Article

Factual Summary: The facts are contained in case's prior history abstracted at 2004 Annual Survey 252. That case involved the same parties and facts, and the Court granted a temporary injunction pending a full hearing. Campbell, J., found "a serious question" to be tried regarding unconscionable conduct and its potential to undo the letter of credit obligation.

Boral received goods pursuant to the underlying contract, however, it incurred expenses in repair and on other items arising defective goods in the sum of $174,065.39. Boral claimed the Beneficiary's demand for payment under the letter of credit was unconscionable in law based upon the Australian Trade Practices Act 1974.

Boral sought "declaratory orders that, in calling for payment under the letter of credit in a sum greater than the Undisputed Amount, (the Beneficiary) is engaging in conduct that is in all the circumstances unconscionable, or unconscionable within the meaning of the unwritten law of New South Wales", and a corresponding injunction. Boral put forward three grounds: an implied negative stipulation in the supply agreement; section 51AC; and section 51AA of the Trade Practices Act. The latter sections deal with unconscionability.

Legal Analysis:

1. Principle of Autonomy and its Exceptions: The Court described the principle of autonomy as the principle where the financier's unconditional payment obligation in commercial instruments is independent of the underlying contract between the applicant for the instrument and the beneficiary of the instrument, so that with limited exceptions, courts do not interfere with performance of the payment obligation.

Austin J cited with approval rationale of the High Court of Australia in Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, on the autonomy principle. "Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is 'as good as cash' can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash ... Being 'as good as cash' in the eyes of those to whom it is issued is essential to its function." Austin, J., referred to the fraud exception, but noted that the parties did not argue that this case fell within that exception.

2. Implied Negative Stipulation: There is a solid line of authority in Australia for the view that an injunction is available to restrain breach of an express or implied negative stipulation in the underlying contract, where the beneficiary has not yet made a call on the instrument, or a call has been made but not acted on. This is the notion that the Court may grant an injunction to restrain breach, by the beneficiary of the instrument, of a stipulation to the effect that the beneficiary will not call upon the financier to meet its unconditional payment obligation if there is a bona fide dispute between the beneficiary and account party. By this means, the Court does not interfere directly with the autonomy of the financier, but it prevents the beneficiary from invoking the financier's autonomous obligation. However, on the facts, Boral failed to establish that there was an implied negative stipulation in the supply agreement grounding an entitlement to an injunction to restrain the beneficiary.

3. Unconscionability: Sections 51AC and 51AA Trade Practices Act (Cth) 1974 provide respectively:

"A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories."

"A corporation must not, in trade or commerce, in connection with the supply or possible supply of goods or services ... engage in conduct that is, in all the circumstances, unconscionable."

Section 51AC has the effect of bringing into the statutory regime of the Trade Practices Act the general equitable concepts of unconscionability, in this case the law of New South Wales. The Court accepted the proposition that the independence principle, applicable to a standby letters of credit, cannot override the statute.

The Applicant argued that a call on the letter of credit at a time when it was clear that the Disputed Amount was not a sum due, and was therefore not capable of being the subject of a beneficiary's certificate, is unconscionable conduct. The beneficiary argued that the unconscionability provisions are circumstantial in nature and are directed at protecting the weak and inexperienced, and have no application to conduct affecting commercial entities such as the Applicant. The Court found no such limitation.

Austin, J., found the conduct to be unconscionable and added "the presumption of autonomy does not provide an adequate discretionary reason for declining declaratory and injunctive relief .... The position might have been different if this was simply a case of making a call on the irrevocable instrument to apply pressure to resolve the dispute. But here ... it was unconscionable for (the beneficiary) to use its rights under the letter of credit by certifying for payment of the whole Invoice Amount in those circumstances." His Honour repeated his "anxiety" and concern of the "dangers" associated with "judicial intervention" against the autonomy principle, but concluded that the acts of the beneficiary "involving as they do a call on the letter of credit on a false basis, are sufficiently special to overcome the hesitation which the principle of autonomy generates."

Comment:

The Court seriously opened the possibility for an exception to the autonomy principle based on a negative implied stipulation in the underlying contract. The rationale was that the injunction was not restraining the bank from paying, but rather that the order would restrain the beneficiary from making the claim or collecting.

The Court accepted the unconscionability exception and potentially damages the letter of credit product. Other Courts universally have required a serious or egregious fraud standard. Reducing the standard below any fraud to that of unconscionability is at best unwise and at worst bad law. It is doubted that the decision would be followed outside Australia. However, the main concern for letter of credit parties is that the principle from the case could be used in other jurisdictions to apply the common law concept of unconscionability or similar legal concept. If used at all, it should be limited on the facts to standby letters of credit or situations where the beneficiary's conduct involves the preparation of the key document.

*Dr. Davidson is a Senior Lecturer at the T.C. Beirne School of Law at the University of Queensland. He practised as a solicitor on a full time basis prior to 1992 and continues to practise as a consultant.

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