Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [No 2]
[2007] FCA 927
•19 June 2007
FEDERAL COURT OF AUSTRALIA
Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No 2]
[2007] FCA 927
INJUNCTION – application to discharge interim interlocutory injunction – whether respondent Banks ought be enjoined from paying under performance guarantees by way of ancillary relief to preserve status quo where principal already enjoined from taking further steps to demand or obtain payment under performance guarantees issued by Banks.
Trade Practices Act 1976 (Cth), ss 6(2), 80, 51AA
Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd [1999] VSCA 214 referred to
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153 referred to
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (No 2) (2000) 96 FCR 491 referred to
Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 cited
Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1 referred to
Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335 cited
Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 considered
Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep 251 cited
Boral Formwork v Action Makers (2003) ATPR 41-953 referred to
Cargill International SA v Bangladesh Sugar & Food Corporation [1996] 2 Lloyd’s LR 524 cited
Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2007] FCA 881 referred to
Deutsche Ruckversicherung AG v Wallbrook Insurance Co Ltd [1996] 1 WLR 1017 cited
Fletcher Construction Australia Limited v Varnsdorf Pty Ltd Australian Competition and Consumer Commission [1998] 3 VR 812 referred to
Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 referred to
Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210 referred to
ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 referred to
Ideas Plus Investments Ltd v National Australia Bank Ltd (2006) 32 WAR 467 considered
Legione v Hateley (1983) 152 CLR 406 cited
Logue v Shoalhaven Shire Council [1979] 1 NSWLR 537 cited
Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia (unreported Qld Supreme Court, 9 August 1990 referred to
Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 at 400 applied
Pierce Bell Sales Pty Ltd v Frazer (1973) 130 CLR 575 cited
Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 applied
Stern v McArthur (1988) 165 CLR 489 referred to
Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 referred to
Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 considered
World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 referred toCLOUGH ENGINEERING LIMITED v OIL AND NATURAL GAS CORPORATION LIMITED, COMMONWEALTH BANK OF AUSTRALIA, HSBC BANK AUSTRALIA LIMITED AND BNP PARIBAS
WAD117 OF 2007
GILMOUR J
19 JUNE 2007
PERTH
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD117 OF 2007
BETWEEN:
CLOUGH ENGINEERING LIMITED
ApplicantAND:
OIL AND NATURAL GAS CORPORATION LIMITED
First RespondentCOMMONWEALTH BANK OF AUSTRALIA
Second RespondentHSBC BANK AUSTRALIA LIMITED (ACN 006 434 162)
Third RespondentBNP PARIBAS (ABN 23 000 000 117)
Fourth Respondent
JUDGE:
GILMOUR J
DATE OF ORDER:
19 JUNE 2007
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1.The motion be dismissed.
2.The 2nd-4th respondents pay the applicant’s costs of the motion to be taxed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD117 OF 2007
BETWEEN:
CLOUGH ENGINEERING LIMITED
ApplicantAND:
OIL AND NATURAL GAS CORPORATION LIMITED
First RespondentCOMMONWEALTH BANK OF AUSTRALIA
Second RespondentHSBC BANK AUSTRALIA LIMITED (ACN 006 434 162)
Third RespondentBNP PARIBAS (ABN 23 000 000 117)
Fourth Respondent
JUDGE:
GILMOUR J
DATE:
19 JUNE 2007
PLACE:
PERTH
REASONS FOR JUDGMENT
The second to third respondents (the Banks) by notice of motion dated 11 June 2007 seek orders for the setting aside of injunctions granted ex parte on 5 June 2007 restraining each of them from making payment under their respective performance guarantees to the first respondent, Oil and Natural Gas Corporation Ltd (ONGC).
The motion is supported by affidavits of Jessica Jie Si Choong and Gene Carlton Lilly each sworn on 12 June 2007.
It is convenient for ease of exegesis and consistency to summarise my earlier reasons for granting interim interlocutory injunctive relief against the Banks. Each performance guarantee is in the same terms, Clough having agreed under cl 3.3.1 of the Construction Contract between it and ONGC dated 6 January 2005 to furnish a performance bank guarantee in the pro-forma terms contained in Appendix-II of Annexure-A. In fact the pro-forma for the performance guarantee is set out in Appendix-III. I set out below the operative terms of the performance guarantee granted by the Commonwealth Bank of Australia. It is in substantially the same terms as the pro-forma instrument. Apart from the name of the relevant bank it is in the same terms as those granted by the other two Banks.
