Commonwealth Bank of Australia v Greenhill International Pty Ltd

[2013] SASCFC 76

SUPREME COURT OF SOUTH AUSTRALIA

(Full Court: Permission to Appeal)

COMMONWEALTH BANK OF AUSTRALIA v GREENHILL INTERNATIONAL PTY LTD

[2013] SASCFC 76

Judgment of The Full Court

(The Honourable Justice Gray, The Honourable Justice Sulan and The Honourable Justice Blue)

15 August 2013

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - IMPLIED TERMS - GENERALLY

BANKING AND FINANCE - INSTRUMENTS - LETTERS OF CREDIT

BANKING AND FINANCE - INSTRUMENTS - BILLS OF EXCHANGE - ACCEPTANCE

Greenhill International sued the Commonwealth Bank in the District Court for damages for breach of an implied term of a contract whereby the Commonwealth Bank silently confirmed a letter of credit issued by the Bank of India. 

It was an express term of the contract that the Commonwealth Bank  had a right of recourse against Greenhill International where any delay or default occurred in payment under the letter of credit resulting from a dispute in relation to the commercial contract.  The trial Judge found that it was an implied term of the contract that the Commonwealth Bank would take all steps necessary to achieve payment in the event of default under the letter of credit.  The Judge awarded damages assessed at US $41,931.60.

The Commonwealth Bank appealed against the judgment.  On the hearing of the appeal, Greenhill International did not support the basis on which the Judge granted judgment.  It advanced a new contention that the right of recourse ceased upon acceptance by the Bank of India of bills of exchange drawn by Greenhill International in favour of the Commonwealth Bank.

Held by the Court allowing the appeal:

1.      The trial Judge erred in finding that the implied term was a term of the contract.  Implication of the term was not necessary to give business efficacy to and was contrary to the express terms of the contract (at [31]-[33]).

2.      Acceptance of the bills of exchange by the Bank of India on 16 and 23 May 2008 did not completely supersede the letter of credit or deprive the Commonwealth Bank of the right of recourse (at [36]-[38]).

3.      Acceptance of the bills of exchange by the Bank of India on 16 and 23 May 2008 did not result in the Commonwealth Bank becoming a Confirming Bank, nor did it deprive the Commonwealth Bank of the right of recourse (at [40]-[44]).

4.      Appeal allowed; judgment of the District Court set aside and in lieu thereof judgment entered in favour of the Commonwealth Bank (at [46]).

COMMONWEALTH BANK OF AUSTRALIA v GREENHILL INTERNATIONAL PTY LTD
[2013] SASCFC 76

Full Court:       Gray, Sulan and Blue JJ

THE COURT.

1. Following a trial in the District Court, the plaintiff and respondent, Greenhill International Pty Ltd, recovered damages against the defendant and appellant, the Commonwealth Bank of Australia, for breach of an implied term of a contract.  The Commonwealth Bank has appealed against that decision.

2. The contract related to a letter of credit issued by the Bank of India in favour of Greenhill International and contained a term giving the Commonwealth Bank a right of recourse against Greenhill International in respect of the letter of credit. The trial Judge found that it was an implied term of the contract that the Commonwealth Bank would take all steps necessary to achieve payment in the event of default by the Bank of India under the letter of credit. 

3. On the hearing of the appeal, Greenhill International did not support the basis on which the Judge granted judgment in favour of Greenhill International and effectively abandoned its case based upon an implied term.  It advanced a new contention. It was submitted that the judgment should be upheld on the ground that the right of recourse ceased upon the acceptance by the Bank of India of certain bills of exchange drawn by Greenhill International in favour of the Commonwealth Bank.

   Introduction

4. In or about March 2008, an Indian entity, SBP and Co, approached another Indian entity, Seth Bankatlal Maloo Industries Pvt Ltd, with a proposal to supply waste paper to Seth Bankatlal.  The approach was made on behalf of Greenhill International through the business name under which it traded, Valley View International Trading and Recycling.  As a consequence, Seth Bankatlal placed an order for the supply of 150 metric tonnes of OCC waste paper and agreed to pay US$254 per metric tonne. 

