Article

Note: Bonnie View Petroleum Pty Ltd (Lessee) sold its business and agreed to transfer its lease of the property rented from Thomas Coad and Vicki Dianne Duin (Landlords) to United Petroleum Pty Ltd (Lessor).

When contamination was discovered at the site, the parties entered into a side agreement whereby Lessee agreed to remediate the site and ultimately transfer the lease. A retention amount of AUD 100,000 was withheld from the purchase price, and the Lessee provided a bank guarantee of AUD 400,000 issued by Bankwest (Issuer) to assure performance of its obligations under the agreement. Pursuant to a clause in the contract, Anthony Craig Van Breugel (Lessee’s Director/Guarantor) also issued a guarantee and indemnity in favor of Lessor.

When a dispute arose regarding Lessee’s lack of remediation of the contamination and failure to assign the lease, Lessor sued Lessee and Landlords for breach of the side agreement and sought an injunction to prevent Landlords from entering a new lease with another party. The Supreme Court of Victoria, Commercial Court, Zamit, J. granted Lessor leave to proceed against Lessee and granted the injunction. As the suit against Lessee for breach of the side agreement moved forward, Lessor claimed interest on the proceeds of the delayed profits and sought a declaration that it was entitled to apply the retention amount and bank guarantee against its losses. Lessee also sought the bank guarantee and retention amount. The Supreme Court of Victoria, Commercial Court, Kennedy J., ruled in favor of Lessor and dismissed Lessee’s counterclaim.

The Supreme Court declared that Lessor was entitled to draw on the bank guarantee, to retain the proceeds of the guarantee to be applied towards the damages for breach of the side agreement, and to retain and apply the retention amount towards the damage. Lessor was entitled to an order against Lessee’s Director/Guarantor for the difference between the damages awarded and the total amount of the bank guarantee and the retention amount.

The Judge determined that by failing both to commence or complete the remediation and to assign the lease, Lessee breached the side agreement. The Judge also ruled the bank guarantee was “unconditional” and Lessor had the right to keep and apply it “as security for [Lessee’s] performance of its ‘obligations’ under the agreement.”

The Judge also ruled the retention amount was only payable to Lessee if Lessor informed Lessee that the environmental issues at the site had been remediated, or if Lessor gave notice that it wished to take an assignment of the site lease. The Judge ruled that the second part of the clause seemed to be “directed to a ‘wish’ to take the assignment following successful completion of the works” rather than a requirement to assign. The Judge therefore determined the bank guarantee and the retention amount could be applied to Lessor’s losses.

The final issue was whether the calling on the bank guarantee was a disposition of Lessee’s property within the meaning of section 468 of the Corporations Act. “Section 468(1) of the Corporations Act provides than any disposition of property of the company other than an exempt disposition made after the commencement of the winding up by the court is, unless the court otherwise orders, void.” The Judge ruled that there was no disposition of property as the bank guarantee “constituted a demand on the unconditional guarantee given by [Issuer]. [Lessee] was not even a party to this Guarantee.”

Text of the Bank Guarantee:
Clauses 1 and 2 provided:

  1. In consideration of the Beneficiary, at the request of the Customer, agreeing to accept this guarantee in connection with the Customer’s obligations to the Beneficiary pursuant to the Contract, the Bank, subject to the terms of this guarantee but otherwise unconditionally, undertakes to pay to the Beneficiary on demand any sum or sums from time to time demanded in writing by the Beneficiary to an amount not exceeding $400,000.00, less the aggregate of any amounts paid by the Bank to the Beneficiary under this guarantee (‘Guaranteed Sum’).
  2. If demanded, payment of the Guaranteed Sum will be made by the Bank to the Beneficiary without reference by the Bank to the Customer and not withstanding any notice to the Bank by the Customer not to pay and irrespective of the performance or non-performance by the Customer or the Beneficiary of the terms of the Contract.

[KEC/JK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.