‘We Commonwealth Bank of Australia ABN 48 123 123 124 registered under the laws of Australia having head/registered office at 48 Martin Place, Sydney, New South Wales 1155 (hereinafter referred to as “The Bank” which expression shall, unless repugnant to the context meaning thereof, include all its successors, administrators, executors and permitted assigns) do hereby guarantee and undertake to pay immediately on receipt of first demand in writing by Company and any/all moneys to the extent of US$7,178,371.88 (United States Dollars, Seven Million, One Hundred and Seventy Eight Thousand, Three Hundred and Seventy One Dollars and Eighty Eight Cents Only) on breach of Contract by Contractor without any demur, reservation, contest or protest and/or without any reference to the Contractor. Any such demand made by Company on the Bank by serving a written notice shall be conclusive and binding, without any proof, on the Bank as regards the amount due and payable, notwithstanding any dispute(s) pending before any Court, Tribunal, Arbitrator or any other authority and/or any other matter or things whatsoever, as liability under these presents being absolute and unequivocal. We agree that the guarantee herein contained shall be irrevocable. This guarantee shall not be determined, discharged or affected by the liquidation, winding up, dissolution or insolvency of the Contractor and shall remain valid, binding and operative against the Bank. Company shall have the unqualified option to operate this Bank Guarantee to recover Liquidated Damages as leviable under the Contract.’
Clause 3.3.3 of the Construction Contract, so far as presently relevant, is in the following terms:
‘The Company shall have the right under this guarantee to invoke the Banker’s guarantee and claim the amount thereunder in the event of the Contractor failing to honour any of the commitments entered into under this Contract.’
The performance guarantee in each case reflects this contractual provision. It requires each of the respondent Banks to pay immediately on receipt of first demand in writing by ONGC the stipulated amount “… on breach of contract by contractor …”. I do not suggest, by this, that any of the terms of the Construction Contract have been incorporated into the performance guarantees.
The affidavit of Mr Malcolm Rutter sworn 15 June 2007 provides a very detailed account of the background to the Construction Contract and what has occurred since its execution. I have set out the relevant factual background as exposed in that affidavit in my reasons of 7 June 2007 when I, amongst other things, restrained ONGC from taking any further step to demand or to obtain payment or renewing or claiming to renew a demand for payment from any of the respondent Banks under the respective performance guarantees: Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2007] FCA 881 [8]-[23]. It is accordingly not necessary for me to repeat that background detail here. Mr Rutter has variously deposed in his affidavit to the effect that Clough is not in any way in default under the Construction Contract. The Banks do not, understandably, attempt to contradict this. ONGC has not appeared in this application.
It is fundamental to Clough’s arguments that it is not relevantly in breach of the Construction Contract nor are there any other contractual bases such as to entitle ONGC to make a demand upon the Banks under the respective performance guarantees. It is contended alternatively that if it is in breach then ONGC has contributed to this in the sense that to the extent that Clough has not met any of its obligations, this has been directly caused by ONGC’s failure to perform its obligations. In other words Clough’s obligations are dependent upon ONGC’s performance.
Clough says that it has, at all material times, been ready willing and able to comply with its obligations, subject to ONGC’s timely performance of its inter-dependent obligations. Clough says that, otherwise, it has completed the work required of it. However, on the evidence of Mr Rutter, ONGC has been in breach of a number of its obligations, including failing to effect necessary well-completion at the deep water field, as well as meeting invoiced payments from Clough in the order of US$7 million.
I said in those reasons that it was arguably unconscionable within the meaning of s 51AA of the Trade Practices Act 1976 (Cth) (‘the Act’) for ONGC to threaten to call, or to call, on the performance guarantees, to take advantage of the Banks’ propensity to pay, despite, arguably there being no right to call on the performance guarantees. Clough also says that, ONGC is in breach of an implied negative stipulation in the Construction Contract to the effect that it will not, except where Clough is in such breach, call on the performance guarantees or any of them. See Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd [1999] VSCA 214 at [8].
Clough continues to contend that it would be unconscionable for ONGC to exercise or purport to exercise its apparent legal rights. It points to several equitable norms falling within the “unwritten law” for the purposes of s 51AA of the Act:
(a)There is equitable relief analogous to relief against forfeiture – even absent waiver or estoppel, where the first party’s breach has effectively contributed to the second party’s breach, equity may regard it as unconscionable for the first party to exercise its legal rights arising from the second party’s breach: Legione v Hateley (1983) 152 CLR 406. See also Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315, [40], [58].
(b)Equity may restrain the exercise of legal right if it is sought to be used unconscionably in the sense of it being used unreasonably or arbitrarily: Pierce Bell Sales Pty Ltd v Frazer (1973) 130 CLR 575.
(c)Equity may relieve against one party’s insistence upon rights in circumstances which make that harsh or oppressive. ACCC v Samton Holdings Pty Ltd (2002) 117 FCR 301.
The Banks were each on notice, having been served with the application, supporting affidavits and written submissions, as to those facts which form the elements of the asserted contravention by ONGC of the provisions of s 51AA of the Act, as well as the asserted breach of the implied negative stipulation. I do not accept the submission made by the Banks that such notice is insufficient to invoke any of the provisions under s 80 of the Act. As matters stand presently they are on notice from Clough that ONGC has no legal entitlement to call on the performance guarantees. It is not mere assertion. It is supported by detailed affidavit evidence. It is in the nature of applications for interim and interlocutory relief that these proceed upon a provisional view of the facts.
