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Note: To assure repayment of bank facilities extended by Rabo Australia Ltd and HSBC Bank Australia Ltd (Banks)1 supporting commodity trading and related foreign exchange trading in Australia, Gulf Import and Export Co and Emirates Trading Agency LLC (collectively "Guarantors") provided guarantees on behalf of various entities including Bustan International Pts Ltd and its holding company Bustan Australia Holdings Pty Ltd (Principals) in favor of Permanent Trustee Co Ltd (Beneficiary) who was acting on behalf of the Banks.

The guarantees provided that Guarantors, as paraphrased by the Judge, "unconditionally and irrevocably guaranteed payment to the Security Trustee [Beneficiary]" all monies payable by Principals to either the Beneficiary or one of the banks which was defined as "Guaranteed Money". The Judge quoted various provisions from the Guarantees, namely

Clause 7.1 provided that the liabilities of the guarantor under the guarantee ''are not affected by anything which might otherwise affect them at law or in equity including, without limitation'' any of a series of specified matters. Those matters include ''any part of the Guaranteed Money being irrecoverable'' (subcl (n)) and ''the invalidity or unenforceability of an obligation or liability of a person other than the Guarantor (subcl (q)). It is important to note cl 8.1, viz:

8.1 As long as the Guaranteed Money or other money payable under this guarantee and indemnity remains unpaid, the Guarantor may not without the consent of the Security Trustee:

(a) in reduction of its liability under this guarantee and indemnity, raise a defence, set-off or counterclaim available to itself, the Debtor or a co-surety or co-indemnifier against the Security Trustee or claim a set-off or make a counterclaim against the Security Trustee; or

(b) make a claim or enforce a right (including, without limitation, an Encumbrance) against the Debtor or any other Guarantor or against their estate or property; or ...

As to payment, under cl 9.2 the guarantor agreed to make payments under the guarantee to the Security Trustee ''without set-off or counterclaim''. Clause 15 required the guarantor to also pay specified costs, charges and expenses. Finally and importantly cl 18.1 provided proof by certificate as follows:

18.1 A certificate signed by the Security Trustee or its solicitors about a matter or about a sum payable to the Security Trustee in connection with this guarantee and indemnity is sufficient evidence of the matter or sum stated in the certificate unless the matter or sum is proved to be false."

When one of Principals improperly engaged in speculative foreign exchange trading and incurred losses in excess of AU$14,400,000.00, the Banks demanded payment from Principals under their credit facilities. When repayment was not made, Beneficiary was appointed receiver from the Principals, marshaled their assets, gave required notice to the Guarantors, and marshaled their assets, and reduced the amount due to AUD$5,078,640.16. It also made demand under the Guarantees, issuing the required certificates.

When Guarantors refused to honor their Guarantees, Beneficiary sued them for breach of their obligations. After a trial, applying Australian law, Supreme Court of Victoria, Hansen, J., entered judgment in favor of Beneficiary.

Guarantors challenged the amount certified, claiming that it was not the amount owed, raised defenses based on set-off, raised various other defenses, and alleged that Banks fraudulently had participated in the improper hedging activities in that their employees had knowledge or notice "that some of the foreign currency transactions of [Principal] were made by its employees as and by way of currency speculation and hence in fraud of [Principal]." Accordingly, Guarantors claimed that the amounts certified were false and, accordingly, no funds were owed by the Principals.

The Beneficiary argued that the amount claimed in the certificates was determinative unless it "could be shown to be false, for example in the calculation of the sum stated, or that error on the face of the certificate was otherwise shown." Otherwise, "the certificate would be sufficient evidence of the matter or sum stated."

Guarantors also "submitted that, notwithstanding the accessorial nature of a guarantee contract and the general principle that a guarantor may take advantage of defences open to the debtor against the creditor, the defendants ought not be permitted to raise the matters sought to be raised in their defence. [Guarantor] accepted that a guarantor is entitled to plead a set-off in its defence against a creditor, where the debtor would be entitled to a set-off against the creditor's demand arising out of the same transactions as the debt guaranteed and in fact reducing the debt." Guarantors asserted that the claims raised by Principals were not related to the amount due under the credit facility but an attempt to recover funds lost through the improper currency transactions which would require joinder of the Principals. More significantly, Guarantors contended that "several clauses in the guarantees themselves precluded the defence", including the undertakings to pay and the indemnities. It argued that "in effect, Guarantors assumed a primary liability to indemnify the plaintiff against loss."

Looking to the decision in Dobbs v. The National Bank of Australasia Ltd, (1935) 53 CLR 643, the Judge ruled that the effect of the Guarantees "was to provide a means by which Guarantor could, by tendering a certificate, establish both the legal existence and amount of the guarantors' debt, unless it is proved that the matter or sum referred to in the certificate is false."

As to the defenses raised, the Judge ruled that "[t]he terms of the guarantees preclude the defence". He stated that "as long as the guaranteed money remains unpaid, the Guarantors may not, without the Beneficiary's consent, raise a defence, set-off or counter-claim (whether available to the Guarantors or Principals) in reduction of their liability under the guarantees." He rejected the assertion that "the guarantees have a penal effect and are thus unenforceable." In addition, the Judge concluded that "if the Beneficiary was not able to recover from the defendants under the guarantees it would be entitled to recover under the indemnity clause."

With respect to Guarantors' claim of fraud on the part of the Banks, the Judge ruled that the effect of the clauses cited above in the Guarantees was that Principals "simply cannot avail themselves of the [fraud defense]. Even if they could make good that case, it would not affect my conclusion that the Beneficiary must succeed on the certificates."

Comment:

This decision illustrates the value of standardization of forms, rules of practice, and law. One wonders what the parties were attempting to achieve by means of the guarantees. The question (one that the Judge does not ask or answer) is whether the undertakings were accessory or independent. Based on the quoted texts of the guarantees, it is as if more than 40 years of standby and independent guarantee practice did not exist and the parties felt compelled to create an independent guarantee by cutting, pasting, and marking up an accessory guarantee. Had the transaction involved a small company and isolated bank, this result might be understandable. However, it involves large sums and sophisticated players. Given these facts, one wonders why there would be litigation over the ability of parties to assert defenses when that question could have been instantly resolved by the use of an undertaking that was clearly independent. The use of a standby or an independent guarantee subject to ISP98, UCP600, or the URDG would have resolved that question and made litigation unnecessary or summary. Presumably, there is a reason for such a cumbersome approach to this drafting exercise but, at a distance, it is not apparent. It resembles attempting to achieve the effects of the doctrine of negotiability in a promissory note by drafting its provisions into the note instead of relying on customary terminology as codified through a negotiable instruments statute.

[ JEB/krp]

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1. The facility was also opened by the Commonwealth Bank of Australia, Commonwealth Bank of Australia was replaced via an Accession Deed by HongkongBank of Australia Ltd, which in turn changed its name to HSBC Bank Australia Ltd.