Board Solutions Australia Pty Ltd v Westpac Banking Corporation
[2009] VSC 474
•30 October 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
PRACTICE COURT
No. 9203 of 2009
| BOARD SOLUTIONS AUSTRALIA PTY LTD (ACN 132 807 811) | Plaintiff |
| v | |
| WESTPAC BANKING CORPORATION (ABN 33 007 457 141) & ORS | Defendant |
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JUDGE: | J. FORREST J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 7 October 2009 | |
DATE OF JUDGMENT: | 30 October 2009 | |
CASE MAY BE CITED AS: | Board Solutions Australia Pty Ltd v Westpac Banking Corporation & Ors | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 474 | |
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PRACTICE AND PROCEDURE – Interlocutory injunction – Bankers’ undertaking – Unconscionable conduct and fraud alleged by the plaintiff – s 51AA and s 51AC of the Trade Practices Act.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mrs C. Kenny SC with Mr P. Fox | Heinz & Partners |
| For the First Defendant | Mr G. Moffatt | Middletons |
| For the Second Defendant | Mr R. Randall | Maddocks |
| For the Third Defendant | Mr M. Simon | Chadwicks – The Law Firm |
HIS HONOUR:
Introduction
The plaintiff, Board Solutions Australia Pty Ltd (“BSA”), authorised its bank, Westpac, to provide a bankers’ undertaking (“the undertaking”) to Bendigo and Adelaide Bank Limited (“Bendigo”) securing the trading facility of Arden Way Pty Ltd (“Arden Way”) with Bendigo. Arden Way supplied building products to BSA during 2009.
On 21 September 2009, Bendigo as favouree, made a demand on Westpac, as guarantor, to make payment in accordance with the terms of the undertaking for an amount in excess of $1 million.
On 24 September 2009, Davies J in the Practice Court granted an interim injunction restraining Westpac, Bendigo and Arden Way (“the defendants”) from taking further steps in relation to the enforcement of the undertaking. That injunction was continued by order of Vickery J made on 2 October 2009. BSA now seeks an interlocutory injunction restraining Bendigo from making any further demand on the undertaking until there is a trial of its proceeding against the defendants.
Courts rarely interfere with bankers’ undertakings, especially those that are, on their face, unconditional. The nub of BSA’s case is that Bendigo has acted unconscionably or fraudulently in seeking to enforce the undertaking. BSA argues that the wording of the undertaking is effectively a guarantee of Arden Way’s indebtedness to its banker, Bendigo, when in fact its intended purpose was only to provide security for interim payments for products provided by Arden Way to BSA. BSA contends that Bendigo and Arden Way knew that it was only prepared to authorise a bankers’ undertaking limited to the supply of goods and, notwithstanding this knowledge, Bendigo now seeks to recover far more than any obligation BSA has pursuant to its agreement with Arden Way.
I think that BSA has demonstrated a strong arguable case in relation to Bendigo and Arden Way’s conduct. I have concluded that BSA is entitled to an order continuing the injunction until the trial against Westpac and Bendigo. However, in my view, there is no utility in continuing the injunction against Arden Way.
Evidence relied on
BSA filed the following affidavits:
(a) Three affidavits of Jonathan Selkirk, director and secretary of BSA, sworn on 30 September, 1 October and 8 October 2009.
(b) Affidavit of Anthony Stone, a director of BSA, sworn on 24 September 2009.
(c) Affidavit of Graham Hill, solicitor for BSA, sworn on 6 October 2009.
In addition to the affidavits and exhibits tendered in the course of proceedings, BSA tendered a number of documents produced by Bendigo at the hearing.[1]
[1]Exhibit BSA1.
Bendigo filed an affidavit of John Spina, a senior manager in its international trade division, sworn 1 October.
Arden Way filed an affidavit of Carl Vreko, a director, sworn 7 October 2009.
Westpac filed no affidavit material.
Factual background
BSA is part of the Selkirk Group of Companies which operate out of Ballarat.[2] It was incorporated in August 2008. On 12 September 2008, it entered into an agreement (“the distribution agreement”) with DM Multiboard (Aust) Pty Ltd (“Multiboard”) to distribute magnesium oxide board products in Australia and New Zealand.[3]
[2]Affidavit of Mr Anthony Stone [5].
[3]Affidavit of Mr Anthony Stone [3] and [4].