Section 80 of the Act confers both jurisdiction and power in the Court to restrain each of them in the way ordered. Alternatively power to do so is available pursuant to s 23 of the Federal Court of Australia Act 1976 (Cth).
By s 80 of the Act the Court may grant an injunction in such terms as it determines to be appropriate, relevantly in this case, where, on the application of Clough it is satisfied that the Banks intend, unless restrained, to pay under the guarantees, and are thereby proposing to engage in conduct that constitutes or would constitute aiding or abetting ONGC to contravene s 51AA under Part IVA of the Act, or would, thereby, be directly or indirectly knowingly concerned in or party to the contravention. See ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 at 266 per Gummow J.
Section 80(2) enables the Court, where, in its opinion, it is desirable to do so, to grant an interim injunction pending determination of an application under s 80(1): ACCC v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153; ACCC v Samton Holdings Pty Ltd (2002) 117 FCR 301. This section confers a judicial discretion of the widest kind upon the Court: World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 at 185-187 per Bowen CJ.
THE BANKS’ SUBMISSIONS
By letters dated 4 June 2007 ONGC made written demand against each of the Banks for payment under the respective performance guarantees. The demands were relevantly put in these terms:
“We here by notify to you that M/s Clough Engineering Limited has committed breach of the above referred contract and therefore in accordance with the terms of the said guarantee, we do hereby exercise our rights and convey our intension (sic) to invoke the Bank Guarantee and make a demand on you to remit the full value of Bank Guarantee amount of USD7,178,371.88 (United States Dollar, Seven Million One Hundred Seventy Eight Thousand Three Hundred Seventy One and Eighty-Eight Cents Only) and remit the guaranteed sum by way of wire transfer, immediately into our account, the details of which are given here under: …”
The Banks submit that there is no serious question to be tried. At a general level what is said on behalf of the Banks as to the well established independence or autonomy of irrevocable letters of credit, is uncontroversial. A standby letter of credit is a letter of credit which performs the function of providing security against the danger that a party to a contract will fail to perform it: Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 at 428 [26]. The purpose of a standby letter of credit is “to provide the beneficiary with an unfettered, immediate remedy upon the triggering event on the letter of credit, pending resolution of any dispute on the underlying contract”: Ideas Plus Investments Ltd v NAB Ltd (2006) 32 WAR 467 at 478 [34]. A standby letter of credit is not simply a mere method of payment but creates a direct liability upon the banker independent of the underlying contract; Ideas Plus at 477, 497, [33], [99], Bachmann at 429-430 [28]-[29]. The contractual promise between the banker and the beneficiary is unaffected by the terms of any underlying contract between the beneficiary and the applicant for the letter of credit. However the applicant for the letter of credit might be able to apply to prevent the beneficiary from claiming against the banker due to the terms of an underlying contract: Bachmann at 429-430 [28]-[29]. These principles apply equally to the performance guarantees the subject of this application.
The Banks submit that the only traditional exception where a banker may be enjoined, is where the beneficiary is fraudulently attempting to draw down the letter of credit. That is because of the Court’s special jurisdiction to prevent fraud, which is wider than the jurisdiction to prevent the beneficiary breaching the underlying contract with the applicant for a letter of credit: Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep 251 at 254, Deutsche Ruckversicherung AG v Wallbrook Insurance Co Ltd [1995] 1 WLR 1017 at 1029-1030, Ideas Plus at 496 [93]. There is no allegation of fraud here and so, the Banks submit, no injunction should be granted against them. The Banks nonetheless rightly, in my opinion, accept that another basis upon which the Banks might be enjoined is by reason of it being allegedly unconscionable, contrary to s 51AA of the Act, for ONGC to exercise its contractual rights in the underlying construction contract and draw upon the performance guarantees although any such restraint would be ancillary to Clough’s claim against ONGC.
The Banks make no submission on the question whether there is a serious question to be tried as to any unconscionable conduct under s 51AA of the Act between ONGC and Clough. However it is said on their behalf that even if ONGC had engaged in such conduct the appropriate order would be to require ONGC to countermand or withdraw the previous demands which it has made on the performance guarantees rather than to enjoin the Banks.
RELEVANT AUTHORITIES
I now turn to consider a number of relevant authorities. In Bachmann the appellant agreed to design, manufacture, supply and commission steel manufacturing equipment for the respondent. A clause in the Supply Contract required the supplier to provide security for the performance of its obligations, which it did by an irrevocable standby letter of credit in favour of the purchaser. The letter of credit required the purchaser to provide the bank with a statement that the supplier had failed to comply with the contract and a sight draft, which the bank undertook to honour. The relevant clause provided:
“A party shall not convert into money security that does not consist of money until the party becomes entitled to exercise a right under the contract in respect of the security.”
