section 108D of the Act prevents parties from contracting out of the Act’s provisions.

The building contract and GLNG’s claims re rectification work

  1. The contract between Saipem and GLNG for the erection of the pipeline contained provision, in cl. 5.5(a), for GLNG to

“… use the proceeds of any Performance Security to recover any Loss suffered or incurred by [GLNG] as a result of [Saipem]’s default under this Contract, or to recover any debt due from [Saipem] to [GLNG].” 

“Loss” was defined in cl. 1.1, the definitions clause, as “any loss, cost, expense, damage or liability of any kind”.  Clause 5.5(c) contained Saipem’s covenant that it would not take any steps to restrain GLNG from demanding, receiving or using payment under the performance securities, even where it disputed GLNG’s right to payment and had commenced dispute resolution proceedings.  Clause 5.5(d) provided that GLNG’s right to call on any performance security in accordance with cl. 5.5 was

“without loss of any other rights under the contract to receive payments of the outstanding amounts”.   

  1. Clause 34.4 of the contract enabled GLNG to direct Saipem to rectify any defect.  In June 2016, GLNG issued a notice alleging that the corrosion protection system for the pipeline was defective and directing Saipem to rectify it.  If Saipem, given such a rectification direction, failed to comply, cl. 34.6(a) permitted GLNG, after giving notice, to remedy the defect at Saipem’s expense. Clause 34.6(b) provided:

“…

(b) the actual and demonstrable costs of rectification work incurred by [GLNG] under clause 34.6(a):

  1. will be a debt due and payable immediately by [Saipem] to [GLNG] following Notice from [GLNG] of the costs incurred; and
  2. may be recovered by [GLNG], either by setting off the relevant amount from future payments due to [Saipem] (whether under this Contract or another Agreement), or by having access to the Performance Security.”
  1. Saipem responded by denying that a valid direction had been given under cl. 34.4.  By letter of 22 July 2016, GLNG gave notice under clause 34.6 that it would remedy the defects at Saipem’s expense, advising that the “actual and demonstrable costs” of doing so would be a debt due and payable immediately upon notice being given of the costs incurred, and could be recovered by GLNG from the performance security proceeds. The letter was expressed to be a notice under s 67J, although GLNG specified that it did not concede that the provision applied.   On 19 August 2016, GLNG advised that it intended to call on the guarantees in respect of the costs of rectifying the defects. It gave an estimate of the costs of the initial work required at $1,500,000 but advised that it would issue notices pursuant to cl. 34.6(b)(1) setting out the actual costs of the works.
  2. Subsequently, GLNG sent 10 letters, one per month over the period from October 2016 to July 2017, advising of the amounts incurred each month in the rectification process.  Each of those letters identified itself as a notice under s 67J, expressly making no concession that the section applied, or if it did, that the time for notice had arisen, and advised that GLNG would call on the guarantees in respect of the sum specified.  On 14 July 2017, GLNG gave notice that it claimed payment of the total of the amount set out in those letters, $3,292,982.98; which, it said, it was entitled to recover as a debt, pursuant to cl. 5.5(a) or cl. 34.6(b)(2) of the contract. That notice was said to be given, “to the extent required”, under s 67J.

When GLNG’s right to recover from the security proceeds arose

  1. Saipem contended that GLNG had no right to call on the guarantees, because it had not given notice, as s 67J(2) required, within 28 days after it became aware, or ought reasonably to have become aware, of its right to obtain the amounts owed. On Saipem’s argument, GLNG was entitled under cl. 34.6(b)(2) to call on the guarantees immediately the rectification costs were incurred, notwithstanding that it had not given formal notice of the costs incurred so as to make them a debt due and payable pursuant to clause 34.6(b)(1).  The two subclauses should be read disjunctively, so that the creation by notice of a debt was not a pre-condition to recovery. In other words, sub-clause (2) could be read with the preamble, but without regard to sub-clause (1), as follows:

“… the actual and demonstrable costs of rectification work … may be recovered by the company either by setting off the relevant amount from future payments due to [GLNG]… or by having access to the Performance Security”.

That construction accorded with clause 5.5(a), which did not limit GLNG to recovering debts from the proceeds of the performance securities, but permitted it also to recover any loss incurred.  The costs of the work fell within the contractual definition of “Loss”, and “relevant amount”, it was argued, was a more expansive expression than “debt”.