Both Arden Way and Multiboard are companies of which Mr Carl Vreko is managing director. An apparent corporate restructure resulted in Multiboard assigning its rights and obligations under the distribution agreement to Arden Way in December 2008.[4]
[4]For consistency, I have referred to Multiboard (Aust) Pty Ltd (“Multiboard”) as the contracting entity up until December 2008.
The terms of the distribution agreement relevant to this application are as follows; BSA was to pay Multiboard in the following manner (clause 4.3):
(b) Without limiting paragraph (a)(ii) above:
(i) For each initial stocking order for each warehouse in the Territory placed in the first 24 months from the Commencement Date, payment terms are:
(1) 20% of the total price of Products ordered is to be paid with the order; and
(2) the balance 60 days after the end of the month in which the Products are accepted at the Delivery Point; and
(ii) For subsequent orders, no deposit is payable with order and full payment is due 30 days after the end of the month in which the Products are accepted at the Delivery Point.
The distribution agreement also provided for “security for initial orders” in the following terms (clause 4.4):
(a)In this clause, ‘Bank Guarantee’ means an unconditional undertaking in favour of Multiboard by a bank approved by Multiboard and lawfully carrying on business under the Banking Act 1959, to pay the Bank Guarantee Amount to Multiboard upon demand and which:
(i) is assignable by Multiboard to any successor in title;
(ii) is otherwise in a form and containing provisions which are acceptable to Multiboard Acting reasonably.
(b)Solely to secure payment by the Distributor of amounts due pursuant to Clause 4.3(b)(i), the Distributor must give to Multiboard a separate Bank Guarantee for the applicable Bank Guarantee Amount for each initial stocking order, at the time of making that order.
(c)The Distributor must ensure that each Bank Guarantee is kept current and enforceable.
(d)If Multiboard properly claims on a Bank Guarantee, the Distributor must promptly:
(i) pay to Multiboard a cash sum equal to the amount claimed; or
(ii) provide a replacement or additional Bank Guarantee equal to the amount claimed.
(e)If the Distributor fails to pay an amount due by the day after the due date for payment in accordance with Clause 4.3(b)(i)(2), Multiboard will be entitled make a claim on the Bank Guarantee for the amount due. For the avoidance of doubt, Multiboard must not make any claim against the Bank Guarantee:
(i) in respect of any order for which the Products have not been accepted, or in respect of which acceptance of the Products is in dispute; or
(ii) for any deposit, or any order made which is not an initial stocking order referred to in Clause 4.3(b)(i).
(f)Multiboard must return each Bank Guarantee to the Distributor within 7 days of the Distributor making payment in full for the initial stocking ordered secured by that Bank Guarantee. (Emphasis added.)
Between July 2008 and December 2008, there was considerable email correspondence between BSA and Westpac, BSA and Bendigo and BSA and Multiboard. That correspondence, as well as internal correspondence at BSA, is set out in the affidavit of Mr Jonathan Selkirk of 1 October 2009. The following matters emerge from that correspondence:
· From the commencement, BSA was concerned that an unrestricted security could simply be claimed upon by Multiboard, even where the terms of the agreement had been complied with.[5]
[5]Emails 1, 2 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
· On a number of occasions BSA communicated to Multiboard its concern about Multiboard having an unrestricted bank guarantee – one that could be claimed upon regardless of compliance with the terms of the agreement.[6]
[6]Emails 2, 5, 6 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
· Multiboard said as follows to BSA in August 2008: “Our understanding is that the bank guarantee will only be utilised on active purchase orders, which we are happy to stipulate is limited, to active initial stock orders. Our intent here is not to draw down on the bank guarantee prior to the expiry of the negotiated credit term, i.e. 60 days after delivery, rather than to put in place a security against the purchase order”.[7]
[7]Email 6 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
· Bendigo was aware of BSA’s concerns about an unconditional undertaking or guarantee. On 19 September 2008, seven days after the distribution agreement was signed, Mr Spina of Bendigo emailed Mr Vreko of Multiboard, stating: “Carl to provide Selkirk with additional comfort where it includes a clause that requires a copy of an original bill of lading which confirms shipment of the goods with reference to an order or confirmation number before claiming under the guarantee in your favour from Selkirk should you not receive payment. Additional documents could include either a quality or inspection certificate to be produced (which we presented by the Chinese supplier under the import letter of credit)”.[8] (Emphasis added)
· In its correspondence with Multiboard after the distribution agreement was signed, BSA continued to emphasise that any guarantee must be linked to compliance with the clauses of the distribution agreement,[9] which referred specifically to the manner in which the guarantee should operate.
