Acting Reasonably – Objective or Subjective Test?

October, 2014

Case note: Lend Lease Pty Ltd v Sugar Australia Pty Ltd

Supreme Court of Victoria

Vickery J

A recent interlocutory judgment provides some important guidance on the question of recourse to security under Australian Standard engineering contract AS4910-2002, cl 5.2, and whether “acting reasonably” in that context should be determined subjectively or objectively.

Lend Lease (“LL”) and Sugar Australia (“Sugar”) entered into a contract for the upgrade of a refined sugar station at Yarraville in Victoria. The contract related to the supply of engineering equipment with installation and therefore incorporated an amended version of AS4910-2002.

Pursuant to the contract, LL provided security by way of two unconditional bank guarantees each in the amount of $2,095,000 and the equivalent of 5% of the contract sum.

LL asserted it terminated the contract on 28 September 2011.

By a notice delivered to LL on 8 August 2014 (Recourse Notice) Sugar:

LL commenced the proceedings seeking an interlocutory injunction restraining Sugar from having recourse to the bank guarantees.

Sugar submitted that as the proceedings concerned the construction of the contract in the absence of an assessment of evidence, the court was obliged to finally determine the construction question without proceeding to trial.  Vickery J, after rejecting that the court was so obliged, held that the proper construction of the contract should be determined at trial.  His Honour noted that there is no authority directly on point concerning the construction of cl 5.2.

In particular, his Honour said that the potential for ongoing precedent concerning the construction of a clause in general use in the engineering and construction industry must be taken into account and, therefore, the resolution of the construction of cl 5.2 should be determined following a trial of the proceeding.

Clause 5.2 deals with availability of security and provides that following the giving of five days’ notice of its intention to do so Sugar may have recourse to the security when it claims (acting reasonably) to be entitled to:

LL contended that:

LL submitted that Sugar had no entitlement under the contract to have recourse to the bank guarantees and was not ‘acting reasonably’ in seeking to do so.  The contract does not define ‘acting reasonably’.   LL asserted that Sugar’s failure to act reasonably should be determined having regard to the following objective factors:

Sugar asserted the words ‘acting reasonably’ invoke a solely subjective element concerned only with its motive for making a claim for payment.  In other words, to satisfy the requirement to ‘act reasonably’ Sugar was only required to show that it had a bona fide claim for an amount equal to or exceeding the sum of the security.  Alternatively, Sugar submitted that ‘acting reasonably’ has both subjective and objective elements.  Once Sugar satisfied the subjective element, LL would need to establish that no reasonable person in the position of Sugar would have formed the view that it had a claim to be entitled to payment.

His Honour held that a serious issue to be tried arose in relation to two aspects concerning cl 5.2 of the contract:

Further, his Honour held that LL had demonstrated a sufficient likelihood of success to justify the preservation of the status quo pending trial.

On the remaining issues raised by LL, his Honour held:

As regards the second point above, his Honour based his finding on the following:

Conclusion

While these proceedings will be determined in the context of cl 5.2 of AS4910-2002, the phrase ‘acting reasonably’, or variants of it, are commonly inserted in construction and engineering contracts to fetter a right or discretion exercisable by a party.  Consequently, a judicial determination as to whether ‘acting reasonably’ should be assessed subjectively or objectively will be of considerable benefit to those preparing and advising on construction and engineering contracts.

 

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