5. At the request of SBP and Co, Greenhill International, through the business name Valley View International, arranged a consignment for 156 metric tonnes of waste paper.  On 10-11 April 2008, Greenhill International issued to Seth Bankatlal invoices totalling US$34,210 and US$6,472.30 for 131 tonnes and 25 tonnes of paper including interest. On 18-19 April 2008, the paper was loaded on board destined for India.

6. On 18 April 2008, Seth Bankatlal obtained a letter of credit from the Bank of India nominating Valley View International as beneficiary and provided that letter of credit to SBP and Co. 

7. On 8 May 2008, the Bank of India advised Seth Bankatlal that the consignment had arrived and the Bank of India delivered commercial invoices together with the papers concerning the consignment to Seth Bankatlal.  Seth Bankatlal then delivered the papers to the clearing agent, who advised that the material had been received on 20 May 2008 and advised of the customs duty and other charges that were payable.  Seth Bankatlal then took possession of five containers of waste paper on 24 May 2008 and found the goods to be not of the quality ordered and refused to accept the goods. 

8. On 26 May 2008, Seth Bankatlal advised SBP and Co that the goods were not of the quality ordered and requested that an inspection be made of the goods.  SBP and Co responded, requesting that photographs be sent depicting the problem with the goods and saying that they would then take up the matter with Greenhill International.  On 19 June 2008, Seth Bankatlal forwarded photographs.  No action was taken by Greenhill International or SBP and Co.  On 26 July 2008, Seth Bankatlal advised Greenhill International and SBP and Co that the goods remained with Seth Bankatlal at the risk of Greenhill International and SBP and Co. 

9. On 18 August 2008, Seth Bankatlal issued proceedings against Valley View International and SBP and Co in Nagpur, India.  On 19 August 2008, an order was made temporarily restraining Valley View International from encashing the letter of credit dated 17 April 2008 that had been provided by the Bank of India.  The order also required Valley View International to show cause as to why the temporary injunction should not be extended.  On an unspecified date, the Bank of India was added as the third defendant to the proceeding.

10. On 24 December 2010, judgment was delivered in the proceeding.  Valley View International did not appear.  SBP and Co and the Bank of India did appear and were represented by advocates.  The Court ordered Valley View International and SBP and Co to pay damages to Seth Bankatlal.  Further, an order was made restraining Valley View International from encashing the earlier referred to letter of credit and restraining the Bank of India from making the payment covered under the letter of credit, either to the negotiating bank, the Commonwealth Bank, or Valley View International.  The Court directed that the letter of credit be treated as cancelled.  Other consequential orders were made. 

11. By an agreement dated 18 April 2008, Greenhill International and the Commonwealth Bank agreed that the Commonwealth Bank would silently confirm the letter of credit that had been issued by the Bank of India in the amount of US$38,100.00.  The issuing bank was the Bank of India and the nominated bank was the Commonwealth Bank. 

12. The agreement was in writing and in the following terms:

    Silent Conformation Documentary Credit

    Documentary Credit No:               8747FLCDA080006

    Issuing Bank:  BANK OF INDIA

    Amount (Including tolerance, if any):      USD38,100.00

    Applicant:  SETH BANKATLAL MALU INDUSTRIES P/L

    Credit Expiry Date:             31/05/2008

    Our Reference:                   0053737844/T40360

    At your request and subject to acceptance of this offer, the Commonwealth Bank of Australia will silently confirm the above Documentary Credit.

    The Bank undertakes to honour drawings on presentation of the documents required under Documentary Credit to the Commonwealth Bank of Australia in accordance with the terms and conditions of the Credit and subject to the provisions of the Uniform Customs and Practice for Documentary Credits, International Commerce Publication No. 600 (2007 Revision).

    This offer has been made based on the format of the Documentary Credit as it was initially advised by the Issuing Bank.  Any Amendment/s will require the separate approval of the Bank in writing.