· BSA also communicated its concern over an unrestricted bank guarantee to Westpac. It specifically referred to the contents of the distribution agreement.[10]
[8]Exhibit BSA1.
[9]Email 16 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
[10]Emails 16, 21 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
BSA placed its initial stocking order with Multiboard on 28 November 2008.[11]
[11]Affidavit of Mr Jonathan Selkirk, 1 October 2009 [2], Exhibit JDS1.
On 5 December 2008, Westpac, at the request of BSA, provided an undertaking nominating Multiboard as favouree (“the first undertaking”). It was expressed in the following terms:
In consideration of the favouree accepting this undertaking for the stock order of a new Multiboard product Westpac Banking Corporation unconditionally undertakes to pay on demand … up to a maximum aggregate sum of $1,488,155.63. (Emphasis added.)
I return to the contents of Mr Selkirk’s affidavit:
· After the execution of the first undertaking, Multiboard sought to alter the guarantee into the name of Arden Way.[12] However, as a result of discussions and correspondence between Bendigo, Multiboard and BSA, BSA agreed to amend the undertaking to make Bendigo the favouree. There was considerable email correspondence between the three parties between 9 December 2008 and 12 December 2008.
· Mr Selkirk, on behalf of BSA, was still insistent that the undertaking be limited and asked for confirmation on 9 December from Multiboard that: “The amended banker’s undertaking in favour of Bendigo and Adelaide Bank Limited satisfies the relevant provisions of our distribution agreement with DM Multiboard (Aust) Pty Ltd namely clause 4.4 and that the undertaking can only be claimed against in accordance with clause 4.4 of distribution agreement.”[13] BSA received an answer on 10 December from Multiboard which implicitly agreed with this proposition.[14]
[12]Email 27 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
[13]Email 33 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
[14]Email 34 in the affidavit of Mr Jonathan Selkirk, 1 October 2009.
The above correspondence, I think, bears out the belief of Mr Stone of BSA:
that it was always my understanding that [Bendigo] could only call for payment pursuant to the banker’s undertaking in respect of accounts that were otherwise due and payable by [BSA] to [Arden Way] as part of the distribution agreement and in particular, in accordance with the provisions of clause 4.4 of that said agreement.[15]
[15]Affidavit of Mr Anthony Stone [12].
Mr Selkirk also deposes to this belief, which, of course, is consistent with the terms of the distribution agreement.[16]
[16]Affidavit of Mr Jonathan Selkirk, 30 September 2009 [12].
On 12 December 2008, after correspondence (some of which I have referred to) between Bendigo, Multiboard and Westpac, the undertaking was redrawn and directed to Bendigo as the favouree and is expressed in the following terms:
In consideration of the favouree accepting this undertaking for the purpose of trade facilities established by Bendigo and Adelaide Bank Limited to Arden Way Pty Ltd for importing of stock order for new Multiboard product Westpac Banking Corporation (the bank) unconditionally undertakes to pay on demand any amount or amounts which may from time to time be demanded in writing purporting to be signed by or on behalf of the favouree, up to a maximum aggregate sum of $1,488,155.63 (the amount).
Payment of the amount or any part thereof will be made by the bank to the favouree without reference to the customer and regardless of any notice from the customer of the bank not to pay any amount.[17] (Emphasis added)
It can be readily seen that this undertaking is unconditional and critically it makes no reference to the distribution agreement or supply of products by Multiboard or Arden Way to BSA, as had the first undertaking. Rather, it is for “the purpose of trade facilities”, which expression is undefined.
[17]Exhibit AWS4 to the affidavit of Mr Anthony Stone.
On 7 January 2009, Bendigo provided to Arden Way banking facilities including a trade finance facility limited to $1,488,200. It was set up to facilitate the importation of Multiboard product to fulfil stock orders from BSA.[18]
[18]Affidavit of Mr John Spina [4].
During 2009, Arden Way delivered products to BSA pursuant to the distribution agreement. Payments were made by BSA to Arden Way pursuant to that agreement.
On 21 September 2009, Bendigo wrote to Westpac in the following terms:
RE: Bank guarantee issued 12 December 2008 for AUD1,488,155.63 details as follows:
Favouree: Bendigo and Adelaide Bank Limited
Customer: Board Solutions Australia Pty Ltd
Expiry: Nil
As per our swift ……………. today, we claim AUD1,010,866.92 under the above guarantee as default for payment under trade facility established by Bendigo and Adelaide Bank Limited to Arden Way Pty Ltd.
