Article

Factual Summary: In connection with development of a residential subdivision, Sudholz Pty Ltd (Subcontractor) entered into a contract with Airlie Summit Pty Ltd (Contractor). The contract required Subcontractor to furnish a bank guarantee for AUS$275,000. In fulfillment of this condition, Subcontractor obtained a bank guarantee from Westpac Banking Corporation (Guarantor).

When a dispute arose between the parties which led to notices of default, Contractor gave notice of termination, claiming that Subcontractor's actions constituted a repudiation of the contract. Several months later, Contractor/Beneficiary "attempted to call up the guarantee" which caused Subcontractor to apply for an injunction. After a hearing, the Supreme Court of Queensland, Mackenzie, J., ordered that the injunction remain in place barring Contractor/ Beneficiary from drawing on the bank guarantee.

Legal Analysis:

Mackenzie J did not analyse the nature of guarantee itself nor the bank's obligation to pay when a demand is made. Instead the court examined the contact between the applicant and the beneficiary and analysed under what circumstances the beneficiary is entitled to make a call. Mackenzie J, without expressly stating, entertained the proposition that the court could restrain the beneficiary for making a demand for payment based upon a negative stipulation in the underlying contract and reached its conclusion on a "balance of convenience".

Applicant relied on three propositions. First, the contact required five days' notice to call on the guarantee. Beneficiary submitted that, notwithstanding this provision, a separate provision permitted Beneficiary to call on the guarantee without giving notice where Beneficiary had a bona fide claim to have terminated the contract and to be owed money by the applicant. The second was that it was necessary that the beneficiary be entitled to payment of an entitlement under the contract before the guarantee could be relied on, raising issues of construction and principle. The third concerned the opposing contentions about termination of the contract, since recourse to the security is available to the party terminating the contract.

Implied Negative Stipulation

It was an essential part of Applicant's argument that it was implicit in the contract that Bbeneficiary was not entitled to call upon the bank guarantee otherwise than in specific circumstances. The court described this as an implied negative stipulation.

To restrain the breach of a negative stipulation in the underlying contract which conditioned the right to call up the bank guarantee, Beneficiary submitted that Applicant must demonstrate a serious question to be tried. Underlying Beneficiary's argument was the proposition that it was sufficient for it to establish, in relation to Applicant's second and third propositions, that it had a bona fide claim to terminate the contract and to be owed money by the applicant. It was also submitted that the balance of convenience did not favour the grant of an injunction because Applicant's material did not cogently establish that it would suffer irreparable prejudice for which damages would be an inadequate remedy.

Beneficiary argued that the purpose of the guarantee was to avoid the risk of being out of pocket during the determination of the dispute between the parties, by providing the beneficiary with access to funds. The court then analysed the contractual circumstances where the beneficiary should exercise this right. Mackenzie briefly noted the case Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812, where Callaway, JA., observed that guarantees were an efficient substitute for cash and that it would be unfortunate if the law made them unattractive, but Mackenzie J., otherwise ignored this principle. Instead the judge analysed the language of the contract and similar cases construing when expressions such as "money due" entitled the beneficiary to make its demand.

The judge concluded, "It is plain from what has been said that the right to recourse depends on the terms of the contract and that the law is unsettled ... I am satisfied that the applicant demonstrate a serious question to be tried has been satisfied".

Mackenzie, J., considered the balance of convenience in ordering the injunction. Applicant deposed that if the guarantee is called up Applicant's reputation and standing would be harmed. If drawn upon, Applicant would be required to disclose its security history to prospective clients as part of the due diligence process when tendering for work, including a credit reference check and a search of the court registry. Applicant is "pre-qualified" to perform work for the Queensland Government on set criteria, and this order would change the applicant's status. The judge held that the balance of convenience is in favour of the restraint sought by the applicant.

The injunction was so ordered subject to "the usual undertaking as to damages" by the applicant.

Comment by Dr. Alan DAVIDSON:

This case is frustrating because the court mainly summarised the parties submissions making few comments, rulings or proffering an opinion. His Honour made no mention of the independence of the bank guarantee, the terms of the guarantee or only brief mention commercial need to treat such guarantees as cash. His Honour made mention of the concept of an implied negative stipulation as grounds to restrain the beneficiary, but gave little explanation other than ruling on the balance of convenience. Given that both parties were within the one jurisdiction His Honour may have felt that the beneficiary was adequately protected by the undertakings as to damages.

Comment by DCW:

Where the beneficiary has a colourable basis for drawing on the guarantee, it is a considerable stretch to conclude that the breach of promise in the underlying contract but not a condition to the independent guarantee constitutes LC fraud sufficient to justify enjoining a drawing which complies on its face with the terms and conditions of the LC. This decision represents a serious departure from accepted LC jurisprudence.

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

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.