Brooking JA with whom Tadgell JA and Ormiston JA agreed said:
‘It is also plain that it is competent to the holder of security provided by the other contracting party to promise as part of the contract under which the security is provided – the underlying contract – not to do some act in relation to the security except in a certain event. Such a contractual promise is efficacious, not in the sense, of when the security is constituted by the obligation of a third person, that the third person can rely by way of defence as against the security holder on a term of the underlying contract, to which he was not a party, but in the sense that relief can be afforded to the person who procured the security in an action brought against the security holder on the promise contained in the underlying contract. No principle or rule of law would deny that a promise forming part of the underlying contract is in this sense efficacious, and the cases recognise this.’ [28]
The cases relied upon by his Honour included Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 at 452-4 per Gibbs J (with whom Mason J agreed) and at 459 per Stephen J. His Honour continued:
‘I do not overlook the credible distinction between the effect of the underlying contract as between the parties to it and its effect (if any) as between the holder of the security and the third person whose obligation constitutes the security. One can for brevity speak of a contractual qualification upon the owner’s powers in relation to the security where the underlying agreement between the owner and the contractor or supplier contains a term which restricts the exercise of those powers in some way.’ [29]
The supplier in Bachmann did not seek to establish any case of fraud on the purchaser’s part but relied only on the contractual qualification upon the purchaser’s powers under the general conditions of the underlying contract to demand payment under the letter of credit. It was conceded that the clause referred to constituted a contractual qualification on the purchaser’s powers in relation to the security. This is to be contrasted with earlier Australian cases where the initial question was whether the underlying contract on its proper construction qualified the security holder’s powers to claim under the security. The only point in the appeal as his Honour put it was as to the content of the qualification. [30]
His Honour canvassed a number of cases in which the proper construction of the language contained in the standby letter of credit, “… until the party becomes entitled to exercise a right under the contract …” had been similarly discussed. Those authorities range from requiring no more than a claimed entitlement which is not specious or fanciful: Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210 to requiring that the holder of the security establish, whether by litigation or arbitration, an actual entitlement to payment of the moneys: Mitsui Kensetsu Corporation Australia Pty Ltd v State of South Australia (unreported Qld Supreme Court, 9 August 1990 per Byrne J).
His Honour referred to Hudson’s Building and Engineering Contracts 1995 11 Ed where I N Duncan Wallace QC said:
‘However, in so far as a construction contract may make clear provision for the furnishing of an unconditional guarantee as security for due performance, the normal interpretation … will be that, in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party’s part, and any further investigation of its merits or extent is not usually intended by the contract…’.
Ultimately, as a matter of construction of the particular standby letter of credit, his Honour concluded that as between the purchaser and the supplier, the purchaser was entitled to have recourse to the security where according to a bona fide claim made by the purchaser monies were due to it from the supplier which exceeded any monies due from it to the supplier. [53]
In Ideas Plus Steytler P with whom McLure and Buss JJA agreed concluded that the National Australia Bank (NAB) was empowered to claim under a letter of credit granted by HSBC Bank of Australia Ltd (HSBC) so long as it had a bona fide belief that the conditions were satisfied. The certificate by the NAB issued to HSBC certifying in effect that the conditions of the letter of credit had been met was only a representation of such a bona fide belief and perhaps that there were reasonable grounds for such a belief. [55]-[57], [105] See also Fletcher Construction Australia Limited v Varnsdorf Pty Ltd [1998] 3 VR 812. Steytler P with whom McLure JA agreed held that the basis for the payment made by HSBC pursuant to its independent obligation by it to NAB under the letter of credit was the provision by NAB of a certificate in the required terms. It was, his Honour found, the presentation of that certificate, not the truth of the facts certified, which conditioned HSBC’s obligation to pay.
In Olex Focas Pty Ltd v Skodaexport Co Ltd, sub-contractors provided unconditional bank guarantees to the head contractor known as mobilisation guarantees. Additionally they provided performance bonds again by way of bank guarantees to the head contractor. All the guarantees contained unconditional undertakings by the bank to pay the head contractor on demand. The contracts made between the sub-contractors and the head-contractor were variously expressed to be subject to the laws of India or Switzerland. The contracts also contained an arbitration clause requiring disputes to be arbitrated in Paris.
Disputes arose between the sub-contractors and the head-contractor. The sub-contractors claimed that they had performed all their obligations under the contract. The head-contractor denied this. The head-contractor then called up the full amount of the guarantees. The sub-contractors sought interlocutory injunctions requiring the head-contractor to countermand the demands made upon the bank, restraining the head-contractor from making any further demand under any of the guarantees and restraining the bank from making any payment pursuant to any of the guarantees.
The mobilisation and bank guarantees all contained irrevocable undertakings on the part of the bank “to pay the buyer at site forthwith on first demand and in writing without protest or demur or proof or satisfaction and without reference to the seller any and all amounts demanded from us by the buyer”, subject to an aggregate limit.