In reimbursement please remit proceeds to the International Trade Department, attention John Spina.[19]
[19]Exhibit AW6 to the affidavit of Mr Anthony Stone.
Pausing here, it is to be noted that at the time of the demand, BSA was not (and had not been) in default of payments for orders placed with Arden Way. Prospectively, it had an obligation to pay Arden Way a sum of just over $250,000 due on 30 September 2009, which has now been paid into Court.
The affidavit of Mr Spina deals solely with the establishment of Arden Way’s trading facility and the provision of the undertaking.[20] He says nothing of his knowledge of BSA’s discussions or correspondence with Bendigo prior to the execution of the undertaking, nor of his dealings with Arden Way/Multiboard relevant to the provision of either the first undertaking or the undertaking.
[20]Affidavit of Mr John Spina [4]-[6].
The issues
Both Bendigo and Arden Way opposed the continuation of the injunction. Westpac, through its counsel, made no submissions and indicated that it would abide by whatever order the Court made.
There was no dispute between the parties as to the applicable principles for the grant of an interlocutory injunction:[21]
[21]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 Gleeson CJ and Crennan J [19], [65]-[83] per Gummow and Hayne JJ. See also Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618.
(a) The plaintiff must demonstrate that there is a serious question to be tried. It must prove, prima facie, a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending trial.
(b) The injury which the plaintiff is likely to suffer must be one for which damages will not suffice as an adequate remedy.
(c) The balance of convenience must favour the granting of an injunction.
(d) The Court must, in determining whether to grant an interlocutory injunction, take whichever course appears to carry the lower risk of injustice if it should turn out to have been wrong, in the sense of granting an injunction to a party who fails to establish its right at the trial, or in failing to grant an injunction to a party who succeeds at trial.[22]
[22]Bradto Pty Ltd v State of Victoria (2006) 15 VR 65; Tymbook Pty Ltd v State of Victoria (2006) 15 VR 65 [35]. See also Magna Alloys and Research Pty Ltd v Coffey [1981] VR 23.
BSA accepts that there are only limited circumstances in which a Court may restrain the issue of a bankers’ undertaking from compliance with a demand upon it. It contends that this is such a case, as it raises a number of significant issues:
(a) Fraudulent conduct, unconscionable conduct and/or misleading and deceptive conduct on the part of Bendigo and Arden Way, in relation to Bendigo’s attempt to enforce the undertaking.
(b) The questionable validity and effect of the undertaking given the circumstances.
(c) The prospect of significant and irremediable harm if Westpac complies with the undertaking.
There are two matters integral to BSA’s case; first, the correspondence between the three parties between July and December 2008. Second, the change in wording between the first undertaking in favour of Multiboard and the undertaking entered into on 12 December 2008 with Bendigo as the favouree.
Bendigo contends that the undertaking is, effectively, an unconditional promissory note payable on demand and, once called upon, no issue arises concerning Westpac’s obligation to pay. Even if BSA has demonstrated that Westpac’s “obligation” is to be regarded as a serious issue to be tried, it says that the balance of convenience points to dissolving the injunction and letting BSA pursue its claim under the common law and the Trade Practices Act 1974 (Cth) (“TPA”) against the defendants at trial.
Arden Way contends that there was no basis for the continuing of an injunction against it. It was a dispute, it said, between the bankers and BSA.
Continuation of the injunction against Bendigo
Relief sought
Over objection from Bendigo, I received a copy of the proposed amended statement of claim that BSA will rely upon. The relief sought by BSA against Bendigo may be summarised as follows:
(a) a declaration that the undertaking is limited to secure payments made by BSA under the distribution agreement and does not entitle Bendigo to demand or receive payment where BSA is not in default;
(b) that the undertaking is void and has been rescinded;
(c) a permanent injunction restraining Westpac from making payment to Bendigo pursuant to the undertaking;
(d) a permanent injunction restraining Bendigo from proceeding with its demand for payment in respect of the undertaking unless it relates to default under the distribution agreement in conformity with clause 4.4;
(e) an injunction restraining Arden Way from making any demand or inciting Bendigo to make demand upon the undertaking unless in conformity with clause 4.4 of the distribution agreement;
(f) rectification of the undertaking to substitute Arden Way as the favouree in place of Bendigo and for it to be directly referable to the stock orders of new Multiboard products.
