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16 Apr 2020

Victorian Supreme Court guidance on “True Rule” of contractual construction and restrains access to performance security

By Frank Bannon, Zac Chami, Jack Fan and Kaitlin Jamieson

For commercial parties in Victoria, this is a significant finding as it places further emphasis on the primacy and certainty of a written agreement.

The recent judgment of Justice Riordan in Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd [2020] VSC 126 provides guidance on two matters of significance in construction disputes:

  • the question of whether ambiguity is a requirement for admitting evidence of surrounding circumstances when construing a contract; and
  • the circumstances in which a court might restrain a call on an unconditional bank guarantee issued under a construction contract.

Bulgana is the owner and developer of a wind farm project in Victoria. It entered into an EPC Contract with Siemens for the design and construction of the project. Thereafter, a dispute arose between the parties in respect of delays to practical completion. Bulgana accordingly claimed an entitlement to delay liquidated damages (DLDs) and threatened to call on two unconditional bank Guarantees issued by Siemens to satisfy that entitlement. After Siemens disputed this, the parties entered into a three-paragraph written Agreement pursuant to which Bulgana agreed not to call on the Guarantees in relation to its claim for DLDs. Contrary to the Agreement, Bulgana notified its intention to call on the Guarantees to satisfy its claim for DLDs only two days later.

Siemens applied to the Victorian Supreme Court for an injunction restraining Bulgana’s call on the Guarantees. The basis for the application, on Siemens’ case, was that the Agreement precluded Bulgana from calling on the Guarantees in relation to any disputed claim for DLDs. Bulgana asserted instead that the Agreement only precluded a call in respect of DLDs which had accrued as at the date of the Agreement. At first instance, Justice Digby dismissed Siemens’ application. After a successful appeal, the matter was remitted for re-hearing before Justice Riordan. The central issue for determination by Justice Riordan was whether the terms of the Agreement prevented Bulgana calling on the Guarantees.

Justice Mason’s "True Rule" requires a finding of ambiguity before regard can be had to surrounding circumstances

The anterior question was one of construction: what did the Agreement actually mean? Bulgana sought to rely on evidence of 'surrounding circumstances' to support its construction of the Agreement. Siemens opposed the admissibility of such evidence and emphasised the primacy of the text.

In determining the question in issue, Justice Riordan provided a thorough summary of the principles of construction in commercial contracts and extensively examined the question of whether ambiguity is a precondition to the admissibility of evidence of surrounding circumstances. After an analysis of the leading authorities on the issue, he found that the “True Rule”, as stated by Justice Mason in Codelfa, requires ambiguity as a precondition to the admissibility of extrinsic evidence of surrounding circumstances.

For commercial parties in Victoria, this is a significant finding as it places further emphasis on the primacy and certainty of a written agreement. This is particularly so given that current authorities have left much uncertainty on this question and the issue is the topic of extensive (and largely divergent) judicial and academic writing. In light of this divergence, however, and given that the issue cannot fairly be considered to be settled, we continue to recommend parties in all jurisdictions to take the time to carefully and clearly express their intentions through their contracts.

Unconditional bank guarantees: a risk allocation regime that can be altered by later agreement

In the context of construction and engineering contracts, there is a strong line of authority supporting the view that courts will not ordinarily restrain the call on an unconditional bank guarantee unless the underlying contract expressly or impliedly fetters the right to access.

Relying on these authorities, Bulgana contended that it was entitled to call on the Guarantees as they were unconditional. Bulgana’s position was that the Contract established a risk allocation regime permitting unfettered recourse whenever Bulgana asserted a right to payment of money by Siemens. At least this much was not disputed by Siemens; instead, Siemens’ position was that that risk allocation had been modified by the Agreement which fettered Bulgana’s access to the Guarantees.

Justice Riordan agreed with Siemens’ position, and found that the Agreement modified the parties’ previous risk allocation and restricted Bulgana’s right to call on the Guarantees. This is significant as it confirms that, notwithstanding the status afforded to unconditional bank guarantees, it is open to parties to agree to alter a previously agreed contractual risk allocation by subsequent agreement. Further, in appropriate circumstances, the courts will uphold such agreements to restrain a call on unconditional bank guarantees.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.