Article

Factual Summary: See facts in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2007] FCA 881 [No 1], abstract at 2008 ANNUAL SURVEY 240. Guarantee is extracted below.

Application

Two Guarantors, CBA and HSBC, made applications to set aside of injunctions granted ex parte on 5 June 2007 restraining each of them from making payment under their respective performance guarantees to the Beneficiary/Seller.

Reasons

The underlying construction contract provided:

The Company shall have the right under this guarantee to invoke the Banker's guarantee and claim the amount thereunder in the event of the Contractor failing to honour any of the commitments entered into under this Contract.

The performance guarantee requires each of the Banks to pay immediately on receipt of first demand in writing by Beneficiary/Seller the stipulated amount "... on breach of contract by contractor ...". Although Gilmore J added "I do not suggest, by this, that any of the terms of the Construction Contract have been incorporated into the performance guarantees".

Applicant/Buyer contended it was not "relevantly" in breach of the Construction Contract nor was there "any other contractual bases" entitling Beneficiary/Seller to make a demand upon the banks. In the alternative Applicant/Buyer contended that if it is in breach then Beneficiary/Seller has contributed to this directly by its failure to perform its obligations.

The demands were relevantly put in these terms:

We here by notify to you that[Applicant/ Buyer] has committed breach of the above referred contract and therefore in accordance with the terms of the said guarantee, we do hereby exercise our rights and convey our intension (sic) to invoke the Bank Guarantee and make a demand on you to remit the full value of Bank Guarantee amount of USD7,178,371.88 (United States Dollar, Seven Million One Hundred Seventy Eight Thousand Three Hundred Seventy One and Eighty-Eight Cents Only) and remit the guaranteed sum by way of wire transfer, immediately into our account, the details of which are given here under: ....

Independence and autonomy principle

Gilmore J stated that "at a general level" the application of the established independence or autonomy of irrevocable letters of credit is "uncontroversial." His honour recognised that the purpose of a standby letter of credit is to provide the beneficiary with an unfettered, immediate remedy upon the triggering event on the letter of credit. He noted that the "contractual promise between the banker and the beneficiary is unaffected by the terms of any underlying contract between the beneficiary and the applicant for the letter of credit". However the applicant may apply for an injunction to prevent the beneficiary from claiming against the bank. He added that these principles apply equally to the performance guarantees.

The Banks submitted that the only "traditional exception" where a bank may be enjoined, is beneficiary fraud, because of the Court's "special jurisdiction to prevent fraud", which is "wider than the jurisdiction to prevent the beneficiary breaching the underlying contract". Although curiously Gilmore J went on to state that the banks in this case accepted "another basis upon which the Banks might be enjoined is by reason of it being allegedly unconscionable, contrary to s 51AA of the Act". (para 17) However the banks argued that even if Beneficiary/Seller had engaged in unconscionable conduct the appropriate order would be to require Beneficiary/Seller to countermand or withdraw the previous demands which it has made on the performance guarantees rather than to enjoin the Banks.

Gilmore J referred to Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 where a clause in the Supply Contract required security for the performance of obligations by irrevocable standby letter of credit. The letter of credit required the purchaser to provide the bank with a statement that the supplier had failed to comply with the contract and a sight draft, which the bank undertook to honour.

The relevant clause provided:

"A party shall not convert into money security that does not consist of money until the party becomes entitled to exercise a right under the contract in respect of the security."

Brooking JA with whom Tadgell JA and Ormiston JA agreed said:

It is also plain that it is competent to the holder of security provided by the other contracting party to promise as part of the contract under which the security is provided - the underlying contract - not to do some act in relation to the security except in a certain event. Such a contractual promise is efficacious, not in the sense, of when the security is constituted by the obligation of a third person, that the third person can rely by way of defence as against the security holder on a term of the underlying contract, to which he was not a party, but in the sense that relief can be afforded to the person who procured the security in an action brought against the security holder on the promise contained in the underlying contract. No principle or rule of law would deny that a promise forming part of the underlying contract is in this sense efficacious, and the cases recognise this. (para 28)

Gilmore J referred to Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158, 164 where Austin J said that there are three principal exceptions, fraud, unconscionability (referring to Olex Focas Pty Ltd v Skodaexport Co Ltd [1997] and a third exception based on contract that whilst the Court will not restrain the issuer of the "bond" from acting on the unqualified promise, "if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts."

