Article

Factual Summary: In October 2006 Broker negotiated with the State of Queensland to supply steel pipe. Broker agreed to purchase the steel pipe from Supplier which had been imported from Korean Supplier. The price was A$19,337,670 with five shipments ex-South Korea at the end of January, February, March, April and May 2007 to Port Kembla, Australia. Payment was to be made 120 days from the provision of clean bills of lading. The steel pipe was to comply with set specifications.

On 22 December 2006, Issuer issued an irrevocable LC subject to UCP 500.

After three shipments were made, Broker/ Applicant claimed the pipes were defective in that they did not comply with the contract specifications. Broker/Applicant further claimed that Supplier/ Beneficiary had engaged in unconscionable conduct within section 51AA Trade Practices Act 1974 (Cth).

Supplier/Beneficiary had presented three sets of documents to Issuer drawing on the LC for each of the three shipments. Payment had not been made at the time of the hearing. Issuer had informed Advising Bank that the LC drawings "had been accepted" and that Issuer would remit the three respective amounts at the respective maturity dates. Based on these commitments, Advising Bank advanced discounted amounts to Supplier/Beneficiary which were used to pay the Korean Supplier. Advising Bank applied to be joined to the legal proceedings to "address the Court on the broader issue of policy considerations relating to the integrity of the letters of credit."

At the request of Supplier/Beneficiary, Advising Bank issued LCs in favour of Korean Supplier, relying on the Issuer's LC as security. The assignment clause is:

Capital Steel and Pipe Pty Limited being the beneficiary of Irrevocable Documentary Credit No: SD3BM872029 established by Westpac Banking Corporation, Sydney, dated 22 December 2006, which documentary credit is held by the Commonwealth Bank of Australia (CBA), Trade Services, Level 3, 120 Pitt Street, Sydney, hereby irrevocably authorises the CBA, upon their receipt of clear proceeds from drawings under the documentary credit to apply the funds in the consideration of any amount that may be payable (or having already been paid) with regard to the documentary credit(s) that Capital Steel and Pipe Pty Limited seeks to have established in favour of Daewoo International Corp.

On 9 January 2007, Advising Bank issued its LC for US$1,922,915 and subsequently made payment. On 8 March 2007 Advising Bank forwarded to Issuer the documents required under the Issuer's LC. On 16 March 2007, Issuer confirmed that at maturity it would remit the relevant amount to Advising Bank. A similar process occurred in relation to the second and third shipments. Advising Bank had a potential unsecured loan exposure to Supplier/Beneficiary of A$13,000,000.

If interlocutory relief was granted, Advising Bank might need to take control of Supplier/Beneficiary.

Broker/Applicant claims unconscionable conduct based on Supplier/Beneficiary's knowing failure to deliver steel pipe that complied with the specifications in breach of its contractual obligations and Supplier/ Beneficiary making and seeking to rely on the three purported drawings down on the LC in circumstances where it lacked the financial capacity to repay those drawings down. Broker/Applicant also claimed breach of a negative stipulation to found its application.

Legal Analysis:

1. Principle of Autonomy: Besanko J referred to UCP500 Article 3 (Credits v. Contracts), Article 7 (Advising Bank's Liability), Article 9 (Liability of issuing and Confirming Banks), and Article 11 (Teletransmitted and Pre-Advised Credits) and Lord Diplock's statement in United City Merchants (Investments) Limited v Royal Bank of Canada [1983] 1 AC 168 that there was one established exception to the autonomy principle that was where the seller, "for the purpose of drawing on the credit, fraudulently presents to the confirming bank's documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue." However, his honour discussed unconscionability and a negative stipulation in the contact as possible exceptions.

2. Unconscionability as an Exception to Payment: Section 51AA Trade Practices Act 1974 (Cth) (TPA) provides: "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."

Supplier/Beneficiary conceded that breach of a negative stipulation and unconscionable conduct within s51AA (TPA) as exceptions to the autonomy principle. Without examination Besanko J said the concession "appears to be correct." Besanko J did not examine the issue and was not put to the test. This view that his honour only rates as high as "appears to be correct" is obiter as best. The case proceeded on the basis that the "unconscionability exception" exists without due consideration.

Besanko J referred to Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 and Boral Formwork and Scaffolding Pty Ltd v Action Makers Ltd [2003] ATPR 41-953, but only in connection with the unconscionability issue. Besanko J approved the statement in the latter case when referring to s51AA: "the principle of autonomy applicable to a standby letter of credit, cannot override the statute."