Serious issue to be tried
BSA contends the following serious issues are to be tried:
(a) the failure by Bendigo to advise BSA that the finance facility provided by Bendigo to Arden Way was conditional upon any bank guarantee being given by Westpac in favour of Bendigo;
(b) that Arden Way had agreed with BSA that the revised bank guarantee would operate in conjunction with clause 4.4 of the distribution agreement;
(c) that in the context of the dealings between BSA, Bendigo and Arden Way, the undertaking in favour of Bendigo could only be properly construed as being referable to the distribution agreement;
(d) that there was a further agreement on 10 December 2009 between BSA and Bendigo relevant to the provision of the amended undertaking being conditional upon breach of clause 4.4 of the distribution agreement.
Bendigo contends that the wording of the undertaking is clear beyond dispute. It is an unconditional undertaking and the principles in relation to compliance with the demand in respect of such an undertaking are clear. It is the equivalent of cash.[23]
[23]Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, 445, 453, 457.
Bendigo relies upon what was said by the High Court in the seminal decision of Wood Hall Limited v Pipeline Authority[24] as to the construction of unconditional bankers’ guarantees:
By each of the bank guarantees, the Bank ‘unconditionally’ undertakes ‘to pay on demand’ the sum demanded up to the limit specified in the bank guarantee. To hold that the bank guarantees are conditional upon the making of a demand that conforms to the requirements of the contract between the Authority and the contractor would of course be quite inconsistent with the express statement in the bank guarantees that the undertaking of the Bank is unconditional. To hold that the Bank should not pay on receiving a demand, but should be bound to inquire into the rights of the Authority and the contractor under a contract to which the Bank was not a party would be to depart from the ordinary meaning of the undertaking that the Bank is to pay on demand. It would be contrary to the settled rules governing the implication of terms in contracts to imply provisions that would contradict the ordinary meaning of the words of the bank guarantees in this way.[25]
[24](1979) 141 CLR 443, 451.
[25]Wood Hall Limited v Pipeline Authority (1979) 141 CLR 443, 451. (See also Fletcher Construction v Varnsdorf (1998) 3 VR 812, 819).
In Olex Focas Pty Ltd v Skodaexport Co Ltd, [26] (“Olex Focas”) Batt J said as follows in respect of the law governing bank guarantees:
Now in Victoria as in England, that law is clear. The principle is clearly established that payment by a bank and a demand therefore by a beneficiary under an unconditional performance bond or guarantee, as under a confirmed irrevocable letter of credit, will not be restrained except in a clear case of fraud, of which the bank is clearly aware at the time of, probably, the proposed payment or in the case of forgery of documents (which is probably applicable only to letters of credit) or perhaps in the case of illegality of the underlying contract …
[26][1998] 3 VR 380, 395. See also Edward Owen Engineering Ltd v Barclays Bank International Limited (1978) QB 159, 257.
Both these decisions are authority for the proposition that payment on an unconditional bankers’ undertaking or guarantee will not be restrained under the general law unless exceptional circumstances are demonstrated. However, there are several matters which I think demonstrate that there is an arguable case on the part of BSA against both Arden Way and Bendigo, notwithstanding the principles I have adverted to.
The starting point is to ask rhetorically why would BSA have authorised its banker to give an unconditional undertaking of the overdraft facility of Multiboard or Arden Way, given the terms of the distribution agreement and the contents of the emails I have referred to. It is simply inconceivable that it intended to. Its clear intention was that any security be linked to the negative stipulations in the distribution agreement which would render it liable only in the event of default under the terms of that agreement. Of course, as counsel for Bendigo pointed out, this may be no answer to the provision of an unconditional undertaking by Westpac to Bendigo. However, it does inform the analysis of the actions of both Bendigo and Multiboard in the months preceding the provision of the undertaking, as well as the construction of the terms of the undertaking.
Bendigo was directly involved in the formulation of the first undertaking and the undertaking itself. It also must have had in contemplation the desirability of having security for the arrangement in place for Multiboard for the trade facility. As the emails demonstrate, both Bendigo and Multiboard were aware of BSA’s insistence throughout the course of negotiations that the guarantee be linked to the distribution agreement and compliance with its terms. The email correspondence of 9 and 10 December 2008 between BSA and Multiboard makes this abundantly clear, as does the Bendigo email of 19 September 2008. The level of Mr Spina’s knowledge of these discussions is not yet clear, however in my view it is significant that he has chosen not to say a word in his affidavit about his dealings with BSA or Multiboard in December 2008. Moreover, the 19 September email demonstrating its awareness of BSA’s concerns (which I regard as significant) only emerged after it was provided pursuant to a notice to produce (over Bendigo’s objection).