Gilmore J held that Applicant/Buyer was not in breach and accordingly the triggering event did not occur and Beneficiary/Seller was not acting according to any legal entitlement. His honour considered this to be unconscionable, within the meaning of s 51AA of the Act. His honour approved Austin J statement in Boral Formwork v Action Makers (2003) ATPR 41-953 at [14] when referring to s 51AA, "The principle of autonomy, applicable to a standby letter of credit, cannot override the Statute".

Gilmore J was satisfied that, "upon the same factual matrix", there is a serious issue to be tried whether Beneficiary/Seller was in breach if the negative stipulation conditioning the right to call up the performance guarantees.

On this basis of these finding the court determined the continuation of the injunctive orders as against Beneficiary/Seller was warranted. However, as against the banks, the court found it was "subject to consideration of the balance of convenience".

Balance of Convenience

The Banks raised a number of issues: whether damages from Beneficiary/Seller would be an adequate remedy; the need for an anti-suit injunction to prevent action in India; whether the Court should interfere with the protection offered by a letter of credit to a beneficiary; whether the injunction would adversely affect the commercial reputation of the banks in a way that would mean that those arranging international letters of credit and performance guarantees would prefer banks from other jurisdictions.

The court noted the "well-established" line of authority underlining the importance of the certainty generated by letters of credit, performance bonds and the like. The banks submitted that this was an important factor on the balance of convenience.

The balance of convenience favoured the grant of an injunction because the evidence demonstrated how Applicant/Buyer would be irreparably affected both financially and through an adverse impact on its reputation if Beneficiary/Seller were to press its demands.

Gilmore J concluded that the balance of convenience strongly favours the maintenance of the injunctive orders as against the banks.

Comments:

Unconscionability

This case confirmed that unconscionable conduct is sufficient to found an injunction restraining a claim by the beneficiary. Gilmore J made a scant reference to earlier cases and again did not analyse or consider the nature of impact of these cases on the principle of autonomy.

Principle of Autonomy

The court accepted without sufficient analysis of international standards, the pre existing Australian court statement that there existed three exceptions to the principle of autonomy, fraud, unconscionability and enjoining the beneficiary for breach of a negative implied stipulation not to make a claim.

Balance of Convenience

The court regarded its discretionary power as subject to the balance of convenience, being the financial impact, practical consequences and impact on the reputation of the respective parties

Textual Appendix

Guarantees

(CBA guarantee - the other guarantees were effectively identical) '

We Commonwealth Bank of Australia ABN 48 123 123 124 registered under the laws of Australia having head/registered office at 48 Martin Place, Sydney, New South Wales 1155 (hereinafter referred to as "The Bank" which expression shall, unless repugnant to the context meaning thereof, include all its successors, administrators, executors and permitted assigns) do hereby guarantee and undertake to pay immediately on receipt of first demand in writing by Company and any/all moneys to the extent of US$7,178,371.88 (United States Dollars, Seven Million, One Hundred and Seventy Eight Thousand, Three Hundred and Seventy One Dollars and Eighty Eight Cents Only) on breach of Contract by Contractor without any demur, reservation, contest or protest and/or without any reference to the Contractor. Any such demand made by Company on the Bank by serving a written notice shall be conclusive and binding, without any proof, on the Bank as regards the amount due and payable, notwithstanding any dispute(s) pending before any Court, Tribunal, Arbitrator or any other authority and/or any other matter or things whatsoever, as liability under these presents being absolute and unequivocal. We agree that the guarantee herein contained shall be irrevocable. This guarantee shall not be determined, discharged or affected by the liquidation, winding up, dissolution or insolvency of the Contractor and shall remain valid, binding and operative against the Bank. Company shall have the unqualified option to operate this Bank Guarantee to recover Liquidated Damages as leviable under the Contract.'

* Dr Alan DAVIDSON is a Professor at the TC Beirne School of Law, University of Queensland

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