In the case of Grande Cache Coal LP & Another v Marubeni Corporation & Another, HCA 2136/2015, the Court discharged an injunction in relation to a performance bond. The case illustrates the difficulty in obtaining injunctive relief to restrain the call on a performance bond, especially where the application for an injunction is made on an ex parte basis. Although this was not a construction case, performance bonds are very common in building contracts and the principle is equally applicable to construction cases, making this a decision relevant to the construction industry.
The Plaintiffs had obtained an ex parte injunction restraining the 1st Defendant from instructing the 2nd Defendant bank from releasing funds to the 1st Defendant pursuant to a performance bond and restraining the bank from releasing funds to the 1st Defendant.
The 1st Defendant applied to discharge the injunction on the grounds (amongst others) that the injunction application should not have been made ex parte and that there had been material non-disclosure to the Court by the Plaintiffs in their application for the injunction.
When will an injunction be granted in respect of a performance bond?
The Court discharged the injunction, holding that in the context of a performance bond, the court would not normally restrain a bank from making payment under it unless there has been fraud (not applicable in this case) or where the terms of the underlying contract preclude the beneficiary from making a call.
Regarding the evidential threshold that had to be met before a court would grant an injunction to restrain a beneficiary from seeking payment under a performance bond, the Court held that it was not sufficient for a plaintiff to merely show that there was a serious question to be tried on whether the terms of the underlying contract precluded the beneficiary from making a call and whether, on the facts, the beneficiary was so precluded. The Court said that a higher threshold was required to be met.
The higher threshold had been variously described, the Court said, as “it is positively established that the party was not entitled to draw down”, or “a strong case” has been shown, or “it has been clearly established that the beneficiary is precluded from making a call by the terms of the contract”.
The Court held that on the materials before it, there was clearly no basis for any injunction to be granted to restrain the bank from making payment under the performance bond, in the absence of any suggestion that the fraud exception was applicable. Further, the existing materials were, the Court said, far from sufficient to satisfy the legal or evidential threshold required for granting an injunction to restrain the 1st Defendant from seeking payment under the performance bond. Further, damages appeared to be an adequate remedy and thus there was no sufficient ground for an interlocutory injunction to be granted.
Other reasons for discharge of injunction
Other reasons for discharging the injunction included the fact that the Court found that there had been material non-disclosure to the Court and also that although the Plaintiffs had applied for the injunction “ex parte on notice”, they had only given the Defendants one minute’s notice of the hearing! An “ex parte on notice” application is an application whereby the applicant gives prior notice to the respondent of the injunction hearing (so that he can attend and make submissions) but does not necessarily serve documents in support of the application on him before the hearing.
Insufficient notice of hearing
In the present case, the Court held that while there had been some justification for making the application ex parte in view of the urgency of the situation, there was no issue of secrecy and the Plaintiffs had themselves considered that notice ought to be given to the 1st Defendant. That being the case, any notice given to the 1st Defendant had to be meaningful and not illusionary. The one minute’s notice given, could not be regarded as proper notice.
This case demonstrates that the courts will only grant injunctive relief to restrain payment under a performance bond in limited circumstances and that where an application for an injunction is made on an “ex parte on notice” basis, it is important that sufficient notice is given of the hearing. Alternatively, where an application is of sufficient urgency and secrecy is important, it may be preferable to make the application on an ex parte basis, without notice.
It should also be noted that even if the injunction is discharged, sometimes the bondsman may still dispute liability under the bond with the beneficiary, especially for performance bonds as opposed to demand bonds, as the employer is required to prove the contractor’s default before it is entitled to payment. In such case, the contractor may join with the bondsman to contest the employer’s claim, making it impossible for the employer to get paid without proving the contractor’s default under the building contract at a full trial.