  1. GLNG resisted that construction, pointing out that in other instances the contract used the conjunction “or” where it was intended to create alternatives. It contended also that there would be no point to the requirement in cl. 34.6(b)(1) that notice be given of the costs incurred, if, under cl. 34.6(b)(2), GLNG could without notice recover the costs from the guarantee proceeds.  I must say that on my (admittedly cursory) perusal of the contract I could not see any instance where the conjunction “and” appeared to be used other than with cumulative effect, whereas clauses which were clearly intended to set out alternatives used the conjunction “or”. It would be a very odd and ambiguous use of “and” if what were intended by its use were alternatives. 
  2. Against that, though, cl. 34.6(b) would align more closely with cl. 5.5(a) if Saipem’s construction were preferred. And it is debateable, anyway, whether cl. 34.6(b)(i) has a limiting effect on the more general right of recovery of loss, broadly defined as it is, which cl.  5.5(a) gives against the guarantee proceeds. Clause 5.5(d) certainly suggests that cl.  5.5(a) is intended to have an operation independent of other recovery rights.  Indeed, GLNG argued for other purposes that cl. 5.5(a) gave it distinct rights to call on the guarantees for rectification costs, on the one hand, as a debt due and on the other, as a loss; which seems inconsistent with the position that cl. 34.6(b)(1) prevents recovery of rectification costs without their being converted by notice to a debt due.  I conclude that Saipem has at least a reasonable argument that GLNG was entitled to recover the costs of its rectification work from the guarantee funds (subject to s 67J’s application) without the necessity to give the cl. 34.6(b)(1) notice.

Whether s 67J applies to unliquidated damages

  1. That leads to the question of construction of s 67J:  whether it extends to unliquidated damages and thus required GLNG to give notice within 28 days of its becoming aware of the costs it had incurred. Saipem’s argument was that the ten letters which GLNG had sent between October 2016 and July 2017 each identified the amount it claimed as incurred in rectifying the defects and constituted, in each case, a claim for unliquidated damages; but at the time each letter was delivered, the amount identified had, it was clear from invoice dates, been known to GLNG from more than 28 days.  Those amounts in each case (it was argued) constituted an “amount owed” within the meaning of s 67J; but GLNG had not given notice of its intention to have recourse to the securities in respect of each amount until more than 28 days after it incurred the relevant costs in each case. 
  2. The premise necessary to Saipem’s argument was that the expression “debt due”, in the definition of “amount owed” in s 67J, should be read as including an entitlement to unliquidated damages.  For that proposition, Saipem referred to the decision of Martin J in Beyfield Pty Ltd v Northbuild Construction Sunshine Coast Pty Ltd[2] and relied on the analysis of that case by McMurdo J (as His Honour then was) in Saipem Australia Pty Ltd v GLNG Operations Pty Ltd (No. 2).[3] 
  3. In Beyfield, the head contractor on a building project gave notice that it intended to have recourse to bank guarantees given by a subcontractor to meet claims for damages for breaches of the subcontract.  The contract permitted the builder to have recourse to the bank guarantees in respect of any claim for payment, liquidated or otherwise.  Considering that the requirements of s 14B of the Acts Interpretation Act 1954 – ambiguity, unreasonableness and the need to confirm his interpretation of s 67J – were met, Martin J had regard to the Explanatory Notes to the Queensland Building Services Authority Amendment Bill 1991.[4]   The Explanatory Notes said generally of s 67J that it required set-offs pursuant to contractual provisions

“to be claimable from the contracted party only if timely notice (28 days) is provided to the contracted party”. 

This was to

“prevent set-offs being effected when the trail has gone cold and the contracted party is in no position to dispute alleged facts.”[5]

  1. I pause here to note, however, that s 67J, as it appeared in the Bill was not in the form in which Martin J was considering it in Beyfield, which is also its current form. As enacted, it defined “amount owed” as

“ an amount that, under the contract, and subject to its being quantified, is owed by the contracted party for the contract to the contracting party for the contract because of circumstances associated with the contracted party’s performance of the contract”.

The provision also operated differently then: it required notice to be given of the proposed use of a security as soon as the principal became aware of its right to obtain the amount owed, even if it could not be quantified; in that event it was to give a further written notice within three business days of becoming able to quantify the amount owed.   The Explanatory Notes indicated that this was to cover a situation such as where a defect became manifest, but it was not yet clear what rectification work would be required. In that instance, the first notice would be required within 28 days of the defect’s becoming apparent, and the second once the amount entailed in its rectification was established.