    By accepting this offer, the company agrees to:

    ·    Assist the Bank and take all steps necessary to achieve payment as the bank may require in the event of default, including initial proceedings to enforce recovery.

    ·    Assign and subrogate all rights and proceeds to which you are entitled or will become entitled under the relevant Documentary Credit to Commonwealth Bank of Australia, including (but not limited to) your rights against the Issuing Bank, all title and interest in the documents under the Credit and goods to which the documents relate and all proceeds of sale of the goods. 

    This offer is personal to you and is not transferable.

    The Bank retains the right to withdraw this offer prior to your acceptance, should we perceive any change in circumstances warrant so.

    Fee:  AUD120.00

    Payable:  On acceptance of this offer

    Validity of Offer:                This offer will lapse if unaccepted by 25/04/2008

    Our silent confirmation is conditional upon receipt by the Bank of the Original Credit and all amendments any payment of our fee.

    Any alteration to this document renders our offer null and void.

    The Bank retains the right to effect recourse to the beneficiary where any delay/default/loss occurs resulting from a dispute in relation to the commercial contract.

    Please sign below indicating your acceptance/rejection and return all pages by fax.

    LYNNE DOBIE

    Manager Trade and Working Capital Finance – South Australia

    Commonwealth Bank of Australia

    Accepted/Rejected

    For and on behalf of

    VALLEY VIEW INTERNATIONAL TRADING & RECYCLING

    Authorised Signature

    [Emphasis added.]

13. On 18 and 19 April 2008, Greenhill International drew in favour of the Commonwealth Bank two sets of bills of exchange on the Bank of India for US$34,210 and US$6,472.30, being the amounts due for the two consignments of 131 tonnes and 25 tonnes of waste paper. Each set contained two bills of exchange, one for the amount of principal and the other for the amount of interest under the commercial contract for the sale of the waste paper.

14. On 5 May 2008 and 23 May 2008, the Commonwealth Bank credited the account of Greenhill International with the net values of the bills of exchange. 

15. The first pair of bills was presented to and accepted by the Bank of India on 16 May 2008 and the second pair of bills on 23 May 2008. 

16. On 23 January 2009, the Commonwealth Bank wrote to Greenhill International advising it that as a result of the Indian Court injunction, the Bank of India had been unable to effect payment under the letter of credit.  As a consequence, the Commonwealth Bank proposed to exercise its right of recourse as against Greenhill International.

17. On 29 January 2009, the Commonwealth Bank purportedly exercised its contractual right of recourse and debited the account of Greenhill International with an amount equal to US$41,939.60. 

    The Trial

18. It is against the above background that Greenhill International took proceedings against the Commonwealth Bank.  Greenhill International asserted that the Commonwealth Bank had confirmed the letter of credit and that the Commonwealth Bank had not been entitled to debit the account of Greenhill International with the amount of money advanced pursuant to the letter of credit.  Greenhill International further asserted that the Commonwealth Bank was not entitled to exercise its contractual right of recourse in circumstances where the Bank of India had refused to honour the letter of credit.  Greenhill International sought payment of the monies wrongfully debited, damages for the breach of contract, interest and costs.

19. The Commonwealth Bank defended the claim, relying on what it claimed was a right of recourse against Greenhill International forming an express term of its contract with Greenhill International.  The Commonwealth Bank asserted that the circumstances that had occurred in connection with the Indian court proceedings constituted a delay, default or loss occurring as a result of a dispute in relation to the commercial contract between Greenhill International and its customer in respect of which the letter of credit had been issued.  The Commonwealth Bank asserted that these events enlivened its contractual right of recourse. 

20. It is common for commercial transactions involving letters of credit to expressly incorporate the terms of the Uniform Customs and Practice for Documentary Credits International Chamber of Commerce Publication number 600.  This publication is referred to as UCP600. 

21. UCP600 provides the following relevant definitions:

    Applicant means the party on whose request the credit is issued.

    …

    Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

    …

    Beneficiary means the party in whose favour a credit is issued.

    …

    Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.

    …

    Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank's authorization or request.

