Canon Foods Services Pty Ltd v VR Pace Corporation Pty Ltd as trustee for the Canon Foods Unit Trust - [2018] WADC 117

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   CANON FOODS SERVICES PTY LTD -v- VR PACE CORPORATION PTY LTD AS TRUSTEE FOR THE CANON FOODS UNIT TRUST [2018] WADC 117
CORAM:   TROY DCJ
HEARD:   3 SEPTEMBER 2018
DELIVERED          :   21 SEPTEMBER 2018
FILE NO/S:   CIV 3299 of 2018
BETWEEN:   CANON FOODS SERVICES PTY LTD
Plaintiff
AND
VR PACE CORPORATION PTY LTD AS TRUSTEE FOR THE CANON FOODS UNIT TRUST
First Defendant
DREAMFIELD NOMINEES PTY LTD AS TRUSTEE FOR THE DICKENSON FAMILY TRUST
Second Defendant

Catchwords:

Landlord and tenant - Interlocutory injunctive relief - Serious question to be tried - Genuine dispute - Damages an adequate remedy - Status quo - Bank guarantee - Unconscionable conduct

Legislation:

Nil

Result:

Plaintiff's application dismissed

Representation:

Counsel:

Plaintiff	:	Mr A P Hershowitz
First Defendant	:	Mr P J Ward
Second Defendant	:	Mr P J Ward

Solicitors:

Plaintiff	:	Greenstone Legal
First Defendant	:	Richard O'Shannassy & Co Pty Ltd
Second Defendant	:	Richard O'Shannassy & Co Pty Ltd

Case(s) referred to in decision(s):

Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 185 ALR 1
Australian Gasfields Ltd v Kvaerner Process Systems Pty Ltd [2001] WASCA 320
Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219
Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136
Fleet Trans Pty Pty Ltd v Gulf Transport Co Pty Ltd [2017] WADC 87
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
Okewood Pty Ltd t/as Perth Glory v Football Federation Australia Ltd [2015] WASC 127
Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110
Wood Hall Ltd v Pipeline Authority [1979] 141 CLR 44

TROY DCJ:

Introduction

By a lease agreement dated 10 April 2015 the defendants leased to the plaintiff commercial premises at 30 Magnet Road, Canning Vale. The agreement provided for the payment by the plaintiff of a cash bond of $264,000. In the alternative a guarantee in the same amount. The plaintiff did not pay the cash bond. Following an extension by variation in 2017, the lease ultimately came to an end on 3 July 2018. It seems that the plaintiff vacated the premises shortly before.
On 10 August 2018 the defendants asserted that the plaintiff had not complied with its obligations to make good the premises prior to the lease term expiring. The defendants called upon the guarantee on 27 August 2018. The monies under the guarantee were paid into their bank account where they presently remain.
Following the call on the guarantee, the plaintiff issued a writ of summons against the first and second defendants on 31 August 2018 seeking repayment of the sum of $264,000, damages, interest, costs and further and/or alternative relief.
The plaintiff also filed a summons for interlocutory injunctive relief and/or freezing order relevantly seeking:
•an order restraining the defendants from dealing with or using any of the proceeds of the guarantee;
•an order directing the defendants to pay the guarantee proceeds in the sum of $264,000 to the defendants' solicitor's trust account;
•alternatively for orders freezing the sum of $264,000.
The application for a mandatory injunction, requiring the defendants to pay the $264,000 into their solicitor's trust account was only faintly pressed during the hearing before me.
Further, the plaintiff accepted that it did not have evidence that the defendants were engaged in putting assets beyond its reach. The plaintiff accepted that the monies in dispute could still be preserved, not by way of a freezing order but a prohibitory injunction preventing the defendants from dealing with those funds, pending the resolution of the dispute.
The plaintiff did not contend that there was a basis for the alternative remedy of a freezing order if the prohibitory injunction was not granted.
It is not necessary to consider the defendants' argument that given that the funds are not the plaintiff's property it is impossible to equitably trace them.