  1. Martin J considered that the remedial nature of s 67J indicated that it was intended to apply to any circumstances where it was sought to have recourse to a security, other than those identified in s 67J(4):

“Section 67J also confines the operation of retention clauses to “debts due”. To argue, as Northbuild does, that this section does not apply to matters other than “debts due” is inconsistent with the scheme of this Part of the Act. The Act sets out to regulate the building industry and to limit the scope of set-offs to contracting parties. Any ambiguity in the construction of s 67J should be resolved by reference to those matters. It is remedial legislation in many respects and that can be seen from the sections which work to impose conditions expressly. While s 67J does not, in terms, impose a condition it restricts the use which a contracting party may make of a security.”[6]

His Honour reached this conclusion: the clause of the contract which purported to permit access to a guarantee to satisfy claims which were not for “amounts owed” was inconsistent with s 67J and (by virtue of s 67E(3)) was unenforceable to that extent. Thus the guarantees were not available to satisfy claims for unliquidated amounts.

  1. Saipem (No. 2), the case in which McMurdo J considered Beyfield, involved Saipem seeking an interlocutory injunction to restrain GLNG from seeking payment under two bank guarantees, provided under what seems to be the same contract as that involved here; at any rate, the relevant provisions are identical. There, GLNG’s claim was for liquidated damages, for which the contract provided in the event of delay; it asserted that the liquidated damages were a “debt due”, entitling it to recover against the bank guarantees under cl 5.5(a).
  2. In that case, Saipem maintained that since there was dispute about whether the delay had occurred, GLNG had no more than a claim for liquidated damages, which was not a “debt due”. It went on to argue that by defining “amount owed” in s 67J(5) as “a debt due”, s 67J “confine[d] the operation of retention clauses to “debts due”, as Martin J had observed in Beyfield. McMurdo J regarded the argument as based on a mistaken reading of Beyfield, saying of that decision:

“It was held that s 67J did extend to the circumstance of a claim for unliquidated damages, so that recourse could not be had to a security for the purposes of satisfying such a claim unless a notice was given under 67J(1).  The term “amount owed” was thereby given a broad interpretation to include unliquidated damages.”[7]

  1. McMurdo J expressed his view that it was the contract, not s 67J, which gave rise to the entitlement to use the security, observing:

“Rather, s 67J(1) affects the right of a contracting party to use a security or retention amount only by requiring the notice which it describes. The section is engaged where that entitlement to use a security or retention amount otherwise exists and once engaged, its effect is to qualify the entitlement by requiring the notice. Therefore, if no debt is due to GLNG, it is precluded from using the bank guarantees by the terms of cl 5.5(a) rather than by, or also by, s 67J(1).”[8]

His Honour noted that it was yet to be conclusively determined whether a notice given in breach of 67J(2) was invalid, but regarded Saipem as having the stronger argument in contending that it was.

  1. Saipem here argued that McMurdo J’s analysis of Beyfield, without dissent from what he considered it held, together with his statement to the effect that s 67J was engaged where an entitlement to use a security otherwise existed, indicated that his Honour’s view was that s 67J applied to claims for unliquidated damages.  That interpretation of the provision would give effect to the purpose of the Act as explained in the Explanatory Notes: of preventing the use of set-off provisions unless timely notice was given, thus allowing the party providing the guarantees to ascertain the facts. The result otherwise would be perverse: that notice was required in respect of a debt, but not in respect of unliquidated amounts which were, in essence, merely a matter of assertion.  Section 67J should, accordingly, be read as applying to unliquidated damages.  The result was that GLNG, not having complied with the requirements of s 67J by giving notice of the unliquidated amounts it claimed within the required timeframe, could not use the bank guarantees to obtain the amount it claimed.
  1. With respect to McMurdo J, however, I do not think his Honour’s characterisation of Martin J’s reasoning in Beyfield is correct.  That is to say, I do not regard Martin J as having concluded that “amounts owed” under s 67J extended to include unliquidated damages.  Although his Honour’s reference to s 67J as applying to “matters other than debts ‘due’” might suggest that view, his conclusion was otherwise.  Rather, Martin J regarded the provision as creating an inconsistency – that the contract clause in question purported to permit recourse in respect of claims which were not for “amounts owed” and hence not within the terms of s 67J – which rendered the clause unenforceable.  His Honour’s view was not that recourse could not be had to a security to satisfy an unliquidated claim unless notice was given under s 67J(1); it was that recourse could not be had to a security in respect of such a claim at all.
  2. I do, however, agree with McMurdo J’s construction of s 67J(1) as not being the source of entitlement to use a security, but instead as affecting such an entitlement only by requiring notice. Nothing in s 67J removes any contractual right; instead it places a hurdle in the way of the exercise of contractual rights, in the form of the notice requirement. Clause 5.5(a) says nothing contrary to that qualification on the exercise of the rights it gives. It follows that, unlike Martin J, I do not regard a clause which permits recourse to guarantees for unliquidated amounts (such as cl. 5.5(a)) as inconsistent with s 67J. 
  3. McMurdo J’s observation as to the effect of s 67J in qualifying an entitlement by requiring notice was made in a context in which the entitlement claim was based solely on a debt said to be due, and the argument was about whether it met that description (there being no question of loss involved in that case).  I am unconvinced that his Honour was endorsing what he understood to be Martin J’s view as to the applicability of s 67J to unliquidated damages claims; or that he was necessarily purporting to propose a general application of s 67J wherever recourse was sought to bank guarantees.   If his Honour was intending to convey the latter, it was in that case obiter dicta, with which respectfully, I do not agree. 
  4. Unfortunately, the Explanatory Notes for the Building Construction Industry Payments Bill 1991, which led to the enactment of s 67J in its current form, shed no light on the reasons for the change in the definition of “amount owed” or the alteration in the notice procedure, simply saying that the provision :

