Contractor wins injunction in South Australian Court to stop call on bank guarantee
Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Limited ATF GSA North Terrace Unit Trust [2025] SASCA 72
It’s commonly understood that injunction applications to restrain a party from calling on a bank guarantee under a construction contract face an uphill battle. That’s because security clauses in sophisticated construction contracts generally provide for a risk allocation of any dispute in favour of the principal.
In a recent decision, the South Australian Court of Appeal granted an interlocutory injunction in favour of a contractor, preventing the principal from calling on a bank guarantee. The court found there was a serious question to be tried about whether the principal was still entitled to retain the security.
Background
Synergy (contractor) was engaged by GSA (principal) under a design and construction contract for a student accommodation building in Adelaide. As a part of their agreement, the contractor was required to obtain bank guarantees in the principal’s favour as security.
When the principal indicated it intended to call on the guarantees, the contractor applied for an injunction, arguing the principal was already contractually obliged to release or return the guarantees.
The court declined to grant the injunction, having found that:
- bank guarantees (like other securities) are risk allocation devices common in construction contracts. Preventing the principal from calling on the guarantee would disrupt the status quo between the parties, irrespective of the dispute regarding the principal’s obligation to return or release the guarantee; and
- the prejudice suffered by the contractor as a result of the bank guarantee remaining on foot was reasonably foreseeable at the time the contract was entered into.
The contractor appealed the decision to the South Australian Court of Appeal.
Key issues for determination
The appeal focused on whether the primary judge erred in:
- treating the bank guarantees as a pure risk allocation device, controlling the availability of injunctive relief; and
- failing to properly consider whether there was a serious question to be tried about the principal’s right to call upon the bank guarantee’s in determining the injunction application.
Outcome
Proper construction of the guarantees
The Court of Appeal agreed that, based on the contract terms, , the bank guarantees in the principal’s favour performed a risk-allocation function. Clause 5.2 of the contract allowed the principal to call on the guarantees ‘at any time’, for any proven claim or any bona fide claim it may have against the contractor, even if that claim was contested.
This entitlement had to be read alongside clause 5.4, which required the principal to release or return the bank guarantees 14 days after a final certificate was issued by the superintendent.
The court held that from the point the return obligation arose, the guarantees no longer functioned as a risk allocation device, and the principal’s right to call on them had ceased.
Availability of injunctive relief
As a result, the court rejected the principal’s argument that the guarantees pre-determined the balance of convenience.
The principal argued that the nature of the guarantees, as a risk allocation device, meant the status quo had been pre-determined between the parties. Since the contract had contemplated the allocation of risk, pending the determination of a dispute, the principal submitted that the balance of convenience should favour allowing the contract to take effect as agreed.
The court rejected this argument, confirming that the balance of convenience and the status quo is to be determined according to ordinary principles. The risk allocation function determined between the parties does not control or dictate the court’s discretion, particularly where the dispute concerns whether that allocation of risk has ceased.
The court granted the injunction in the contractor’s favour having been satisfied that the principal’s entitlement to call on the security was a serious question to be tried. It also held that the balance of convenience favoured granting the injunction.
While the contractor had, in general terms, contemplated the consequences of recourse to the bank guarantees by the principal, it had not contemplated this occurring after the principal was contractually required to return them. The court found that failing to grant injunctive relief in these circumstances would result in unfair prejudice to the contractor.
Key takeaways
- A security’s risk allocation function is not determinative of whether injunctive relief is available, especially where the right to retain the security is itself in dispute.
- A party’s right to call on a bank guarantee may be conditional on whether they have the right to retain the security.
- The Court explicitly disagrees with Rees J’s comments in the New South Wales Supreme Court decision of Daewoo Shipbuilding[1], where it was suggested that characterising guarantees as risk allocation devices requires the refusal of injunctive relief, even if there is a serious question to be tried about the party having been obligated to return or release the guarantees.
- Principals should ensure contracts clearly define when security must be released, and under what circumstances they may continue to hold or call on security, especially if disputes are likely.
This article was written with assistance by Tom O’Rourke, Law Graduate.
[1] Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125
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