22. The terms of UCP600 provide that both the issuing bank and the confirming bank owe obligations to the beneficiary to honour the letter of credit.  These obligations are distinct from the underlying commercial transaction between the beneficiary and the applicant. 

23. Applying these definitions to the present proceeding, the issuing bank, the Bank of India, issued the letter of credit at the request of the applicant, Seth Bankatlal, in favour of the beneficiary, Greenhill International.  The Bank of India therefore owed an obligation to Greenhill International to honour the letter of credit, and this obligation was independent of the commercial transaction for the purchase of waste paper between Greenhill International and Seth Bankatlal. 

24. UCP600 does not address the concept of a silent confirmation.  The Commonwealth Bank submitted that it was not a confirming bank for the purposes of UCP600 as it had not added its confirmation to the letter of credit at the request of the issuing bank, the Bank of India.  It was pointed out that the Commonwealth Bank had, solely at the request of Greenhill International, added its confirmation as silent confirmation.  This was done by the contract between the Commonwealth Bank and Greenhill International of 18 April 2008.  As a consequence, it was said that the obligations of the Commonwealth Bank were governed by the terms of that contract and not exclusively by the terms of UCP600. 

25. The Judge concluded that the entitlement of the Commonwealth Bank to recourse, the subject of the agreement of 18 April 2008, was inconsistent with the provisions of UCP600.  He said:

    Properly construed, the defendant, by undertaking to “honour drawings on presentation of the documents required”, effectively agreed to take on the obligations of an issuing bank.  This is reinforced by the fact that the Agreement had incorporated, into its terms, the provisions of the UCP.

    Without more, the plaintiff was entitled to expect that the defendant would honour its obligations regardless of any “dispute” arising in relation to its supply contract, i.e. as provided for by UCP 600.

    However, the Agreement also expressly provided that the defendant reserved the right to have recourse against the plaintiff in the event of a “dispute” involving the sale contract.  Such a term stands in stark contrast to the unconditional undertaking inherent in a confirmation, silent or otherwise, particularly when it is done subject to the provisions of the UCP 600.

    On the face of the Agreement there would therefore appear to be an inconsistency between the “recourse clause” and the provisions of the UCP which are incorporated into it.

26. The Judge concluded that the express term of the contractual recourse clause prevailed over the incorporated provisions of UCP600, and that the provisions of UCP600 were to be disregarded to the extent of the inconsistency. 

27. Despite this finding regarding the terms of UCP600, the Judge accepted a submission advanced by Greenhill International that the agreement contained an implied term qualifying the entitlement of the Commonwealth Bank to effect recourse.  The implied term was to the effect that the Commonwealth Bank would take all steps necessary to achieve payment in the event of a default by the Bank of India.  The Judge reasoned as follows:

    I am however satisfied that the first term should be implied because of all the conditions identified in BP Refinery (Westernport) Pty Ltd are satisfied.

    It is clearly reasonable and equitable for the defendant to take reasonable steps to require the BOI to honour its obligations.

    It is also necessary in order to give business efficacy to the Agreement because, in the absence of such a term the plaintiff has bargained away its rights to require the BOI to pay whilst at the same time agreeing that the defendant can have recourse without effectively doing anything on the plaintiff’s behalf.  In short, it would be agreeing to place itself in a worse situation than that which would have applied if the defendant had simply negotiated the credit on behalf of the BOI.

    It is in my view “so obvious” because another term of the Agreement requires the defendant to “take all steps necessary” to achieve payment.  It seems to me to be implicit in that covenant that the defendant will act reasonably (where it becomes necessary) in seeking to recover the monies.

    The term is also capable of clear expression and does not contradict any express term. 

28. The Judge then concluded that the Commonwealth Bank had breached this implied term and proceeded to assess damages which he entered in US dollars, in the amount of US$41,931.60. 