“[l]imits the scope of set-offs available to contracting parties. Set-offs may be claimed from the contracted party only if a notice (28 days) is provided to the contracted party.”[9]

The Second Reading Speech is of limited assistance, simply saying that the amendments made to Part 4A of the Act (in which s 67J appears) are “to complement and align with the rapid adjudication process” in the Building Construction Industry Payments Act 1991.

  1. That statement may suggest that a more streamlined process was contemplated, including confinement of s 67J’s effect to debt. At the least, it seems to me that broad expressions of the provision’s aims in the original Explanatory Notes must, in light of the amendments to it, be treated with circumspection. Whatever the reasons for the change, the definition of “amount owed” as it now appears in s 67J is, in my view, unambiguous.  I acknowledge that there may be an anomaly in placing a constraint on recovery of debts from securities, but not on recovery of unliquidated amounts. But by the most liberal of readings in an endeavour to meet what one might regard as the purposes of the provision, one would struggle to construe “an amount that, under the contract, is a debt due from the contracted party…” as applying to an unliquidated damages claim. 
  2. Were there no previous decisions concerning the issue, I would reject the proposition that there is a serious question about s 67J’s application to unliquidated damages, but in light of what may be seen as contrary (but differing as between them) views in Beyfield and Saipem (No. 2), I accept that there remains a live argument on the point. What seems to me its lack of strength is a factor to be taken into account in deciding where the balance of convenience lies.

Whether timely notice was given in respect of unliquidated damages

  1. GLNG contended that if notice were required under s 67J in respect of unliquidated damages, it had given that notice on 19 August 2016, within 28 days of becoming aware of its right to obtain damages, by giving an estimate of the costs and foreshadowing its intention, although not then in a position, to advise of the amounts owed.  It was then entitled to identify actual amounts in subsequent notices. However, I do not think on any construction of s 67J that advising of an estimate could constitute notice of an amount owed. If the provision does apply to unliquidated damages (which, as I have said, I doubt), it required notice within 28 days of GLNG’s becoming aware of its right to obtain a quantifiable amount; in this instance, within 28 days of GLNG being invoiced for the costs of rectification by its new contractors.

Whether notice given in breach of s 67J is invalid

  1. I concur with McMurdo J on this point: the stronger argument is that a breach of the requirements of s 67J renders a notice purportedly given under it invalid. GLNG conceded that it was at least a serious question to be tried, while contending that the contrary – that a failure to give the notice within 28 days did not render it ineffective – was also seriously arguable.

