Article

Factual Summary: Payment in the sum of AU$3.5 million was made by Guarantor on unconditional performance bonds. The prescribed demand was accompanied by the required statutory declaration stating that there had been default, that was said to be failure in achieving practical completion by the contractual date, and the amount said to be owing was liquidated damages calculated pursuant to the contract. Guarantor claims the Receiver, who made the declaration on oath, knew or should have known of matters that were either falsified or cast doubt upon the entitlement that was the subject of the demand. Guarantor argued inter alia that this conduct was "misleading or deceptive conduct" in breach of section 52 of the Australian Trade Practices Act 1974 and that Receiver was liable for negligence for misstatement.

Legal Analysis:

1. Misleading and Deceptive Conduct: The court considered the possibility of restraining payment based upon "misleading and deceptive conduct" of the beneficiary. The court acknowledged that the guarantor was not entitled to go behind the guarantee, or entitled to go into the contractual dispute in respect of which the guarantee was given. McDougall J stated:

"Guarantees of the kind in question play a very important part in trade and commerce generally, and in the building and development industries in particular. However, to acknowledge both that and the contractual force of the guarantee is not to say that s 52 of the Trade Practices Act has no application."

Section 52 provides: "A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive." Remedies for breach include restraining orders and damages.

McDougall J referred to Fletcher Construction Australia Ltd v. Varnsdorf Pty Ltd (1998) 3 VR 812 where the court, without offering any comment or conclusion, made a tentative reference to misleading and deceptive conduct by a beneficiary. McDougall J stated that "perhaps" if there were misleading or deceptive conduct in relation to presentation of "statutory declarations" supporting the demand, the guarantor might have been entitled to rely upon that as a circumstance vitiating the demand. McDougall J did point out that the court in that Fletcher Constructions did not reach any such conclusion and such comments were obiter.

McDougall J also referred to Ideas Plus Investments Ltd v. National Australia Bank Ltd (2006) 32 WAR 467, where Steytler P said "the presentation of the demand could amount to no more than a representation, on the part of the party making the demand, of 'a bona fide belief that the conditions had been satisfied and, perhaps ... that there were reasonable grounds for holding that belief'" (at [55]). At [56], Steytler P appeared to recognise that if a representation in those terms were made without reasonable grounds, then, based upon what Callaway JA had said in Fletcher, the demand might be vitiated. However, on the facts of that case there were reasonable grounds for forming the belief in question, and that the belief had been held in good faith, which "negated any prospect of an argument of misleading or deceptive conduct".

McDougall's conclusion, though cautiously put was to state that "those decisions do allow, at least as a possibility, that a guarantor in [Guarantor's] position may be able to rely, against the beneficiary, on misleading or deceptive conduct (if proved) in relation to the making of demand, in an action either to avoid payment or to recover the amount paid".

Comments:

The possibility of restraining the honour of an independent undertaking, such as a demand guarantee or letter of credit, based on misleading and deceptive conduct of a beneficiary is ill conceived for a number of reasons. The cases confuse dependent and independent undertakings. They ignore the possibility, that where the required supporting documents are deliberately falsified, the fraud exception would apply. No attempt was made to reconcile the court's statement that as a general proposition it is "not entitled to go behind the guarantee" with its statement that it is "arguable that a demand made under a guarantee could be vitiated by misleading or deceptive conduct". A casual, even careless comment made by one Judge in 1998 should not be the basis for the establishment of a previously unheard principle.

The three cases noted refer to an Australian statute, and should in any event be limited to the Australian jurisdiction. However, section 52 comes under part V of the statute which is intended for "Consumer protection". It is not meant to be applied to sophisticated commercial parties.

[AD/eml]

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.