Clauses 2.2(a) and 4.19(b)

It is necessary to set out two key clauses of the lease agreement.
Clause 2.2(a) relevantly states:
… the Lessee shall pay the sum (if any) set out in the second schedule ('Bond') to the Lessor … as security for the due and punctual performance of the covenants, agreements and obligations on the part of the Lessee to be performed and observed hereunder … and in the event of any breach … by the Lessee then the Lessor shall be at liberty to expend the said sum or part thereof towards making good any damage or loss occasioned by the Lessor by such breach or failure on the Lessee's part.
The second schedule provided that the bond under that clause would be a sum equivalent to six-months rent plus GST namely $264,000.
Clause 4.19(b) states:
If the Lessee does not provide the Bond in compliance with clause 2.2 on execution of this Lease then the Lessee shall on execution of this Lease provide an irrevocable bank guarantee effective for the term … plus an additional 6 calendar months for a sum equal to 6 months rent plus GST to be applied to the benefit of the Lessor and the proceeds thereof to be called upon and applied to recoup the Lessor's losses and expenses occasioned by any such default on the part of the Lessee including non‑payment of rent or other monies payable by the Lessee, any costs of reletting the Leased Premises, in shortfall in rental or outgoings payable by any future tenant as the case may be upon any one or more of the following occurring namely:
(i)the Lessee at any time during the term either breaching or defaulting under this Lease and thereby having its rights to occupy the Leased Premises determined;
(ii)this Lease, whether by agreement or otherwise, coming to an end and determining at any time prior to the expiry of the term.
Given that no cash bond was paid the plaintiff, as lessee, provided the bank guarantee referred to. The term of the lease was initially for three years, extended until 3 July 2018.

Applicable principles

As a general rule, the purpose of an interlocutory injunction is to keep matters in status quo until the rights of the parties can be determined at the hearing of the suit: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 185 ALR 1 (the ABC case) (Gleeson CJ) [9].
As Gleeson CJ noted [13]:
In Castlemaine Tooheys Ltd v South Australia, Mason ACJ summarised the principles governing the grant or refusal of interlocutory injunctions in both private law and public law litigation. He said:
'In order to secure such an injunction the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief; (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction.'
As Mitchell J noted in Okewood Pty Ltd t/as Perth Glory v Football Federation Australia Ltd [2015] WASC 127 [16] these considerations are interrelated. His Honour referred to the decision of Beech J in Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 where at [9] his Honour held:
The phrase 'prima facie case' does not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed. It is sufficient that the plaintiff show a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial.
Beech J continued [11]:
As the apparent strength of the applicant's case diminishes, the balance of convenience moves against the making of an order. The grant of an injunction involves balancing the injustice which might be suffered by the defendant if the injunction is granted and the plaintiff later fails at trial, against the injustice which might be suffered by the plaintiff if the injunction is not granted and the plaintiff later succeeds at trial.
As Kirby J noted in the ABC case [167]:
The cases collected by Callinan J demonstrate that no narrow view has been adopted as to the meaning of the expression 'a serious question to be tried.'
In the same case Callinan J observed [246]:
Just what measure of success an applicant for an interlocutory injunction must establish is not completely settled. In my opinion, the correct test is whether the applicant can demonstrate either a reasonably arguable case on both the facts and the law, or that there is a serious question to be tried. These tests it seems to me are to the same effect.

Serious question to be tried

The plaintiff accepts that if the bank guarantee clause within the lease agreement was unqualified the defendants were entitled to make their call upon the guarantee. To that concession, it might be added that the defendants were equally so entitled if the clause is to be construed as they contend.
The plaintiff submits that the guarantee was not unqualified. The plaintiff relies upon the absence of any express reference to the guarantee being unconditionally payable on demand. That was the case, for example, in the contract considered by the High Court in the seminal case of Wood Hall Ltd v Pipeline Authority [1979] 141 CLR 443.
I bear in mind and apply the need to interpret clauses in a contract such as this as a whole and in a way which gives commercial effect to them and which avoids commercial absurdity: Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219 (Newnes & Murphy JJA & Beech J) [42].

