Balancing risk: Injuncting recourse to bank guarantees under construction contracts

Bank guarantees are an important risk allocation device in construction projects and contracts.

In the recent decision of Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd [2025] SASCA 72, the South Australian Court of Appeal clarified that a beneficiary to a bank guarantee in a construction project (usually the Principal) will lose its right to have recourse to a bank guarantee after the date upon which the Principal was required to return or release the bank guarantees in accordance with the construction contract.  

Background

Synergy Construct Australia Pty Ltd (Contractor) was engaged under an amended AS4902-2000 form of construction contract (Contract) to design and construct a 36-storey student accommodation tower for 352 apartments at North Terrace in Adelaide for GSA North Terrace Pty Ltd (Principal).  

The Contract provided for the Contractor to provide security in the form of bank guarantees (Bank Guarantees) and included clauses that provided that:

• the Principal could have recourse to the Bank Guarantees to satisfy a bona fide claim the Principal may have against the Contractor;
• the Contractor is not permitted to take any steps to injunct or otherwise restrain the Principal from having recourse to the Bank Guarantees;
• the Principal is required to return and release one of the Bank Guarantees within 14 days of the achievement of practical completion and the second within 14 days after the final certificate.

The Contractor submitted three bank guarantees to a value of $1,999,038 which were held by the Principal. On 13 April 2022, the Superintendent certified that practical completion had been achieved on 31 March 2022 and that the defects liability period would end on 31 March 2023.  During the defects liability period, the Superintendent directed the Contractor to rectify a defect described as blocked sewer stacks which became the subject of an extended defects liability period, further negotiations and a dispute between the parties.

On 5 December 2023 the Contractor submitted its final payment claim and on 22 December 2023 the Superintendent issued a final certificate.  

The application at first instance

On 3 April 2024 the Contractor filed an application with the Supreme Court seeking an injunction restraining the Principal from making a written demand on the Bank Guarantees, including on the basis that the Principal was obliged to return the Bank Guarantees within 14 days after the Superintendent issued the final certificate.  

In the first instance, following a detailed review of relevant authorities, the Supreme Court dismissed the Contractor's application for an injunction on the basis that:

• the Bank Guarantees were intended to operate under the Contract as a 'risk allocation device';
• to preserve the status quo between the parties while the disputes between them are resolved, the Principal is entitled to call on the Bank Guarantees in accordance with the Contract;
• whilst the Contractor would suffer from prejudice if the Bank Guarantees were called upon, this prejudice was no different to the prejudice that would have been envisaged at the time the Contract was entered into.  

The application on appeal

On appeal, the Court of Appeal allowed the appeal and granted the injunction on the basis that (inter alia):

• once the Principal was required to return the Bank Guarantees under the Contract the Bank Guarantees could no longer operate as a risk allocation device;
• one of the serious questions to be tried was whether the Principal had an obligation to return the Bank Guarantees, and in these circumstances the entitlement to have recourse to the Bank Guarantees did not reflect the status quo when the entitlement was seriously disputed;
• at [103] "the risk allocation function of the [Bank] guarantees cannot control or dictate the Court's consideration of the balance of convenience, nor can it conclusively determine the status quo in some limiting way, when the very issue about which a serious question arises is whether that function had come to an end";  and
• a re-evaluation of the balance of convenience favoured an injunction because:
  • the refusal of the injunction would result in adverse financial and reputational consequences for the Contractor; but
  • if an injunction was allowed, the Principal would continue to hold the Bank Guarantees and retain the security benefit of the Bank Guarantees and would only lose the ability to have recourse to the Bank Guarantees pending resolution of the dispute.

Key Takeaways

This decision of the South Australian Court of Appeal puts a time limit on any risk allocation function of security under a construction contract and puts more weight to consideration of the balance of convenience test in circumstances where the right to call on security is a serious question to be tried.  

Parties should consider this carefully when drafting and negotiating construction contracts.

For assistance please contact a member of our Construction team in your state.

Authors

Geoff Brennan | Partner | +61 8 8236 1301 | gbrennan@tglaw.com.au

Shannon Schwarz | Partner | +61 8 8236 1175 | sschwarz@tglaw.com.au

‍