    The Appeal

    The Implied Term

29. The Commonwealth Bank submitted that the Judge had been wrong to imply the term in the contract of 18 April 2008.  It was pointed out that courts were slow to imply terms and that parties are generally presumed to embody the totality of the agreement in their express terms.  It was said that in the present case this was clearly evident as the agreement was only a two page document containing clear and express terms.  It was then contended that the Judge erred in holding the implied term to be necessary to give business efficacy to the agreement.  It was said that the agreement was clearly effective without the implied term.  It was argued that the only purpose in implying the term was to protect Greenhill International from having bargained away its rights.  It was further contended that the Judge erred in saying that the implied term was so obvious that it went without saying.  Complaint was also made that the Judge erred in concluding that the implied term did not contradict any express term in the agreement.  It was said that the implied term completely negated the express right of recourse and that, as a consequence, the Judge was, in effect, removing the right of recourse.  

1. As earlier noted, on the hearing of the appeal, Greenhill International did not seek to support the Judge’s conclusion that a term was to be implied into the agreement of 18 April 2008.  In essence, Greenhill International abandoned the case that it had run at trial and the basis upon which the Judge had entered judgment in its favour.  Instead, it advanced an entirely new contention, which will be addressed later in these reasons. 

2. We consider that the submissions advanced by the Commonwealth Bank concerning its challenge to the term implied by the Judge are well based.  Such a term was not necessary to give business efficacy to the agreement.  While the contract contemplated that the Commonwealth Bank would receive payment of the sum of US$38,100 from the Bank of India, it explicitly contemplated and provided for circumstances in which such payment would not be made as a result of a dispute in relation to the commercial contract between Greenhill International and its customer, Seth Bankatlal.  In that event, it provided that the Commonwealth Bank retained a right of recourse to Greenhill International.  It was the evident purpose and effect of this right of recourse that the risk of non-payment by the Bank of India under the letter of credit would ultimately fall upon Greenhill International and not the Commonwealth Bank. 

3. It was an express term of the contract that Greenhill International would, upon request by the Commonwealth Bank, assign and subrogate its rights under the letter of credit and otherwise assist the Bank to achieve payment in the event of default.  There was, however, nothing in the contract which obliged the Commonwealth Bank to take an assignment or exercise subrogated or other rights against third parties.

4. The implied term operated to negate the express right to recourse, and was therefore contrary to the whole tenor of the contract.  It would effectively prevent the Bank exercising its right of recourse unless the Bank had first exhausted every means of attempting to recover from the Bank of India the amount payable under the letter of credit, including the institution of legal proceedings.  On no view could the implied term be said to be so obvious that it went without saying.  It is relevant that counsel for Greenhill International did not seek to support the Judge’s conclusions as to an implied term.  We consider that the Judge erred in implying a term into the contract. 

   The Alternative Contention

5. On the hearing of the appeal, Greenhill International sought to advance an alternative contention that, properly construed, the contractual right of recourse only applied to loss caused by the silent confirmation, and that the loss incurred as a result of the Bank of India’s non-payment did not fall within that description.  Greenhill International accepted that this contention had not been identified in the pleadings or at trial, and had not been addressed by the Judge in his reasons.  Greenhill International claimed that the issues arose on the evidence as led and that no further evidence could be relevant to this contention.  It asserted that, in these circumstances, it was entitled to raise this contention.  This contention was put in two different ways. 

   Substitution of Bills of Exchange for Letter of Credit

6. Greenhill International first submitted that the acceptance by the Bank of India of the bills of exchange completely superseded the letter of credit, which was therefore spent by 23 May 2008.  It was said that thereafter the Commonwealth Bank could only seek recourse against the Bank of India on the bills of exchange, which it was said to be entitled to do as a result of having taken an assignment of Greenhill International’s rights pursuant to the terms of the 18 April contract. 

7. The contention that the letter of credit was superseded by the bills of exchange is unsupported by either the terms of the letter of credit or any extrinsic evidence.  It is contrary to the tenor of the letter of credit, which does not provide that it ceases to exist or have any continuing effect upon acceptance of bills of exchange.  On the contrary, the letter of credit expressly provides that:

   We hereby engage with drawers and/or bona fide holders that any credit will be duly honour at maturity except so far as otherwise stated.  We shall reimburse you in accordance with your instruction.