Construction of clause 4.19(b)

Not unusually, a difficulty has arisen because the drafter of clause 4.19(b) has unduly complicated the sentence. The sentence is not of a manageable length. The drafter has also separated the vital words.
The plaintiff submits that the phrase within 4.19(b), 'to be called upon and applied to recoup the lessor's losses and expenses occasioned by any such default on the part of the lessee' is not a reference to the requirement to provide a bond. Rather, it is a reference to any default by the lessee arising under the agreement.
If the word 'such' was missing, then the plaintiff's construction would be at least arguable. But the word 'such' is not missing and, in my view, it plainly has a purpose.
I construe cl 4.19(b) as follows:
•If the lessee does not provide (my emphasis) the cl 2.2 bond; (it did not)
•It shall, on execution of this lease, provide an irrevocable bank guarantee;
•with the proceeds to be called upon and applied to recoup;
•the lessor's losses and expenses occasioned by such default (my emphasis).
I am quite satisfied that the proper construction of this clause is that the phrase 'such default' can only refer back to the default in not providing the bond. 'Such' is a legalism for 'that'. I regard the use of the word 'any' as otiose.
I conclude that the purpose of this clause is that any losses and expenses occasioned by the inability to have recourse to a cash bond are recouped by virtue of the irrevocable guarantee.
The non-exhaustive (given the use of the word 'including') losses and expenses that then arise from the absence of the cash bond are provided for by the balance of 4.19(b) as follows:
•non-payment of rent or moneys payable by the lessee
•costs of reletting the leased premises
•a shortfall in rent or outgoings payable by any future tenant upon one or both of the specified occurrences set out at 4.19(b)(i) and (ii).
I readily accept that the irrevocable guarantee cannot place the lessor in a more advantageous position than if the lessee had provided the cash bond.
If the lessee had provided the bond, the lessor would be at liberty to expend some or all of that bond towards making good any damage or loss occasioned by the lessor. Such damage or loss being as a result of any breach or failure on the lessee's part, arising from its obligations of due and punctual performance of the covenants, agreements and obligations under the lease.
So, if there is a failure to perform a covenant, agreement or obligation by the lessee, the lessor can call upon either the bond (if there is one) or the guarantee (if there is not a bond).
In this case the defendants, in the absence of a bond, called upon the guarantee because it asserted there had been a failure to comply with the obligation under cl 2.26 to deliver the premises in tenantable condition.

Lack of reference to unconditional payable on demand

Although, as noted, the plaintiff has framed the dispute as revolving around the issue of whether or not the guarantee is unconditional, I do not find the absence of wording to the effect of 'unconditional payable on demand' determinative.
In my view, the absence of such wording does not prevent the defendants from calling upon the guarantee, if there is an absence of a bond and if the defendants consider that the lessee has failed to perform some covenant, agreement or obligation by the lessee.
If cl 4.19 read, 'the lessee shall on execution of this lease provide a unconditional irrevocable bank guarantee payable on demand' and then continued as currently framed, the issue between the plaintiff and the defendants would still turn on the construction of 'such default.'

