Article

Factual Summary: Purchaser entered into a contract to purchase an apartment from Vendors. Originally, the contract called for a cash deposit of AUD$100,000, however, the parties substituted this for a bank guarantee naming Vendors as apparent beneficiaries. The guarantee was "held by" Conveyancer. Purchaser later challenged the enforceability of the contract on grounds of alleged misrepresentations as to the apartment's size, and purchaser filed an action seeking declaratory relief that the contract lawfully repudiated and an order setting the contract aside. Purchaser also sought damages for the false and misleading conduct, and a permanent injunction preventing Vendors from negotiating with the bank guarantee.

In the interim, Purchaser/Principal also sought an interlocutory injunction restraining Vendors/ Beneficiaries from drawing on the guarantee until the contract suit was settled. The trial court concluded that monetary damages were a sufficient remedy, if the contract were ultimately set aside or rescinded and declined to grant the interlocutory injunction. On appeal, the appeal was allowed, and the injunction extended and classified as an interlocutory injunction.

Legal Analysis:

1. Stakeholder: The trial judge had concluded that the Conveyancer was not a stakeholder. Vendors conceded that the trial court judge misunderstood the contract in declaring that the Conveyancer was not a stakeholder. The appellate court found that the text of the contract specifically stipulated that the Conveyancer would hold the guarantee as a stakeholder. The appellate court then reviewed prior precedent regarding the role of the stakeholder, concluding that "whether the deposit is held on trust or under a contractual or quasi-contractual obligation, it is the duty of the stakeholder to hold it in medio pending outcome of a future event", and declined to address the trustee issue as inappropriate to the appeal.

2. Damages as an Adequate Remedy: The trial court's basis for finding that damages were adequate in the event of a rescinded contract was that Principal could simply file suit and recover the proceeds of the guarantee. The appellate court, however, noted that the Principal would not have a suit against the Vendors, but only against the Conveyancer/stakeholder. Furthermore, the appellate court was more interested in protecting the Principal's property right over the deposit, favoring an injunction.

3. Interlocutory Injunctions: For an interlocutory injunction to be granted, the party seeking the injunction must have a prima facie case with "a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial". Additionally, the party seeking the injunction must show it would suffer greater hardship without an injunction than the other party would suffer with an injunction. The Vendors "conceded that they would face no real prejudice with the granting of an injunction, and that there was a prima facie case to be tried." Given that Purchaser had a prima facie case with a reasonable chance of success, and an injunction would not impose hardship on Vendors, the Judge found an interlocutory injunction appropriate.

Comment:

1. This decision is seriously problematic for Australian law regarding independent undertakings. Instead of treating the bank guarantee as independent of the underlying transaction, the appellate court interprets its significance by virtue of the terms of the underlying agreement that were meant to apply to an escrow deposit. It then emasculates the bank guarantee by determining the role of the escrow agent who should have "held" the escrowed funds as a stakeholder. If, as is suggested, the Vendors were the Beneficiaries, the theoretical "holding" of the bank guarantee is irrelevant. The appellate court is wrong in concluding that the substitution of a bank guarantee did not change the relationships. Only LC fraud would have justified an injunction and certainly not what is a mere contract dispute.

[JEB/jsc]

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