The bank further agreed that: it wasn’t necessary for the buyer to proceed against the seller before proceeding against the bank and that the guarantee would be enforceable against the bank as principal debtor notwithstanding the existence of any security; the liability of the bank to the buyer under the undertaking would remain in full force and effect notwithstanding the existence of any difference or dispute between the seller and the buyer, the seller and the bank and/or the bank and the buyer or otherwise howsoever … to the effect that notwithstanding the existence of such difference, dispute or instruction, the bank shall remain liable to make payment to the buyer in terms of the guarantee.
The Court declined to grant injunctions under the general law, they not having established a clear case of fraud by the head-contractor in making demand under the guarantees and that the bank was aware of any such fraud at the time of the post payment. There was accordingly no serious question to be tried in that respect. In so finding the Court applied Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443.
However, the Court held that there were serious questions to be tried whether the parties were engaged in trade and commerce between Australia and a place outside Australia, for the purposes of s 6(2) of the Act, and whether the head-contractor had acted unconscionably, and in contravention of s 51AA of the Act, by making demand under the mobilisation guarantees, in the sense that it had insisted on strict legal rights in circumstances which made that harsh or oppressive or caused hardship. Accordingly, the sub-contractors were entitled to injunctions in respect of the mobilisation guarantees: (Logue v Shoalhaven Shire Council [1979] 1 NSWLR 537; Stern v McArthur (1988) 165 CLR 489 referred to). Batt J in so finding held that the effect of the Act, applying as it did to international trade and commerce, was to work a substantial inroad into the well-established common law autonomy of letters of credit and performance bonds and other bank guarantees. In that case the bank which operated in Victoria, had made a submitting appearance only.
In Wood Hall Ltd v The Pipeline Authority a condition in a contract for the construction of a pipeline required the contractor to provide a cash security or, alternatively, a bank guarantee as security for the contractors due and faithful performance of the work. This was in the nature of a performance guarantee. Another condition entitled the owner to retain 10% of the progress payments due to the contractor until the work had been performed and accepted in accordance with the contract. The owner, at the contractor’s request, agreed to accept a bank guarantee in lieu of the monies retained. This was a so-called retention guarantee. By each of the guarantees the bank unconditionally undertook to pay the owner on demand any sum up to the limit specified in each guarantee. When the work was almost complete, the owner demanded payment from the bank under the guarantee. The contactor sought declarations and orders the purpose of which was to restrain the bank from making payment to the Authority under four instruments described on their face as bank guarantees given by the bank to the Pipeline Authority. The Court there held that the owner was entitled to demand and be paid the amount of the performance guarantee whether or not there had been a want of due and faithful performance of the work, and the monies so paid must be held by him as security for the contractors due and faithful performance of the work.
Gibbs J, having regard to the proper construction of the performance guarantee, said that to hold that the Banks 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. (p 451) However, Stephen J observed that, if the construction contract itself had contained some qualification upon the Authority’s power to make a demand under a performance guarantee, the position in relation to the grant of such an injunction might well have been different (p 459). Young J in Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 at 550-551 made observations to like effect.
In Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158, 164 Austin J said:
‘There are three principal exceptions. The first, noted in passing by Gibbs J in the Wood Hall case (at 451) and recognised as well by Young J in Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1986) 2 BCL 366, 370, is that the Court will enjoin the party in whose favour the bond has been given from acting fraudulently. The second exception, recently recognised by the Victorian Supreme Court in Olex Focas Pty Ltd v Skodaexport Co Ltd, [1997] ATPR (Digest) [46-163], is that the Court will intervene to restrain the party for whose benefit the bond was given from acting unconscionably for the purposes of s 51AA of the Trade Practices Act 1974 (Cth).
There is a third exception, which is based on contract and is the most important for present purposes. A line of cases has recognised that whilst the Court will not restrain the issuer of the bond from acting on the unqualified promise to honour it, 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.’ [emphasis added]
Clough relies upon the last two of these three principle exceptions for the proposition that the performance of the bond is an event in which the Court will not intervene at all.
In addition to its submissions concerning the Construction Contract Clough also contends that the performance guarantees are expressly by their terms triggered only “on breach of contract by” Clough. It is said accordingly that the performance guarantees are not ‘unconditional’ enabling the Banks to ignore the position as between Clough and ONGC. Any suggestion that notices under the performance guarantees are ‘conclusive and binding’, and had effect notwithstanding any dispute pending in any court and that the bank’s liability is ‘absolute and unequivocal’ is, it is submitted, to miss the threshold point. They are only conclusive it is said if they are properly called and absent there being a breach of contract they have not been so called. Clough contends that there is a serious question to be tried whether in fact they have been properly called.
REASONING
It is inherent in the nature of an application for interlocutory relief that the evidence upon which the application must be determined will be incomplete and unsatisfactory for the purposes of making a final finding.
