Recourse to Performance Bonds: An Unconditional Promise to Pay?

    July 2017

    In its recent decision in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 2] [2017] WASCA 123, the Western Australian Court of Appeal unanimously dismissed CPB’s appeal from the decision of the Supreme Court which refused to injunct JKC Australia LNG Pty Ltd from calling on performance bonds issued under the security provisions of the parties’ Subcontract. In doing so, the Court of Appeal confirmed that whilst the unconditional nature of performance bonds are a factor to be taken into account, the bonds’ terms do not “control the question of construction of the Subcontract”.

    Key Findings

    • The Court of Appeal noted the way in which the WA Supreme Court followed the Clough Engineering and Sugar Australia cases’ approach without objection from CPB.
    • Upon the proper construction of the Subcontract, JKC has a right of recourse to the performance bonds where, in the circumstances, it had an honest, bona fide claim to immediate payment under the Subcontract.
    • The purpose of the performance bonds, and the provisions of the Subcontract relating to them, would be defeated if JKC was restrained from calling on the performance bonds until the dispute concerning extensions of time and liquidated damages had been resolved by arbitration.