Article

Factual Summary: A letter of credit was issued to provide practical security for the payment by Boral Formwork & Scaffolding Pty Limited (Boral). Those goods were supplied under terms of an agreement made in 2002, which made provision in clause 7, for Boral to provide an irrevocable standby letter of credit to the value of each order which it placed.

The letter of credit was issued by National Australia Bank, Sydney, to Action Makers Limited (Action Makers), an English Company, on 16 July 2002 for a total of AUD$2,300,000. That letter of credit contains a term:

"Payment under this credit will be made upon receipt by us of the above drafts and the following document in duplicate; beneficiary's certificate stating the amount claimed and certifying that such amount represents funds due to be paid to the beneficiary by Boral Formwork and Scaffolding Pty Ltd. Such amount was not paid to the beneficiary when due by Boral Formwork and scaffolding Pty Ltd in accordance with the unpaid invoice No ... dated ... demand for payment of such amount has been made by the beneficiary on Boral Formwork and Scaffolding Pty Ltd and such demand has remained unsatisfied."

Boral received goods, the invoice value of which was a little over $808,000. Boral alleged that some of the goods were defective upon receipt and admits that it owes an amount of $634,821.53. However Boral asserted that it incurred expenses in repair and on other items arising defective goods in the sum of $174,065.39.

Action Makers went into administrative receivership. If payment was made to the receivers for Action Makers, Boral would be an unsecured creditor for its claim. The receivers "candidly" stated that Action Makers would likely to go into liquidation, and that there will be a nil dividend to unsecured creditors. Thus, if payment is made on the letter of credit, Boral will suffer a "detriment for which any right to claim damages, or right of proof, which it has against Action Makers will not be an adequate remedy".

Applicant sought an ex parte injunction that the National Australia Bank be restrained from paying on an unconditional letter of credit, which was issued to Action Makers.

Legal Analysis:

The solicitors for the receivers pointed out to Boral, to which the court agreed, "the uncontroversial proposition that it is an essential characteristic of a letter of credit that it is an autonomous contract and its performance is independent of the underlying contract to which it relates."

Campbell, J., made reference provisions of the Australian Trade Practices Act 1974, which dealt with the legal consequences for unconscionable conduct to commercial transactions. His Honour referred to two Australian decisions which considered applying the legislation in similar, although not identical circumstances.

Campbell, J., quoted Batt J in Olex Focas Pty Limited v Skoda Export Co. Ltd [1998] 3 VR 380, who stated that the effect of the Trade Practices Act "is to work a substantial inroad into the well-established common law autonomy of letters of credit and performance bonds and other bank guarantees".

Campbell, J., fell short of deciding that the conduct in question was unconscionable within the meaning of the Act, but held that there was "a serious question to be tried about whether the making of demand for the full invoice value constitutes unconscionable conduct". Campbell, J., stated that it could not be doubted that in the usual case there is a "powerful reason for not undermining the institution of the issue of irrevocable letters of credit by the granting of injunctions". However his Honour considered the facts of the present case to be a "special factor" and held on the "balance of convenience" to grant the interlocutory injunction, "for only as long as is necessary to enable there to be a better informed argument before the court".

Comment:

Expanding the grounds for an exception to the independence principle is fraught with danger. The Australian Courts have played with the expanded concept of unconscionability since its inclusion in the Federal Trade Practices Act.

The Court did not directly decide that unconscionability should be an exception to the independence principle. However, in leaving the matter to another Court for full argument, the decision implies that unconscionability in the right circumstances can be an exception founded an injunction. The rationale for this decision is that it was an ex tempore judgment heard "late" in the day with no time to reflect on the consequences to letter of credit law.

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