Such is the case here. Clough says that it is not and has not been in breach of the Construction Contract and that no other contractual basis exists as a matter of fact to entitle ONGC to call up the performance guarantees. Alternatively it says that if any breach exists that has been occasioned by ONGC’s own breaches of contract. ONGC has not appeared. Accordingly the facts deposed to are presently uncontradicted. The Banks do not contradict that evidence nor could they. I am required to consider the application on the basis of the evidence as it stands before me.
As I have mentioned, Batt J was not persuaded, on the evidence before him in Olex Focas, that there was a serious issue to be tried that the head-contractor was acting unconscionably for the purposes of s 51AA of the Act in calling up the performance guarantee. His Honour came to the opposite conclusion on the evidence before him in respect to the mobilisation/procurement guarantees. This was because his Honour considered that the calling up the whole amount secured by this category of guarantees, when the greater part had already been paid, was “according to ordinary human standards, quite against conscience” and accordingly, unconscionable within the terms of the Act.
This conclusion was reached although the contractor was, in calling up these guarantees, acting according to his strict legal entitlement: Stern v McArthur (1988) 165 CLR 489. See also: ACCC v CG Berbatis Holdings Pty Ltd (No 2) (2000) 96 FCR 491 at 498 adopted with approval in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1 Gummow and Hayne JJ.
Clough says that it is not in breach and accordingly the triggering event has not occurred. ONGC is not, on that basis, acting according to any legal entitlement. It is acting without any legal entitlement. In my opinion, judging the matter as I must, on the evidence before me, I consider this to be unconscionable, within the meaning of s 51AA of the Act.
I remain satisfied that there is a serious issue to be tried as to whether ONGC has acted unconscionably in contravention of s 51AA of the Act in calling on or threatening to call on the performance guarantees despite there being no legal right, on its part, to do so. As Austin J said in Boral Formwork v Action Makers (2003) ATPR 41-953 at [14] when referring relevantly to s 51AA of the Act: “The principle of autonomy, applicable to a standby letter of credit, cannot override the Statute”. I am also satisfied that, upon the same factual matrix, there is a serious issue to be tried whether ONGC is in breach if the negative stipulation conditioning the right to call up the performance guarantees.
These findings warrant the continuation of the injunctive orders as against ONGC, and subject to consideration of the balance of convenience, ancillary injunctive orders as against the Banks.
In these circumstance it is not necessary for me presently to enter upon the question of the construction of the performance guarantees and in particular whether, as between the Banks and ONGC the obligation to pay under a call is conditioned by ‘breach of contract’ by Clough, and if so, just what is required to be done by way of notice, or proof, or otherwise, in order for that condition to be satisfied.
BALANCE OF CONVENIENCE
The Banks raise the following issues in this respect:
(a)whether damages from ONGC would be an adequate remedy for any loss which Clough might suffer;
(b)whether the Federal Court will issue an anti-suit injunction against ONGC to prevent ONGC suing the Banks in India. Unless there is an anti-suit injunction, the Banks are exposed to the significant prospect of being sued for the guaranteed amounts in India and being ordered to pay these amounts in contravention of the Federal Court’s injunction;
(c)even if an anti-suit injunction is issued, whether this will offer adequate protection to the Banks against being sued in India. An Indian Court may not accept that a company owned by the Indian Government should be prevented from suing upon a contract governed by Indian contract law and subject to the exclusive jurisdiction of the Indian Courts;
(d)even if an anti-suit injunction is issued and would protect the Banks from being sued in India, whether the Court should interfere with the protection offered by a letter of credit to a beneficiary;
(e)even if an anti-suit injunction is issued and would protect the Banks from being sued in India, whether the injunction would adversely affect the commercial reputation of the Banks in a way that would mean that those arranging international letters of credit and performance guarantees would prefer banks from other jurisdictions.
Damages an Adequate Remedy
The Banks contend that even if ONGC has incorrectly drawn down on the performance guarantees there are remedies available between Clough and ONGC, for example, by suing the beneficiary for an account and payment of any overpayment under a performance bond: Cargill International SA v Bangladesh Sugar & Food Corporation [1996] 2 Lloyd’s LR 524 at 530. See also Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335 at 351 and Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 at 454. It points also to the fact that there is no suggestion that ONGC would be unable to repay any amount owing. Accordingly damages from ONGC, it is said, would be an adequate remedy.
Should an Anti-Suit Injunction be Issued?
The Banks contend that they will not be adequately protected against the prospect of being sued in India for the guarantee demands unless an anti-suit injunction is issued against ONGC and that this is relevant in the context of the balance of convenience.
The balance of submissions by the Banks relating to the subject matter of an anti-suit injunction are all based upon the proposition that an anti-suit injunction has in fact issued and raises questions as to whether such an injunction would be recognised by Indian courts, suggesting that they might not be and that if any injunction were to be granted it should be framed so as to prevent the Banks being placed in a contradictory position if an Indian court does not give effect to any anti-suit injunction for example, by expressly conditioning its operation upon Indian courts actually giving effect to any anti-suit injunction granted against ONGC.