Relevance of genuine dispute

Obviously a lessee may, and often will, dispute that there has been a failure to comply with the terms of the lease. But that does not prevent the use of the bond or, in this case, a call upon the guarantee pending the resolution of any dispute.
I adopt the same approach, with respect, as Charles JA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812, 821 where his Honour concluded that the terms of the agreement under consideration there showed that its commercial purpose was to provide an allocation of risk. Further, that the respondent was entitled to call on the security provided by the appellant notwithstanding that there was a genuine dispute and a serious issue to be tried.
Charles JA held at (823) that there was no qualification in the relevant clause to the effect that resort to the security under that clause was available only in the event of the respondent having an undisputed entitlement.
Callaway JA considered that the beneficiary, unlike the bank, may be restrained if there is an express prohibition in the underlying contract against calling upon the guarantee. There was none in that case, nor is there one here.
His Honour observed (826):
In theory an implicit or implied prohibition is just as good. The practical problem is that it is much harder to establish. That is not because of a requirement that an implicit or implied prohibition against calling upon a guarantee must be clear. It is because the implication cannot be made if it would stultify, or even if it would be inconsistent with, the purpose for which the guarantee was taken.
His Honour continued:
There are broadly two reasons why the beneficiary may have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default.
In my view in the present case also, the clause permits the defendants to call upon the guarantee even if it turns out, in the end, that the plaintiff was not in default in respect of its make good obligations.
Importantly his Honour also noted (829):
It may be said that damages are an adequate remedy in the case of a wrongful deduction but not in the case of wrongful recourse to a guarantee, but that is not decisive if the guarantee was intended to be functionally equivalent to money.
In my opinion the guarantee under cl 4.19 was also intended to be functionally equivalent to money.
In a similar vein in Australian Gasfields Ltd v Kvaerner Process Systems Pty Ltd[2001] WASCA 320Templeman J (Anderson J agreeing) held [26] that where, as was the case there,
… a security has been provided as a risk allocation device, the party having the benefit of that security should be entitled to enforce it if he has a bona fide claim: that is, a claim which is not fraudulent. The claim may be weak. But in my view if, for example, competent counsel was of the view that it would be proper to plead it, the claim would qualify as bona fide.

Conclusion on serious issue to be tried

It is not necessary to make any comments about the controversy as to whether there was an obligation to ensure that the premises were in the condition they were in at the start of the lease, as opposed to delivering the premises up in a tenantable condition, as seemingly required by cl 2.26.
That is a matter that will be determined in due course when the plaintiff's claim for repayment of the $264,000 is considered.
The plaintiff has not satisfied me that there is a seriously triable issue in respect of its construction of cl 4.19(b).

Damages not an adequate compensation?

If I am wrong about that, however, the next issue that would arise is whether the plaintiff will suffer irreparable injury, for which damages will not be an adequate compensation, unless an injunction is granted prohibiting the defendant from dealing with or using any of the $264,000, that is currently sitting in the defendant's bank account.
It may readily be accepted that without injunctive relief the defendants will utilise the $264,000 in its entirety in order to make good the premises as it says, and the plaintiff disputes, is required.
As noted, the purpose of an interlocutory injunction is to keep matters in status quo until the rights of the parties can be determined at the hearing of the suit.
That presents an immediate difficulty for the plaintiff. The status quo is that the plaintiff's monies that were held by the National Australia Bank by virtue of the guarantee, were then called upon by the defendants and paid by that bank into the defendants' bank account.
The status quo, therefore, is that the defendants now possess the $264,000. But it is the plaintiff that seeks interlocutory relief in order to prohibit the defendants from dealing with or using any of the proceeds of the guarantee. Rather than preserving the status quo, on the face of it the plaintiff is seeking to disturb the status quo by an order prohibiting the defendants from dealing with monies now in its possession.
Ordinarily the court would be dealing with a situation where there is an application for interlocutory relief prohibiting a defendant from dealing with the proceeds before the guarantee is called upon. In terms, an apprehended breach of contract.
In this case interlocutory relief is sought after the proceeds have been called upon, although the plaintiff complains that this is the result of 'sharp practice' by the defendants. It may well be that the proceeds are, as the plaintiff described it 'red hot', but the fact remains that the plaintiff is still seeking relief after the event as opposed to before the event.
The plaintiff has been unable to point to any authority justifying an interlocutory injunction prohibiting dealing with the proceeds of a guarantee after the call has been made rather than before.
In my view, and notwithstanding the decision in Fleet Trans PtyPty Ltd v Gulf Transport Co Pty Ltd [2017] WADC 87, the plaintiff's claim that the defendants were not entitled to call upon the guarantee will not be rendered nugatory in the absence of an injunction. The plaintiff will continue to have the right to seek damages as a consequence of its claim that there was no basis for the call on the guarantee, because the plaintiff was not in breach of the lease.