Besanko J stated "a seller of goods who presents the necessary documents under a letter of credit and at the time of doing so has a level of knowledge about the goods and whether they comply with the contract may be guilty of unconscionable conduct within s51AA. I am prepared to proceed on the basis that such unconscionable conduct could found an order restraining payment under the letter of credit. That, of course, is a very general proposition." However, his honour determined that in this particular case that it was not established that there was serious question to be tried.

3. Implied Negative Stipulation: Broker/ Applicant suggested that the breach of a negative stipulation was an exception to the autonomy principle entitling the court to restrain payment. Besanko J found there was no such express condition and added, "nor do I think it can be said that there is a serious question to be tried that there was an implied term to that effect." However his honour did not question the existence of such an exception, citing Clough Engineering Limited v Oil and Natural Gas Corporation Ltd [2007] FCA 881.

4. Estoppel, Doctrine of Acquiescence, Hardship, Fairness, Damages: Advising Bank submitted that the Court should not grant interlocutory relief restraining LC payment referring to the doctrine of estoppel, the principle that he who seeks equity must come to the Court with clean hands, the doctrine of acquiescence, considerations of hardship and unfairness and the fact that damages are an adequate remedy. Besanko J stated that these submissions "raise some difficult issues of law and fact," but did not elaborate having decided to refuse interlocutory relief on other grounds.

5. Interlocutory Orders and the Balance of Convenience: His honour considered the balance of convenience having regard to the nature of interlocutory orders. The factors included the following.

The application for an injunction prohibiting Supplier/Beneficiary from making any further demand under the Issuer's LC is "probably misconceived" because the demand had been made. Issuer was already "under an irrevocable and unconditional obligation to pay" without any further action on the part of Supplier/Beneficiary.

Restraining Issuer paying would "probably lead to financial disputes between [Broker/Applicant] and [Supplier/Beneficiary]." Broker/Applicant has substantial financial resources. Supplier/Beneficiary does not. Broker/Applicant submitted that payment by Issuer would leave Broker/Applicant with no effective remedy against Supplier/Beneficiary. Besanko J stated; "On the face of it that is a weighty consideration in favour of [Broker/Applicant]."

Besanko J considered that the "most important consideration" was the fact that Broker/Applicant gave the Issuer's LC. It agreed to the issuing of an irrevocable LC to be governed by the UCP, which makes "it clear that the letter of credit transaction is quite separate from the underlying sale of goods transaction." Besanko J appreciated that the LC was "designed to give Supplier/Beneficiary the security of knowing that it would be paid the price for the goods and avoid the difficulty of not being paid."

Another "important consideration" was the prejudice caused to Supplier/Beneficiary and Advising Bank. Besanko J expressed particular concern regarding Advising Bank's exposure as "an innocent party."

Two other factors considered were the fact that Broker/Applicant has the steel pipes and that Supplier/ Beneficiary has delivered other goods to Broker/ Applicant and had not been paid. The latter point shows that "[Broker/Applicant]'s loss, if interlocutory relief is refused, may not be as great as it suggests."

The court concluded, "the balance of convenience clearly favours the refusal of those orders sought."

Comments:

1. Unconscionable Conduct: This is the fourth Australian case giving credence to the possibility of unconscionable conduct as an exception to the autonomy principle. However, this judge fails to appropriately address the issue, and merely accepts the first defendant's concession without little independent analysis.

The quote that "the principle of autonomy cannot override statute" is fraught with errors. First, it was not the intention of the legislature to address LCs. S51AA is designed to protect consumers, not experienced bankers and merchants. Second, whilst the autonomy principle does not "override the statute" Besanko J makes no attempt to discuss the use of judicial discretion, the integrity of the LC product and use of alternative remedies. There is danger of this quote being used as truism out of context.

Besanko J explained that Broker/Applicant agreed to the issue of an irrevocable LC which "is quite separate from the underlying sale of goods transaction." Nevertheless, his honour considered multiple contractual factors in accepting unconscionability as an exception in principle.

The court seemingly ignored s51AAB, which provides that s51AA does not apply to "financial services. This recent provision did not exist at the time of the Olex Focus case and spuriously is ignored in this case.

2. Negative Stipulation: The true effect of a negative stipulation was not explored by the court. There is danger that, by stating this general proposition without proper application to the case, greater credence will be given to this questionable development.

3. Interlocutory orders and the balance of convenience: The court appropriately weighed a range of factual matters to determine the appropriateness of interlocutory relief. However, usually plaintiffs are considering the nature and standard of the fraud (proven, gross, prima-facie, etc.), rather than the contractual consequences.

Cases of this nature are a real threat to the LC as an international reliable payment instrument.

* Dr Alan DAVIDSON is a Senior Lecturer TC Beirne School of Law University of Queensland and a Solicitor and Barrister.

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