Andrew Hales, Partner and Emily Miers, Lawyer at MinterEllison focus on how the infrastructure industry are affected by the financial burdens as a result of the COVID-19 pandemic. They guide you through key issues to consider if you become involved in an interlocutory injunction during these times.
As a result of the financial burdens imposed by the COVID-19 crisis, participants in the infrastructure industry are likely to be forced to take an introspective focus in order to ensure solvency for the immediate future.
This internal focus may lead to principals making calls on performance security provided under construction contracts in order to access additional funds. If a contractor does not believe the principal is entitled to exercise this right, the contractor may consider seeking an interlocutory injunction restraining the call on security.
To grant an interlocutory injunction, the court must be satisfied of three matters. First, there must be a serious issue to be tried. Second, if interlocutory relief is not granted the applicant must be likely to suffer injury for which an award of damages would not be an adequate remedy. Third, the balance of convenience must favour the grant of an injunction.
Currently, the court’s willingness to deviate from well-established principles on interlocutory injunctions to accommodate the business volatility resulting from COVID-19 is untested. It may be arguable that the effects of COVID-19 affect the balance of convenience, especially in relation to matters concerning the solvency of the parties. The balance of convenience may favour the grant of an injunction, as damages may not be an adequate remedy if the party calling on the security is a major insolvency risk. The status quo may be preferred during this uncertain period. On the other hand, if the security is a risk allocation device, the principal may argue that its requirement for immediate cash flow from security shifts the balance in its favour. A contractor’s own solvency concerns arising from a call on security may also be a relevant factor.
So what should you consider if you become involved in an interlocutory injunction during COVID-19? To assist you navigate the uncertainty, we’ve highlighted the key issues to consider that will come into play in the response and recovery phases. These include:
- The court’s ability to grant an interlocutory injunction will still be restricted by the application of the terms of the construction contract and recourse provisions which govern the relationship between the principal and contractor. The wording of contractual recourse provisions often differs on a case by case basis and any interpretation of these clauses must be read in the light of the entire contract. The court cannot read words into the contract contrary to the written terms as drafted and agreed to by the parties. Hence, unless the parties have included contractual provisions which apply to the current COVID-19 pandemic, the contract provisions are unlikely to offer the contractor any grace.
- Contractual recourse provisions commonly permit the principal unconditional access to performance security. This typically results from an imbalance of power during contract negotiations. This means there are very few grounds on which a principal can be restrained from calling on security at any point in time. As a result, most interlocutory injunction cases are likely to fail where the contract contains an unconditional recourse clause, regardless of the COVID-19 climate and extenuating circumstances.
- The court must consider the commercial purpose of the contractual recourse provisions., The commercial purpose of the contractual recourse provisions is usually to either act as security for performance of the contractor’s obligations or to allocate the risk as to who should be out of pocket pending resolution of a dispute (or in some instances, both). The risk allocation function of a contractual recourse provision will usually be defeated by a court if it grants a restraint on recourse, something the court will not do lightly. The court will primarily have regard to the commercial purpose of the contractual recourse provisions before taking into account any commercial consequences affecting the contractor or principal as a result of the COVID-19 pandemic. The court will not readily favour a construction inconsistent with an agreed allocation of risk.
- The court has strictly established that it will not prevent a party from seeking recourse to security, unless the party in whose favour the security, has been given has acted fraudulently, acted unconscionably or breached a contractual promise not to call on the guarantee in particular circumstances. As the court has generally taken the approach of not interfering in the relationship between principal and contractor in interlocutory injunctions, a party seeking to restrain a call on security would face an uphill challenge to satisfy the court that an additional ground for interference is available to accommodate the issues faced by companies affected by the COVID-19 crisis; as such assistance is unprecedented.
- Parties seeking to initiate or defend an interlocutory injunction should consider whether the state, territory or federal governments have enacted legislation which protects a party from a call on security. In the COVID-19 climate, laws are constantly changing in order to accommodate ongoing employment, business longevity and economic functions. Where a contract permits a principal to have unconditional recourse to security for breach of an obligation, the state, territory and federal government legislation enacted in response to the COVID-19 pandemic may apply so as to prevent the principal from seeking recourse. This would assist an application for interlocutory relief during the COVID-19 response and recovery phase. We do not know of any such laws having been enacted at present.
- Evidence of the potential insolvency of a counterparty seeking to call on security, or its likely inability to repay the amount of the security, will be required if a contractor is to argue that the balance of convenience favours the granting of an injunction on the basis that damages will not be an adequate remedy.
Finally, courts are seeking to operate without lengthy delays by utilising technology services to run hearings without the need to be present in-person in the court room. This is applicable to construction related hearings nationally and, as a result, applications for interlocutory injunctions are unlikely to be subject to drawn-out delays.
Andrew Hales is an experienced construction lawyer advising clients on a range of issues in the construction, infrastructure and energy sectors. He regularly advises on live project issues in order to assist with effective contract administration and to help clients avoid the escalation of disputes. Andrew has particular experience and a strong interest in renewable energy projects across Australia and internationally. Andrew acts in all forms of dispute resolution including litigation, domestic and international arbitration, expert determination, mediation and adjudication under security of payment legislation. Connect with Andrew via email or LinkedIn
Connect with Emily Miers via LinkedIn