Notwithstanding Mr Spina’s knowledge of BSA’s concerns about an unconditional guarantee, he proceeded to formulate on its face an unconditional undertaking of the trade facility to which he acquired Mr Selkirk’s assent – at the very time Mr Selkirk was seeking reassurance from Multiboard that the guarantee would operate as stipulated in the distribution agreement.
It is also arguable that Bendigo failed to disclose to BSA its interest in securing an unconditional guarantee (in the form of security for the trade facility), as opposed to a guarantee conditional upon compliance with the provisions of the distribution agreement, which involved progress payments conditional upon delivery and then demand. Given Mr Spina’s apparent reluctance to comment on the events of December 2008, there is an inference available (at least at this stage) that Bendigo, which was aware that BSA wished to limit the scope of the undertaking, refrained from disclosing to BSA that it was in the process of establishing a trade facility for Multiboard which required security. These are matters that cannot be resolved until trial, as much depends upon the knowledge and conduct of the Bendigo officers.
I am not dissuaded from this view by the fact that, having received the unconditional guarantee, neither Mr Stone nor Mr Selkirk did anything to adjust its terms in the ensuing months. One feasible explanation is that it was perceived by BSA that the email correspondence of 9 and 10 December 2008 with Multiboard had resolved the issue, and that the undertaking was necessarily linked to the terms of the distribution agreement.
Whether Bendigo was aware of the precise nature of the terms of the distribution agreement at the time of the provision of the undertaking is not yet clear – but it is patent that it knew about Selkirk’s concern about an unconditional guarantee.
On the material adduced on this hearing, I am not satisfied that there is evidence that Bendigo has acted fraudulently. Accordingly, a case cannot be made out on the basis of the general law exceptions to the enforcement of a bankers’ undertaking as set out by Batt J in Olex Focas.[27]
[27]See [36].
However, BSA’s case is not confined to fraud. It also relies on unconscionable conduct on the part of Bendigo and Multiboard contrary to s 51AA and/or s 51AC of the TPA, as well as misleading and deceptive conduct contrary to s 52 of that Act. There was no suggestion that the provisions of the TPA did not apply to Bendigo.
As Batt J made clear in Olex Focas, where a party establishes that there is a serious issue to be tried on the basis of a potential breach of the provisions of the TPA, then that raises different considerations to those applicable under the general law. As his Honour concluded:
I consider that the plaintiffs are entitled to relief under the statute with respect to this class of guarantee. The effect of the statute, applying as it does to international trade and commerce, is to work a substantial inroad into the well-established common law autonomy of letters of credit and performance bonds and other bank guarantees. I must apply the Act as I understand it.[28]
[28][1998] 3 VR 380, 404.
Subsequently, in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd & Ors,[29] the Full Court of the Federal Court (French, Jacobson and Graham JJ) said in relation to the principles relevant to restraining compliance with a performance guarantee or bond:
[29](2008) 249 ALR 458 [77].
Nevertheless, the authorities have recognised three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee, or bond, from performing its unconditional obligation to make payment. The exceptions were succinctly stated, with references to relevant authorities, by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd:[30]
First — the court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently: see, for example, Wood Hall per Gibbs J (at CLR 451; ALR 391–2). As the primary judge observed at [36] Clough does not assert that ONGC has made a fraudulent claim. Accordingly, the first exception has no application in the present case.
Second — the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the TPA: Olex Focas Pty Ltd v Skodaexport Co Ltd. On this point, different views have been expressed about the reach of s 51AA. The High Court has not determined which of these views is correct: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd.[31] In any event, none of the categories of unconscionable conduct recognised in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd[32] apply in this case. Accordingly, the second exception has no application.
Third — the most important exception for present purposes, is that, while the court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay (Reed Construction Services at 164 per Austin J):
… 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.
It may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the “primary focus” will always be the proper construction of the contract: Bateman Project Engineering Pty Ltd v Resolute Ltd;[33] per Owen J at [30]. Stephen J recognised this in Wood Hall at CLR 459; ALR 398–9 by observing that the provisions of the contract may qualify the right to call on the undertaking contained in a performance guarantee.