Alternative right of recourse to security for debt

  1. GLNG argued that even if through non-compliance with s 67J it had lost its right to recover loss under cl. 5.5(a), its entitlement to recover a debt remained. That clause gave it distinct rights of recourse against the bank guarantees in respect of the debt of $3,292,982.98 on the one hand, and on the other in respect of its loss: the $3,292,982.98 in costs incurred as a result of Saipem’s default under the contract. If s 67J precluded it from recovering the latter, the former was still available. Either its notice of 14 July 2017, which identified the “actual and demonstrable costs of rectification work” both created the debt and constituted the s 67J notice; or the ten letters created a series of debts and gave the necessary notice. Section 67J having been complied with, there was no bar to recovery against the bank guarantees of the debt or debts thus created.
  2. It seems to me, in fact, that each of the ten letters created a debt.   Clause 34.6(b) did not require that notice under that clause be described as such or that the costs of rectification work be expressly identified as a “debt due and payable’.  All that was required was that notice was given of the costs incurred. (The definition of “notice” under the contract[10] did not add any further relevant requirement, except that notice be in writing.)  The letters sent by GLNG advised of the cost incurred, with the result that the costs then became debts due and payable. But I have difficulty with the proposition that the “amount owed” for the purposes of s 67J would change simply because a claim for unliquidated damages had been converted to a debt claim, the former precluded from recovery and the latter not, when the amount was literally the same and the same expenditures were concerned. If s 67J applies to unliquidated damages, in my view, the time for notice elapsed 28 days after GLNG became aware of the costs of the work and was not revived by use of the contract mechanism for crystallising those costs into a debt.

Section 67J(4) exception - work taken out of the contractor’s hands

  1. GLNG’s final argument turned on the meaning of the expression in s 67J (4)(a), “work has been taken out of the hands of the contracted party”.  It argued that the circumstances fell within the exception, because the rectification work had been taken away from Saipem.  The latter contended, however, that this was a reference to circumstances where, pursuant to a contractual provision, the principal was able, in prescribed circumstances, to take the work remaining to be done out of the contractor’s hands  as an alternative to terminating the contract. Both alternatives involved the ending of all of the contractor’s obligations under the contract and were the two alternatives which s 67J(4) also contemplated.  It would be an unattractive reading of the provision to allow a principal to avoid the effect of s 67J by simply removing from the contractor the work which would otherwise require a notice under that section. 
  2. GLNG, however, argued that that was the clear effect of the provision, which could only be sensibly read as applying to work subject to the claim for access to the security. It would make no sense to construe the provision as applying only where the whole of the works had been taken from the contractor.  The fact that s 67J(4)(a) referred to “work” rather than “all works” or “the works” supported a more limited construction, and given that it concerned an exception to a notice requirement, the rational construction was that the provision applied to work relevant to the notice.  The provision was not dealing with the equivalent of contractual alternatives open to the principal, of removing the work or terminating the contract. It did not purely contemplate remedies available to the principal; instead, it encompassed termination by either party on any basis, or through frustration of the contract.  The legislative intent was plainly to remove any constraint upon access to the security where there was a contractual entitlement to take works out of the hands of the contractor. Clause 34 was the only mechanism in the contract for taking work out of the contractor’s hands. The effect of the notices given under that clause, requiring Saipem to do the work and then advising that the GLNG would do it at Saipem’s expense, could only be understood as taking work out of Saipem’s hands.
  3. In my view, while there is a serious question to be tried as to the application of s 67J (4), GLNG has by far the stronger argument. There is no obvious reason to construe the provision as narrowly as Saipem contends, confining the notion of termination to align with the principal’s rights under a particular form of building contract. And it seems to me reasonable to construe the provision as having the intended effect that once the principal has assumed responsibility for the work and its cost, its access to the security to recover the relevant expenditures is unconstrained by the notice requirement.

Balance of convenience – reputation and covenant not to litigate 

  1. Saipem put on an affidavit by one of its officers deposing that a call on guarantees was likely adversely to affect Saipem’s credit rating and its ability to obtain finance or bank guarantees, while increasing the costs to it of doing so, and to cause a loss of its competitiveness in bidding for future contracts, as well as possibly adversely affecting its prospects of success in current tender bids.  In two previous instances where it had failed to obtain injunctive relief to restrain GLNG from calling on securities, it had gone to considerable lengths to avoid reputational damage by paying the amounts involved.
  2. GLNG countered that any reputational damage was easily avoided by Saipem’s taking similar steps here: paying the amount of the securities to GLNG. The financial records attached to the affidavit of Saipem’s financial officer indicated that it was well able to do so: its current assets were €1,892,000,000 and its shareholder equity €4,885,000,000. And, GLNG argued, a powerful factor in the balance of convenience was the existence of cl. 5.5(c), the covenant that Saipem would not seek to restrain GLNG from exercising its rights in respect of the performance securities, even where it disputed the debt.  The court would not readily permit Saipem to breach its contract. One of the purposes of providing a performance security in this contract was