Returning to the case of Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd Charles JA noted at (822 – 823) the existence of a genuine dispute. His Honour noted therefore the possibility that if the respondent was permitted to call on the letters of credit, the appellant would be very seriously disadvantaged if it were unable to recoup these moneys later, with interest, if it should be determined in the arbitration that its contentions were justified.
His Honour noted however that the appellant did not submit that the respondent had acted fraudulently in proposing to call on the security.
Charles JA rejected, at (825), the submission that a failure to order injunctive relief would cause irreparable damage to the appellant which would not be compensable by damages. His Honour concluded the parties to the agreement expressly contemplated, as part of the allocation of risk, that the respondent was to have as security an unconditional undertaking to pay in its favour.
His Honour held that to prevent the appellant now having recourse to such security would be to disturb the status quo with respect to the appellant's ability to call on the letters of credit.
In the present case I accept that bringing a suit against the defendants for damages in respect of this $264,000 is, like any other litigation, costly, troublesome and inherently risky. The plaintiff argues that it should not be put in the position where it has to take the risk of suing the defendants, with no definitive knowledge of their financial position. That is a contention that, it seems to me, would be raised by every plaintiff confronted with an argument that damages is an available remedy.
The purpose of interlocutory relief is to preserve the status quo so as to avoid a theoretical right been rendered worthless. The fact that litigation to pursue that right is risky and expensive does not render the plaintiff's claim worthless.
This is not a case like Twinside Pty Ltd v Venetian Nominees Pty Ltd [68] (Beech J) where there is an enormous risk of injustice to the plaintiff if the injunction is not granted, and at trial the plaintiff establishes its claim for repayment of the $264,000.