[30](1999) 15 BCL 158, 164–165.
[31](2003) 214 CLR 51.
[32](2002) 117 FCR 301.
[33](2000) 23 WAR 493.
Section 51AA(1) of the TPA reads as follows:
A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
Section 51AC of the TPA also deals with unconscionable conduct and extends the provisions of the Act to business transactions involving the supply to or acquisition of goods or services of no more than $10 million except in the case of a listed public company. It has a broader application than the general law concept of unconscionability, but still requires the impugned conduct to be unconscionable.[34]
[34]ACCC v CG Berbatis Holdings Pty Ltd (2000) 96 FCR 491, ACCC v Four WD Systems Pty Ltd (2003) 200 ALR 491.
In Australian Broadcasting Corp v Lenah Game Meats Pty Ltd,[35] Gummow and Hayne JJ cited with approval the following statement by French J in ACCC v CG Berbatis Holdings Pty Ltd (No. 2):[36]
The fundamental principle according to which equity acts is that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct [(Legione v Hateley (1983) 152 CLR 406 at 444 (Mason and Deane JJ))]. So it can be said that the overriding aim of all equitable principle is the prevention of unconscionable behaviour –a term which can be seen to encompass duress, undue influence and ‘unconscionable dealing as such’.
[35](2001) 76 ALJR 1 [99].
[36](2000) 96 FCR 491.
Bendigo relied upon the principles set out by Deane J in Commercial Bank of Australia Limited v Amadio[37] as to unconscionable conduct. However, I do not understand his Honour’s statements to be an exhaustive commentary of what may or may not constitute unconscionable conduct. As was said by the Full Court of the Federal Court in Hurley v McDonald’s Australia: [38]
[37](1983) 151 CLR 447, 474.
[38](1999) FCA 1728 [31].
Before sections 51AA, 51AB or 51AC will be applicable, there must be some circumstance other than the mere terms of the contract itself that would render reliance on the terms of the contract ‘unfair’ or ‘unreasonable’ or ‘immoral’ or ‘wrong’.
And by French J in ACCC v Samton Holdings Pty Ltd:[39]
The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education - Commercial Bank of Australia Ltd v Amadio. Or it may be situational, deriving from particular features of a relationship between actors in the transaction …[40]
[39](2002) 117 FCR 301.
[40]Ibid [48], cited with approval by Gleeson CJ in ACCC v CJ Berbatis Holding P/L (2003) 214 CLR 51, 63.
This case, I think, falls within that situational description. Given Bendigo’s knowledge of BSA’s concerns about an unconditional guarantee when combined with the need to have security for the trade facility and Multiboard’s implicit affirmation of Mr Selkirk’s email of 9 December, then there is, in my view, a case to be made out against both Arden Way and Bendigo on the basis of a potential breach of s 51AA or s 51AC. It is the tripartite nature of the relationship that places this case out of the norm.
The reliance by Bendigo upon the statements of principle contained in Burleigh Forest Estate Management v Cigna Insurance Australia Limited[41] does not address the real question here. The facts of this case are considerably different to those in Burleigh Forest. Bendigo was not just a banker which “out of the blue” was provided with an undertaking by Westpac at the request of BSA – a situation which is highly unusual in itself. Bendigo was involved in the discussions concerning the provision of the undertaking – it well knew of the change of terms between the two undertakings and it knew of BSA’s desire to limit the guarantee to the terms of the distribution agreement. Notwithstanding this, it now seeks, effectively, that BSA’s banker respond to the guarantee and pay for Arden Way’s indebtedness to Bendigo whilst BSA is still liable to make payments under the distribution agreement.
[41][1992] 2 QdR 54.
It may well be that BSA also has a tenable claim under s 52 of the TPA for the reasons I have set out.
There is also the question of the proper construction of the undertaking in the context of the distribution agreement and the surrounding circumstances attending the execution of the undertaking. In Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd & Ors[42] the Full Court said:
[42][2008] 249 ALR 458.
Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said in the passage quoted above, the court ought not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach.[43]
The Court went on to say:[44]
The question of construction as to whether the underlying contract contains a qualification on the right to call upon the security must be determined in light of the contract and the form of the performance guarantee as contained in the contract. This accords with the basic principle of construction that the terms of an instrument must be read as a whole: Re Media Entertainment and Arts Alliance; Ex parte Hoyts Corp Pty Ltd.[45] It also accords with the approach taken to the construction of the underlying contract in the leading authorities to which we have referred: see, for example, Wood Hall at CLR 445, 451, 457–8; ALR 387, 391–2, 396–7; Fletcher Construction at 821–2.