8. In any event, there is no basis for Greenhill International’s contention that, on its true construction, the express right of recourse given by the 18 April 2008 agreement ceased to exist upon issue and acceptance of bills of exchange under the terms of the letter of credit.  The contract does not expressly say so and there is no basis for any such implication.  On the contrary, if a “dispute in relation to the commercial contract” arose, as contemplated by the recourse clause, it was quite likely that it would arise after the acceptance of bills of exchange. 

9. The suggestion by Greenhill International that the Commonwealth Bank had taken an assignment of Greenhill International’s rights under the bills of exchange is unsupported by the terms of the 18 April 2008 contract.  Insofar as that contract referred to the assignment of rights, there is no basis for concluding that the other party to those rights had notice of any assignment.  In any event, the agreement did not operate as an assignment, but rather contemplated an assignment at some future time. 

   Conversion to Full Confirmation

10. Greenhill International also contended that the contractual right of recourse only subsisted as long as the Commonwealth Bank’s confirmation remained as silent confirmation.  It was asserted that, as the payments made by the Commonwealth Bank to Greenhill International had occurred with the express mandate and authority of the Bank of India, the payments were not made under a silent confirmation.  Instead, it was asserted that the Commonwealth Bank had become a confirming bank within the meaning of UCP600, and that the terms of UCP600 therefore applied.  Thereafter, the Commonwealth Bank assumed an absolute obligation to the beneficiary, Greenhill International, to honour the letter of credit and could only look to the Bank of India for payment and not to Greenhill International. 

11. The contention that the Commonwealth Bank had become a confirming bank within the meaning of UCP600 and lost its right of recourse due to acceptance of the bills of exchange is unsupported by any extrinsic evidence. It is contrary to the terms of the contract between the Commonwealth Bank and Greenhill International.  The terms of the letter of credit explicitly contemplated and provided for presentation by the beneficiary of and acceptance by the Bank of India of bills of exchange for the invoice value.  The mere fact that this transpired could not of itself constitute the Commonwealth Bank as a confirming bank.

12. Under UCP600, the term “confirming bank” means a bank that adds its confirmation to a credit upon the issuing bank’s authorisation or request and the term “confirmation” means a definite independent undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation. 

13. The contract contained a term that the Commonwealth Bank would silently confirm the letter of credit.  This amounted to no more than the express undertaking contained in the contract that the Bank would honour drawings by its customer, Greenhill International, in accordance with the terms and conditions of the credit upon presentation of the requisite documents.  This was done by the Bank when it credited US$34,210 to Greenhill’s International’s account on 5 May 2008 and $6,472.30 on 23 May 2008. 

14. As at 5 May 2008, when the Commonwealth Bank credited the bulk of the monies to Greenhill International, there had been no acceptance by the Bank of India of the bills of exchange.  By the time the Bank of India accepted the first pair of bills of exchange on 16 May 2008, the Commonwealth Bank had already credited the amount to Greenhill International’s account. It could not be said that that was in any way authorised or requested by the Bank of India.  In any event, there is no evidence that the Bank of India authorised or requested the Commonwealth Bank to confirm the letter of credit within the meaning of UCP600.

15. More importantly, there is nothing in the terms of the contract capable of providing that, if the Commonwealth Bank should subsequently become a confirming bank, then its right of recourse would be lost.  That suggestion is contrary to the express recourse term. 

    Alternative Submissions

16. Alternative submissions were advanced by the Commonwealth Bank.  It was claimed that, in the event that there was an implied term in the 18 April 2008 agreement, as found by the Judge, there had been compliance with that term.  It was also contended that the Judge erred on the question of causation.  It was said that no loss had been proved.  Finally, an issue arose as to Greenhill International’s entitlement to interest.  Having regard to our earlier referred to conclusions, we do not consider that it is necessary to address any of these matters. 

    Conclusion

17. We allow the appeal.  We set aside the judgment in favour of Greenhill International and direct that judgment be entered in favour of the Commonwealth Bank.   We will hear the parties as to further orders.