Lack of clean hands

Based upon the affidavit material, the plaintiff contends that I should infer that the defendants lacked clean hands in negotiating with the plaintiff. Whilst on the one hand purporting to engage in preliminary discussions on a 'lawyer to lawyer' basis, the defendants always had, it is said, the intent of unilaterally calling upon the guarantee as they did on 27 August 2018.
The only suggested relevance is that, even if I was to find that the plaintiff has not established a serious triable issue in respect of its construction of the relevant clause, where a party behaves in an unconscionable way the court has the power to injunct the party from calling on the guarantee. In this case to prohibit the defendants from dealing with the proceeds, 'post call'.
I do not understand the plaintiff to be alleging that the defendants have acted fraudulently and should therefore be enjoined: Wood Hall (451) (Gibbs J) as discussed in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136 [77]. Nor is this a case, such as in Clough where the issue is whether a party has acted unconscionably in contravention of s 51AA of the Trade Practices Act 1974 (Cth).
As stated in Clough [77] the primary focus will always be the proper construction of the contract, in this case the lease agreement, given that the provisions of the contract may qualify the right to call on the undertaking contained in a guarantee.
The defendant submits that some of the conversations referred to in the affidavit are inadmissible because of legal professional privilege. They also submit that there is no basis to conclude that there was any 'sharp practice' as opposed to the playing out of a genuine commercial dispute between the parties.
The plaintiff has filed affidavits, with attachments, from its managing director Arthur Edward Abrahams dated 31 August 2018, and its solicitor Bruce Josem dated 30 August 2018. The defendants' solicitor Mr Richard O'Shannassy, filed his affidavit on 2 September 2018.
The affidavits reveal the following. On 7 June 2018 Mr O'Shannassy wrote to Mr Josem and referred to the plaintiff's obligations to make good the premises prior to the lease term expiring.
On 20 July, following an exchange of communications, Mr Josem conveyed his instructions as to the plaintiff's compliance with the make good obligations and sought an immediate return of the bank guarantee.
In a letter of 10 August 2018 Mr O'Shannassy made reference to a telephone conversation of 1 August and enclosed a premises condition report dated 3 July 2018 coupled with a quotation, dated 9 August 2018, of $622,907.37 to complete certain works at the premises.
Mr O'Shannassy also required the plaintiff to show cause within 14 days as to why the full amount of $264,000 should not be drawn down by the defendants. Mr Josem received the letter on the same date. As of 10 August 2018, therefore, the plaintiff was on notice of the defendants' intentions to draw down the guarantee on or after 24 August 2018.
Mr Josem responded on 15 August advising Mr O'Shannassy that the plaintiff disputed the report and required a written undertaking that the bank guarantee would not be called upon.
Mr O'Shannassy responded by letter dated 17 August although Mr Josem did not receive the letter until 22 August. Mr O'Shannassy advised that the defendants would not give an undertaking not to call upon the bank guarantee.
Mr Josem responded on 23 August seeking confirmation as to the defendants' position with regards to the bank guarantee by close of business on 24 August. The defendants, of course, had previously indicated an intention to draw down the guarantee on or after 24 August and had declined to give an undertaking not to do so.
Mr Josem and Mr O'Shannassy spoke by phone on 24 August. I am not satisfied that the discussion went beyond the synopsis provided by Mr O'Shannassy in his affidavit. The lawyers discussed the concept of a 'standstill period'. Mr O'Shannassy told Mr Josem that he did not have instructions to propose such a period, but was advancing it on a 'lawyer to lawyer' basis for mutual consideration.
On 24 August Mr Josem advised Mr O'Shannassy that the plaintiff would agree to a standstill arrangement. Mr O'Shannassy, who I am satisfied had not received any instructions as to his client's agreement in that regard, forwarded that letter to his client the same day requesting his client's instructions on his return to Australia.
At 8:40 am on 27 August 2018 Mr Richard Pace on behalf of the defendants, advised Mr O'Shannassy that he was disinterested in a standstill period. Mr Pace also advised that he and had just issued a demand for the guarantee, in the sum of $264,000 which had been paid into a joint bank account of the defendants.
'Sharp practice', even if it is established would not necessarily assist the plaintiff.
I note that in Wood Hall Ltd v Pipeline Authority as Gibbs J explained,
the Authority made demand upon the Bank for payment in full of the sum payable under each of four bank guarantees … without prior notice to the contractor. Indeed, it took deliberate steps to conceal from the contractor its intention to make the demands and it knew that its action would give the contractor no real chance to marshal funds quickly to meet the inevitable requirement of the Bank. There is evidence that suggests that the Authority, in making the demands, was acting pursuant to what it described as a 'strategy' to put pressure on the contractor in the hope that the dispute between the parties might be settled more advantageously to the Authority.
The contractor contended for an improper or impermissible motive which tended to support the view that the Authority had made the demands when it was not entitled to do so. Gibbs J rejected that argument. His Honour determined that 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.
In the present case, whilst the plaintiff would undoubtedly have been aggrieved that the defendants took this step at a time when the respective lawyers were engaged in at least preliminary discussions, there is no material before me that suggests that Mr O'Shannassy had in any way sought to bind his clients from not enforcing the guarantee. Nor had it ever been expressly conveyed to the plaintiff that the defendants would not enforce the guarantee. To the contrary, the plaintiff was on notice that the guarantee could be called upon any time after 24 August, as indeed it was.

Conclusion

The plaintiff's application for an interlocutory injunction is dismissed. I will hear from the parties as to costs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
MW
ASSOCIATE TO JUDGE TROY
21 SEPTEMBER 2018