“to allocate the risk as to who [should] be out of pocket pending resolution of the dispute”.[11]

This was a matter which was often, though not necessarily, determinative in assessing the balance of convenience, the parties’ agreement that the contractor should bear the risk pending the resolution of the dispute effectively amounting to an agreed status quo. [12] 

  1. Against this argument, Saipem pointed to obiter dicta of the Court of Appeal in Monadelphous Engineering Pty Ltd & Anor v Wiggins Island Coal Export Terminal Pty Ltd.[13] In that case, the Court dismissed an appeal which turned on a contention that the primary judge should have found that there was a serious question to be tried as to whether two contracts were “building contract[s]” so as to attract the application of s 67J. The Court concluded that one of the two contracts was not a building contract, the result being that there was no constraint on the respondent having recourse to guarantees under that contract.  The balance of convenience in relation to an application for an injunction in respect of the second contract, which did involve building work, was thus altered in favour of the respondent. 
  2. In the course of considering the balance of convenience, however, Fraser JA, with whose judgment the other members of the court agreed, accepted a submission that if the appellant were to succeed at trial on the serious question to be tried (i.e. whether s 67J applied), s 67E(3) would render a clause equivalent in effect to cl. 5.5(c) ineffective.  The result was that the existence of the clause was not to taken into account in assessing the harm the appellant would sustain if no injunction were granted and it succeeded at trial.

Conclusions

  1. Applying the Monadelphous reasoning, I proceed on the basis that if s 69J does apply, cl 5.5(c) will be inconsistent with it in so far as it would prevent Saipem’s reliance on a claimed failure to give notice under the provision. Consequently, I will not take the covenant into account in considering the balance of convenience in relation to the triable questions concerning the application and effect of s 67J.  But so far as the serious question to be tried is whether the pipeline is defective so as to entitle GLNG to recover rectification costs, the existence of cl. 5.5(c) provides a very strong argument that Saipem has given up any right to injunctive relief on that ground, in a bargain which the Court should respect.
  2. I have identified in the course of this judgment the other questions which I regard as the remaining serious questions to be tried.  However, of those, as I have also indicated, the interpretation of s 67J for which Saipem contends, as applying to unliquidated damages, seems to me fragile indeed.  If there were no authority to suggest the possibility of different views I would not have regarded this an arguable point. Saipem’s argument as to a limited application of s 67J(4) is also weak, in my view; so that generally I consider its prospects of resisting GLNG’s claim to recourse against the guarantees to be poor.
  3. As to the remaining issue, as GLNG contends, Saipem’s financial position does not suggest that it will be forced to undergo the reputational damage suggested; it does appear to be open to it to provide the funds subject of the bank guarantees pending determination of the arbitration.
  4. Taking all of those matters into account, I conclude that the balance of convenience lies in refusal of the injunction.   

Orders

  1. The application for an injunction is refused. Saipem is to pay GLNG’s costs.

Footnotes

[1]  Schedule 2 Queensland Building and Construction Commission Act.

[2]  [2014] QSC 12.

[3]  [2016] 1 QdR 254.

[4]  The Queensland Building Services Authority Act was renamed the Queensland Building and Construction Commission Act in 2013.

[5]  At 23 of the Explanatory Notes, quoted in Beyfield at [34].

[6]  At [40].

[7]  At [31].

[8]  At [33].

[9]  Clause 9 Explanatory Notes Building Construction Industry Payments Bill 1991.

[10]  Clauses 1.1 and 55.1.

[11] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 at 826 per Callaway JA, cited in Saipem (No. 2) at [48].

[12] Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [25] cited in Saipem (No. 2) at [49]

[13]  [2014] QCA 330.

Close

Editorial Notes

  • Published Case Name:

    Saipem Australia Pty Ltd v GLNG Operations Pty Ltd

  • Shortened Case Name:

    Saipem Australia Pty Ltd v GLNG Operations Pty Ltd

  • MNC:

    [2017] QSC 294

  • Court:

    QSC

  • Judge(s):

    Holmes CJ

  • Date:

    08 Dec 2017

  • White Star Case:

    Yes

Litigation History

Event Citation or File Date Notes
Primary Judgment [2017] QSC 294 08 Dec 2017 -

Appeal Status

No Status