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Factual Summary: Beneficiary is a charity intending to develop land worth some AU$90,000,000. Beneficiary and Principal executed a Deed to develop the land. The Deed required the Principal to obtain eight bank guarantees. The Deed provided for an entitlement to make demand under the bank guarantees if, among other things, there is failure to pay core option fees in accordance with a requirement of the Deed. Clause 2.6(b) of the Deed provided: "[Beneficiary] will not demand more than the money in arrears under this deed..."

Pursuant to the Deed, approval under Australia's Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) was obtained but the approval included the condition that the Principal:

"[C]ommences continuous construction of the proposed development at an expected cost of at least 50 per cent of the purchase price of the land by 31 August 2008 and advises this office in writing of the commencement date within 30 days of commencing construction; ..."

The bank guarantees provided: "[Guarantor] unconditionally and irrecoverably undertakes, on demand being made by the Beneficiary in accordance with this Bank Guarantee, to pay to the Beneficiary the sum demanded up to a specified maximum amount ... . The total of the specified amounts is some AU$9,000,000."

The approval to develop lapsed as construction had not commenced within time limits provided. As a result, proceeding with the project would involve the committing criminal offences under the FATA. When Beneficiary indicated that it would demand payment of AU$9,000,000 under the bank guarantees, Principal brought this action to restrain the making of these demands.

The Principal argued that the contract has been frustrated by reason of the lapse of the approval, and accordingly there are no longer amounts owing under the contract and that there is no entitlement for demands to be made under the bank guarantees.

The Beneficiary argued there is no frustration of the contract and that any lapse was the result of action, or inaction, of the Principal.

Hamilton, J, stated: "[Beneficiary's] arguments have a good deal of substance. However, in my view, they do not negative that there is a serious question to be tried as alleged by the [Principal] to the effect that the [Deed] has been frustrated".

Hamilton, J, referred to "special principles" relevant to "the grant of injunctive relief in relation to the making of demands or draw downs under bank guarantees and similar instruments". The basic principles were laid down in the High Court of Australia in Wood Hall Limited v. The Pipeline Authority [1979] HCA 21 with "an important exposition" by Austin, J, in Reed Construction Services Pty Limited v. Kheng Seng (Australia) Pty Limited [1998] 15 BCL 158. Austin, J's analysis was adopted in the Full Court of the Federal Court (French, Jacobsen and Graham JJ) in Clough Engineering Limited v Oil and Natural Gas Corporation Limited (2008) 249 ALR 458. In their joint judgment their Honours adverted to the rule that:

"In general terms draw downs under bank guarantees will not be restrained because to introduce a qualification on the entitlement of the owner to call upon the performance of the guarantees would be to deprive them of the quality which gives them commercial currency", citing Stephen J in Wood Hall at 457.

Hamilton, J, quoted Clough Engineering where their Honours stated there were three exceptions: first, fraud; second, unconscionability (Olex Focas Pty Ltd v. Skodaexport Co Ltd [1998] 3 VR 380). The third is the relevant issue for this case, per Austin, J, in Reed Construction Services:

"[I]if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts." (at 164)

Hamilton, J, stated that "Numerous authorities have accepted the third proposition", including Reed, Fletcher Construction at 826-7; Bachmann Pty Ltd v. BHP Power New Zealand Ltd, [1998] VSCA 40 at para 28; Baulderstone Hornibrook Pty Ltd v. Qantas Airways Ltd [2000] FCA 672 at para 10; and Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579 at para 37.

Hamilton, J, stated:

"[Principals'] contention is that cl 2.6(b) of the [Deed] is an express negative stipulation, breach of which will be restrained. They say that it is breached because, if the contract has been frustrated or otherwise brought to an end, nothing is owing under it, so that a demand made for payment will be for more than the money in arrears under the [Deed]."

Hamilton, J, regarded this submission as correct. "If the contract be non existent, then the demands are for more than the sum stipulated in cl 2.6(b)". Hamilton, J, referred to Reed Constructions, where "the subjacent contract provided that the security should be available to the beneficiary only in specified circumstances, it was held there should be taken to be an implied prohibition on the beneficiary calling up the security except where there was authorisation for it to do so in the relevant provision of the deed."

An injunction will not issue where damages are an adequate remedy. The evidence questioned the existence of an available market for the land and its development and the advantage to the project and the possibility of immediate expansion if the AU$9,000,000 were made available. In assessing the "balance of convenience", the court considered the Beneficiary continued operating at a loss and the availability of expedited hearings. Hamilton, J, stated it "would be a grave inconvenience to [Principals], the AU$9,000,000 having been paid out by [Guarantor], if they could not recover for a protracted period the AU$9,000,000 that they have deposited with [Guarantor] as the counter security for the grant of the bank guarantees."

In all the circumstances, Hamilton, J, concluded that "damages are not to be regarded as an adequate remedy but that the balance of convenience favours the grant of the injunctive relief sought."

* Dr. Alan Davidson is Senior Lecturer TC Beirne School of Law University of Queensland; Solicitor and Barrister Supreme Court of New South Wales and of the High Court of Australia. Dr. Davidson is a member of the DCW Editorial Advisory Board.

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