likely intended to be a means of giving LORAC comfort about the circumstances in which its security would be at risk. It is not unusual for contractors to seek this sort of protection when negotiating these types of clauses.
Nonetheless, this decision appears to stand for the proposition that it will usually be straightforward for a construction principal to establish that they have acted on a bona fide basis. That is particularly so given that the issue will usually only arise in an interlocutory setting, such as an injunction application, where, as Tottle J stated, there are procedural limitations and evidence is not usually tested by cross examination.
An initial view of the decision might be that the requirement for demands on security to be made on a bona fides basis offers no protection to contractors given the relative ease by which Samsung appeared to jump the hurdle. However, there is another way of looking at the case.
When coupled with a notification period, as was the case here, the inclusion of a requirement that the principal to act reasonably (or bona fides) will, in most circumstances, permit a contractor to argue that they are not. Thus, there will almost always be an opportunity for a contractor to bring an injunction application and thereby force the principal to proves its bona fides. While that application might not always succeed, indeed, this decision suggests it will usually fail if that is the only argument, the mere ability to legitimately make the argument will usually have an added collateral benefit of buying the parties more time to continue to negotiate. It might even give a contractor who was in a weak negotiating position a stronger position while the principal diverts resources into defending the injunction application. In parallel, the time taken for the application to make its way through the court process might give the contractor time to negotiate with its bankers so that even if a call on the security is made there are alternative financing arrangements in place to soften the blow of such a call.
So, while it might be easy for a principal to establish its bona fides, forcing it to do so could just be a lifesaver for the contractor!
Matthew Blycha - Partner
Matthew advises on the development, construction and operation of resource projects. He has worked on large-scale infrastructure projects and project finance transactions in industries including power, mining, rail and oil and gas across Asia, Australia and the Middle East. He acts for operators, managers, contractors, specialist sub-contractors and joint venture participants, and has also worked in-house with energy companies regarding the development of LNG projects.
Matthew has particular experience with offshore construction and other offshore oil and gas operations. He has advised clients in relation to dispute resolution and has worked with clients on international arbitrations under various rules including ICC, SIAC, UNCITRAL and ad-hoc arbitrations.
Matthew is qualified in Australia and England and Wales.