Interference with Commerce
I have already adverted to the well-established line of authority underlining the importance of the certainty generated by letters of credit, performance bonds and the like. The Banks submit that this is an important factor on the balance of convenience and point to the case of Olex Focas Pty Ltd v Skodaexport Co Ltd where Batt J refused an injunction against either the beneficiary or the bank to prevent payment on performance bonds based on claims of unconscionable conduct contrary to s 51AA of the Act.
Banks Commercial Reputation
It is submitted that an injunction may well adversely affect the commercial reputation of the Banks in a way that would mean that those arranging international letters of credit and performance guarantees would prefer banks from other jurisdictions. This, it is contended, gives rise to an unquantifiable difficulty, which means that an undertaking as to damages, by Clough, may well be insufficient to protect the position of the Banks.
The Status Quo
As between Clough and ONGC I have already concluded, when granting an interim interlocutory injunction against ONGC that the balance of convenience favoured the grant of an injunction because the evidence demonstrated how Clough would be irreparably affected (both financially and through an adverse impact on its reputation) if ONGC were to press its demands and secured payment under the performance guarantees. I found that damages would not be an adequate remedy for Clough on the evidence then before me.
In so finding I relied upon the affidavit of Richard Francis Simons sworn 28 May 2007 who proposed that if ONGC were to call on the performance guarantees this would have a material and long term adverse effect on Clough’s business. [8] He went on to explain the effect this would have upon Clough’s debt facilities and available cash, its reputation and its ability to obtain other performance guarantees. It will be helpful, for present purposes, to refer to these matters in detail.
Impact upon Debt Facilities and Available Cash
Mr Simons says that Clough’s debt facilities provided by the Banks have a limit of approximately $52 million, and at the date of swearing his affidavit, the total amount drawn down against those facilities was approximately $50 million, leaving a balance available of approximately $2 million. He says that, accordingly, if the performance guarantees are called this would crystallise significant additional debt obligations for Clough. In that event, Clough would not have sufficient available debt facilities to fund the encashment of the performance guarantees. This he says would reasonably be expected to lead to the Banks requiring Clough to reimburse them for the funds paid out by them under the performance guarantees which would place Clough under considerable strain in respect of its cash flow. In particular, he says, it would prevent Clough from continuing to make capital investments to continue its growth and that presently it is planning the investment of several tens of millions of dollars over the course of the next 12 months to expand its capacity in its fixed asset base. Such planned expansion could not proceed if ONGC called upon the performance guarantees and Clough were required to reimburse the Banks. He refers to a project presently being undertaken by Clough namely a substantial refurbishment and upgrade of its vessel the ‘Java Constructor’. This capital expenditure program has a cost of US$45 million and is being funded through a new debt facility to be provided by the Royal Bank of Scotland plc. Negotiations for the new debt facility are well advanced and credit approval has been obtained with expected finalisation of documentation by approximately mid June 2007. Additionally Clough is also in the course of finalising negotiations for the acquisition of a new vessel; again those are expected to be concluded by approximately mid June 2007. The acquisition is to be funded by a new debt facility of US$72 million to be arranged by Caterpillar Marine Financial Services. Credit approval for that has been obtained and is expected to be finalised by about end of June 2007.
He says that if ONGC calls upon the performance guarantees it is highly likely that the new debt facilities to which I have referred will be jeopardised with each financial institution being concerned about the impact on Clough’s cash flow from having to fund the calling of the performance guarantees by ONGC which is likely to lead to the withdrawal of the current offers of finance. Mr Simons deposes that in his view the probability of such an outcome is very high and should that occur Clough will be unable to pursue both of the vessel projects. He then says that absent the capacity expansion program Clough is at significant risk of its competitive position being severely eroded. It would not he said be able to respond to the changing requirements of Clough’s clients which were the catalyst for the new capital investments.
The adverse cash flow impact of funding the performance guarantees would cause Clough to undertake a significant cost cutting and retrenchment program to be able to generate sufficient cash to reimburse the Banks. Such actions would materially adversely impact Clough’s competitive position and make it very difficult to attract and retain key staff. The reason why Clough would have to undertake significant cost cutting and retrenchment is that without those drastic measures the pressure on Clough’s cash position after paying US$21 million would be such that to be able to pay its ongoing debts from available cash resources Clough would have to reduce its expenses.
