Article

Factual Summary:

To guarantee the performance of contractual obligations with the head contractor to supply a closed circuit television system for Minehunter ships in the Royal Australian Navy, a standby was issued for $110,000. The standby was also to secure amounts advanced by the beneficiary to the applicant to facilitate the performance of the underlying contract.

Without giving any notice of default to the applicant, as required by the underlying contract, the beneficiary made a presentation under the standby. The applicant sought an injunction to prevent the issuer from honoring the draw. The applicant alleged that the beneficiary was in itself in breach, having not made the requisite advances under the contract and having not given any notice of default. Further, the applicant stated that if the draw was honored, the applicant would be forced into liquidation, which would place it in breach of the underlying contract. The hearing to grant the injunction was ex parte, but the court did take notice of a letter in which the beneficiary stated that the applicant had failed to perform its obligations under the contract.

Legal Analysis:

The court first noted that injunctive relief should be given only in extreme circumstances in letter of credit cases. It stated that any other rule would threaten the integrity and reliability of the letter of credit as a payment mechanism. The court then noted that an injunction would not issue "unless the payment would be occasioned or tainted by actual fraud." Fraud was normally the only exception upon which an injunction had been issued. The court found, however, dicta in prior decisions suggesting that an injunction could issue in the face of "unconscionable conduct if sufficiently gross or even complete and utter non performance under contract." The court also reviewed Australian authorities which granted injunctive relief where the beneficiary had "no ... entitlement" to draw or a demand is not permitted. It also cited an English authority to the effect that an injunction would be to prevent "irretrievable injustice" Elian v. Matsas (1966) 2 Lloyds Rep. 495 (UK Ct. of App.).

The court also a distinction between enjoining an issuer from paying and enjoining a beneficiary from drawing, requiring that any payment made be frozen. It note that:

It is important that courts be particularly sensitive in cases such as this to the obvious risks for international commerce if doubt is cast on the commercial efficacy of bankers' undertakings and like obligations. These depend from the bank's point of view on the bank being able to make payment without regard to the contractual situation that may exist underlying the transaction which gave rise to the undertaking or letter of credit and to which the bank is not a party. ...

In reaching these conclusions, a heavy onus rests upon the Plaintiff to disclose all relevant matters which should be before the Court when granting such an injunction. In particular, if it should transpire at the time of the substantive hearing that the contractual position was otherwise than that the subject of the affidavit evidence before me or if otherwise there were material matters which could have affected the exercise of the Court's discretion not placed frankly before the Court, this would be a matter which the Court would take particularly seriously.

As the court had not been presented with any evidence that the beneficiary was entitled to make a drawing, and the court found that honor would unjustly injure the applicant, the court ordered that, should the issuer honor the draw, the letter of credit proceeds had to be deposited in to a frozen account and prevented from leaving the jurisdiction.

Before the order was made final, it was brought to the court's attention that the underlying contract chose Italian law to govern the obligations of the parties. As such, the court noted that the issuer had undertaken to refrain from honoring the credit for 24 hours while the applicant was given an opportunity to make a prima facie showing to the court that it was not in breach of the underlying contract under Italian law. Subsequently, the applicant submitted an opinion of an Italian commercial law professor that it was not in breach and that, under Italian law. Accepting the opinion, the court did so. However, the court noted that this equitable remedy was possibly subject to an interpretation by a court of law that, under Italian law, the beneficiary had breached the contract. In addition, the applicant undertook to forward a copy of the judgment to the beneficiary by express airmail.

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