[43]Ibid [479].
[44]Ibid [85].
[45](1993) 178 CLR 379 at 386–7.
Notwithstanding the unconditional nature of the undertaking, I think that, in the circumstances of this case, there is a real question regarding its proper construction in the light of the distribution agreement, the knowledge of Bendigo and Multiboard and the correspondence between the parties. Again I emphasise the unusual nature of the circumstances surrounding this undertaking being entered into. There is an arguable case on the material adduced to date, that the undertaking and the expression “trade facility” must be construed in the light of the specific references in the distribution agreement to the provision of a guarantee and particularly the negative stipulations contained in those provisions.[46]
[46]Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158, BC9806316.
In summary, and for the reasons I have endeavoured to set out, I am persuaded that BSA has established that there is a serious issue to be tried in relation to its claim against Bendigo and Arden Way.
Balance of convenience/least possible injustice
The only discernible impact upon Bendigo in the event that the injunction is continued is that it will delay immediate payment pursuant to the undertaking. In the event that BSA fails in its claim, then it will be able to renew its demand upon Westpac. Any loss that Bendigo sustains consequential upon the delay will be covered by the undertaking as to damages proffered not only by BSA but by its parent company, which has assets of over $5 million.[47] Further, this proceeding is currently being managed in the Commercial Court. There will therefore only be a relatively short delay before it is ready for trial, particularly as it would seem that most, if not all, of the relevant documentary material has emerged.
[47]Affidavit of Mr Jonathan Selkirk, 8 October 2009 (3).
On the other hand, there is, I think, a powerful argument for preserving the status quo until trial. First, BSA has, I think, a strong arguable case as I have tried to set out.
Second, I assume that Arden Way will continue to deliver stock to BSA, which will be the subject of payment. It would, I think, be unfair in the extreme in a situation where BSA has demonstrated an arguable case, to require it to repay to Westpac the full amount of the undertaking, as well as for it to make ongoing payments in relation to the delivery of the stock.
Third, once Westpac calls upon BSA in relation to the provision of the funds paid by it pursuant to the undertaking, then the necessary reduction of capital in such a large amount will cause substantial difficulties for BSA in its commercial operations.[48] I do not think that damages constitute an adequate remedy to BSA, to compensate for these difficulties.
[48]Affidavit of Mr Jonathan Selkirk 30 September 2009 [13]
Finally, there is one other issue that favours the granting of an injunction. The exact state of knowledge and the intention of the officers of Bendigo and Multiboard in relation to the redrafting of the undertaking is not clear. The chain of correspondence may only tell part of the story. There is no explanation yet as to why the email correspondence of 10 December between Multiboard and BSA was not brought to Bendigo’s attention or, for that matter, if it was. Nor is the level of Bendigo’s knowledge of the terms of the distribution agreement apparent. Mr Spina’s apparent reluctance to disclose his knowledge of the events surrounding the procuring of the two undertakings is surprising. In those circumstances, the lower risk of injustice favours the granting of the injunction.
I have concluded that the injunction should be continued until the completion of the proceeding.
Continuation of the injunction against Westpac
Westpac made no submissions other than to agree to abide by any order of the Court. Given my conclusions as to the continuation of an injunction against Bendigo, the injunction should also be continued against Westpac on the same basis.
Continuation of the injunction against Arden Way
It can be accepted that BSA has demonstrated a serious issue to be tried in relation to the actions of Multiboard. The distribution agreement itself and the email correspondence demonstrates, at least on a prima facie basis, that Multiboard accepted that the undertaking was to be linked to the distribution agreement. At the same time, it was involved in negotiations with Bendigo for the provision of a trade facility, which was unconditionally guaranteed by the undertaking, as opposed to the first undertaking.
I should add that I do not accept Arden Way’s submission that BSA has not acted with clean hands. The sum outstanding has now been paid into Court and the managing judge in the Commercial Court can determine how it is to be dealt with.
However, the balance of convenience does not favour the continuation of an injunction against Arden Way. BSA is protected by the restraint of Westpac and Bendigo in relation to any further steps being taken vis-à-vis enforcement of the undertaking. No amount of incitement by Arden Way can alter that position. Accordingly, I propose to dissolve the injunction against Arden Way.
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