Reputation Impact
Mr Simons says that Clough is presently in formal dispute proceedings with one of its other clients in relation to another project, the Bass Gas Project. The formal dispute commenced when the client called on performance guarantees granted in relation to Bass Gas project. The dispute relating to the Bass Gas Project is well known in the public domain and Mr Simons believes it has adversely affected Clough’s reputation in the market. If ONGC calls on the performance guarantees then the same adverse outcomes resulting from drawing of the performance guarantees on the Bass Gas Project would be repeated and would, he believes, magnify the negative reputational impact as a result. He says that from his experience with Clough and as a result of having to deal with the reputational impact as a result of the calling on the performance guarantees in relation to the Bass Gas Project as well as from his experience generally, that the act of calling on the performance guarantees creates an impression amongst stakeholders (current and prospective employees, clients, suppliers and shareholders) that Clough has failed to perform its technical obligations on a project and may not be competent. He says that the clearing of Clough’s name by litigation, after the performance guarantees had been called and paid, as a result of likely protracted litigation taking several years could, throughout that period, permanently adversely affect Clough’s reputation as an engineer and contractor. He deposes that the impact could lead to a substantial reduction in the share price of the company. Indeed this is something which occurred when the dispute relating to the Bass Gas Project commenced. This in turn would make it very difficult to raise equity capital and debt capital from new lenders.
It would also be a concern amongst current and prospective clients about Clough’s technical competency which would affect its ability to win new work, undertake and complete projects.
There would be concern amongst current and prospective clients about Clough’s financial stability and its ability to complete the existing projects and take on new projects. Queries were raised in this regard by a number of prospective clients who questioned Clough’s financial capability following the Bass Gas dispute. Mr Simons had to present Clough’s financial position to a number of its clients and consultants. He deposes also to the tightening of credit facilities by suppliers such as Mitsui & Co, a long term supplier of pipes to Clough as a result of the Bass Gas dispute. Indeed Mitsui also required Clough to provided security for their trade debt prior to the shipment of their goods.
There will also be likely concern amongst Clough’s employees about its financial stability and hence the security of their employment. The labour market is presently very competitive with organisations like Clough competing for resources. In such a buoyant labour market it is said it would be easy for employees to find other jobs and indeed Clough has lost a number of its employees to competitors and clients due, amongst other things, to concerns over Clough’s financial stability. That position would merely be exacerbated in the event that ONGC drew on the performance guarantees and the Banks paid pursuant to those demands.
Ability to Obtain Other Performance Guarantees
Mr Simons says that Clough is required ordinarily to provide performance guarantees in respect of construction projects. He believes that if ONGC were to call on the performance guarantees (and these were paid) it would make it extremely difficult for Clough to obtain the issue of new guarantees from its Banks and other performance guarantees providers. Absent the ability to obtain such guarantees for future projects it would not be awarded new contracts. This in turn would lead potentially to consequences for the continued viability of Clough’s business.
He concludes by stating his belief that Clough and the companies associated with it would suffer irreparable harm if payment under the performance guarantees were made in circumstances where, ONGC is not entitled to call on them.
Nothing of what was said by Mr Simons was in any way disputed by the Banks.
CONCLUSION ON BALANCE OF CONVENIENCE
I have no hesitation in finding that the balance of convenience strongly favours the maintenance of the injunctive orders as against each of the Banks. The possibility of the Banks being confronted with contradictory orders by reason of any proceedings which may be instituted against them by ONGC in India, is just that, a mere possibility at present. The institution of such proceedings will possibly generate a number developments which might well avoid such a result. Clough might seek to be joined to those proceedings in order to protect its position. One way or another it is highly likely that the fact that these proceedings will be brought to the attention of the Indian court. This might lead to applications both in India and here in Australia as to which is the more appropriate forum. There is no reason for me to conclude at this stage that there is any real likelihood that an Indian court would ignore relevant principles of private international law including international curial comity.
Nor am I persuaded to give any significant weight to the expressed concern on the part of the Banks as to their commercial reputation or that there is any immediate likelihood of parties arranging international letters of credit and performance guarantees preferring Banks in jurisdictions other than Australia. The Banks have taken prompt action to have the interim injunctive orders dissolved in order to enable each of them to discharge their perceived obligations to ONGC. They cannot be accused of adopting a merely passive role. It is no discredit to the Banks to be the subject of injunctive orders, in these circumstances, by this Court. The circumstances of this case are in any event exceptional.
On the other hand, I am satisfied that to discharge the injunctions could very well lead, not only to irreparable harm to Clough as a company and thereby its shareholders but would likely visit adverse consequences upon its employees and others such as suppliers and parties with whom Clough has engineering contracts. I remain of the view that damages in this context would not be an adequate remedy.
In these circumstances, and in light of the serious issues to be tried as between Clough and ONGC, it is necessary, in my opinion, in order to preserve the status quo, and the efficacy of the injunctive orders made against ONGC, given the Banks’ intention, otherwise, to pay under the guarantees, to restrain them from doing so: see Olex Focas at p 405.
Accordingly I am of the view that the motion by the Banks should be dismissed.
I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour. Associate:
Dated: 19 June 2007
Counsel for the Applicant: Mr G Murphy SC with Mr B Dharmananda Solicitors for the Applicant: Corrs Chambers Westgarth Counsel for the 1st Respondent No appearance Counsel for the 2nd-4th Respondents: Mr J Thomson Solicitors for the 2nd-4th Respondents: Allens Arthur Robinson Date of Hearing: 12 June 2007 Date of Judgment: 19 June 2007
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