North Western Shipping & Towage Company P/L v Commonwealth Bank of Australia Ltd

NORTH WESTERN SHIPPING AND TOWAGE COMPANY PTY LIMITED v. COMMONWEALTH BANK OF
AUSTRALIA LIMITED and G.J. MACHINE AND STEEL CONSTRUCTION PTY LTD (In
Liquidation) (Receiver Appointed)
No. SAG31 of 1993
FED No. 842
Number of pages - 15
Mercantile Law
(1993) 118 ALR 453

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
GUMMOW, HILL AND COOPER JJ

CATCHWORDS

Mercantile Law - contract with Australian buyer for construction in Canada of equipment for installation in tug boats under construction for a third party - payment to be by irrevocable letter of credit - whether in the events that happened title to the equipment had passed to the third party free of security held by the banker which supplied funds to the Australian buyer for the purchase of the equipment.

E.D. and F. Man Ltd v Nigerian Sweets and Confectionery Co. Ltd (1977) 2 Lloyds Rep 50

Saffron v Societe Miniere Cafrika (1958) 100 CLR 231

National Australia Bank Limited v K.D.S. Construction Services Proprietary Limited (1987) 163 CLR 668

Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1

HEARING

ADELAIDE, 12, 13 May 1993

#DATE 22:11:1993

Counsel and solicitors for W.J.N. Wells QC and
the Appellant: R.J. Baxter instructed by

Finlaysons

Counsel and solicitor N.W. Morcombe QC instructed
for the First Respondent: by N.P. Anderson

Counsel and solicitors C.R. Eaton instructed by
for the Second Respondent: Eaton and Associates

ORDER

THE COURT ORDERS THAT:

(1) The appeal be dismissed.

(2) The appellant pay the costs of the respondents, the costs of the second respondent being the costs of a submitting party.
Note: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules.

JUDGE1

GUMMOW, HILL AND COOPER JJ This is an appeal, by leave, from orders made 1 April 1993 by a Judge of this Court (O'Loughlin J) in which his Honour granted declaratory and other relief upon determination of a separate question for decision under Order 29 Rule 2 of the Federal Court Rules. The State law made applicable by ss. 79, 80 of the Judiciary Act 1903, is that of South Australia.

The second respondent ("Machine and Steel") carried on business in South Australia trading as Adelaide Ship Construction. On 26 February 1991, Machine and Steel entered into a contract with the appellant ("North Western") for construction of a tug boat; the terms of the contract are contained in a document of 31 pages dated 9 April 1991 ("the Construction Contract"). The governing law of the Construction Contract was that of the State of South Australia (cl. 32). In turn, on 27 February 1991, Machine and Steel placed an order ("the Supply Contract") for the construction of two marine "Z" drive propulsion units ("the propulsion equipment") for the tug boat, the subject of the Construction Contract. The propulsion equipment was to be manufactured by a Canadian corporation, Ulstein Marine Limited ("Ulstein"), which carried on business in British Columbia. Payment was to be by irrevocable letter of credit. TSF Engineering Pty Ltd ("TSF"), which carried on business at Mona Vale in New South Wales, acted as Australian agent for Ulstein.
The separate question determined by the primary Judge concerned, in the events that had happened, the title to the propulsion equipment supplied by Ulstein under this contract.
Machine and Steel was a customer of the first respondent ("the Bank") at its Para Hills Branch. On 3 October 1989, the Bank had taken from Machine and Steel a fixed and floating charge over its assets ("the Charge"). The Charge was duly registered. The Bank received a copy of the Construction Contract on about 25 September 1991. On the application of its customer Machine and Steel, in November 1991 the Bank issued two letters of credit as a method for payment by Machine and Steel for the propulsion equipment. One letter of credit was for $C434,095.58, and the other for $US56,268. The beneficiary was shown as TSF and its bank as Westpac Banking Corporation, Sydney ("Westpac"). The letters of credit were received by Westpac on 20 November 1991 and were to expire on 15 January 1992. Documents were to be presented within 49 days of the on board date of the bill of lading. The on board date was 16 December 1991.
The propulsion equipment was delivered from Ulstein's works in 2 containers, one on 22 November 1991 and the other 3 days later. They were shipped from British Columbia in December 1991. The propulsion equipment arrived in Adelaide on or about 13 January 1992.
On 2 January 1992, whilst the propulsion equipment was still on the water, Westpac advised the Bank of alleged discrepancies in the documents called for by the letters of credit. There followed correspondence between the Bank and Westpac. Notwithstanding that the letters of credit by then apparently had expired, this correspondence was still continuing on 13 March 1992. The Bank then received a letter from Westpac requesting acceptance of certain discrepancies which were still unremedied, and enclosing the documents required by the letters of credit.
Since at least January 1992, the Bank had been discussing with Machine and Steel the financial difficulties of the company and the Bank's exposure. The company had been told by the Bank before 15 January that no further cheques should be drawn by it on the Bank. However, on 15 January the Bank appears to have agreed with Machine and Steel that the letters of credit would be honoured, despite their expiry, if the discrepancies in the documents were dealt with. At that stage the Bank expected that its contingent liability would be converted "to outright debt" by payment on the letters of credit within about a week. However, there was further delay. We will return to this topic.
By instrument dated 16 March 1992 and delivered on that day, the Bank notified Machine and Steel of a purported fixing of the previously floating charge over the propulsion equipment. It was only on the next day, 17 March, that the sums referred to in the letters of credit were forwarded by the Bank to Westpac, for the benefit of Ulstein. Notice of the crystallisation of the Charge was registered on 9 July. Later, on 26 August 1992, a receiver and liquidator was appointed to Machine and Steel.
In September 1992, North Western demanded and was refused delivery up of the propulsion equipment. This litigation commenced on 14 October 1992 and the separate question was tried in November 1992.
The active contestants at first instance and on appeal were North Western and the Bank. Upon the appeal being called on, the Court gave to counsel for the liquidator of Machine and Steel leave to withdraw. Counsel had indicated that his client would abide by the judgment of the Court.
Before the primary Judge, North Western contended, as it submitted on the appeal, that it owned the propulsion equipment and held it free of any charge in favour of the Bank. In particular, it submitted that upon its proper construction, cl. 22 of the Construction Contract (the parties to which were it and Machine and Steel), had the effect that once Machine and Steel, as the builder, had acquired the propulsion equipment, being components for the tug boat, property in those components passed to North Western. It was then said that (i) upon its proper construction the Supply Contract between Machine and Steel and Ulstein provided for the title to the propulsion equipment to pass to Machine and Steel when payment occurred and (ii) effective payment was made upon receipt on about 20 November 1991 by Westpac of the letters of credit, that is to say before the forwarding of the sums referred to in the letters of credit by the Bank to Westpac on 17 March 1992.
North Western submitted that if these propositions be accepted, it had a title to the propulsion equipment which was anterior and superior to any fixed charge held by the Bank from 16 March 1992. Before that time, the interest of the Bank had, at best, been that of a floating charge and assets subject to such a charge may be dealt with by the chargor in the ordinary course of business, as had happened in the present case.
The primary Judge rejected the submissions for North Western and granted a declaration that the propulsion equipment was owned by Machine and Steel, subject to a fixed charge in favour of the Bank.
The issues before the primary Judge were tried principally upon agreed facts. As is not infrequently the case, it became apparent in the argument before us that those facts might not enable the Court to deal as fully as it would have wished with all the issues.
The primary Judge described the present litigation as one of those typical cases where two innocent parties have suffered from the financial collapse of the third. His Honour said that in commercial terms both North Western and the Bank could assert some justification for making their competing claims. He continued:

"(North Western) has paid most of the purchase price - less than $300,000 out of almost $4m remains due. On the other hand the Bank, being under no obligation to pay under the letters of credit (because of their expiry date) claims that it was wholly justified in securing itself in return for the financial accommodation that it gave (North Western)."

It is necessary to begin by setting out the text of the crucial provisions of the Charge, the Construction Contract and the Supply Contract. In the course of so doing, it will be appropriate to deal with several of the issues on the appeal.

The Charge
17. The Charge is in the standard form used by the Bank for equitable mortgages by corporations. It secures moneys identified in a widely expressed "all moneys" clause. The subject matter of the Charge is described therein as all the undertaking and property of Machine and Steel and "all its assets whatsoever and wheresoever both present and future including its uncalled capital for the time being". The definition of "the mortgaged premises" so states. However, cl. F.1 of the Charge distinguishes between its operation as a fixed and floating charge and provides a mechanism for conversion of the latter into the former. The clause reads:

"F It is hereby agreed and declared that:

1. The charge hereby created shall operate as a fixed charge as regards all real and leasehold property uncalled capital engines machinery (OTHER THAN STOCK-IN-TRADE) plant books of account vouchers and other documents relating in any way to the business transactions of the Mortgagor and all securities negotiable or otherwise and Bond and Store Warrants at any time deposited with the Bank by the Mortgagor and the goods mentioned in any such Bond and/or Store Warrants and shall operate as a floating security only as regards all other assets hereby charged but so that the Mortgagor is not to be at liberty to create any mortgage or charge in priority to or pari passu with this mortgage nor to sell assign discount or otherwise dispose of (whether by way of factoring or otherwise) debts owing or payable to the Mortgagor except with the consent in writing of the Bank. NEVERTHELESS THE BANK SHALL BE AT LIBERTY AT ANY TIME AND FROM TIME TO TIME BY NOTICE IN WRITING TO THE MORTGAGOR TO DETERMINE THE FLOATING CHARACTER OF THE CHARGE AFORESAID AS REGARDS ALL ASSETS HEREBY CHARGED OR ANY PARTICULAR ASSET SPECIFIED IN ANY SUCH NOTICE AND THEREUPON THE CHARGE AS REGARDS SUCH ASSET SHALL BECOME AND OPERATE AS A FIXED CHARGE AND SHALL CEASE TO BE A FLOATING CHARGE." (Emphasis supplied - IN CAPS)

It was accepted that the crystallisation effected by a notice given under the latter portion of this clause was effective. There was no challenge to the reasoning of Hoffmann J in In re Brightlife Ltd (1987) Ch 200 at 214-6. See also the discussion of a somewhat differently drafted provision, by Gleeson CJ and Sheller JA in Fire Nymph Products Ltd v The Heating Centre Pty Ltd (In Liq.) (1992) 10 ACLC 629 at 634-7, 639-41. It will be necessary to refer later to other issues which arise as to the effectiveness of the notice dated 16 March 1992, which is therein stated to have been given pursuant to the provision which we have emphasised above. North Western submitted that the notice was ineffective to create any fixed charge over the propulsion equipment in favour of the Bank.

The Letters of Credit
19. The applications by Machine and Steel to the Bank for issue of the letters of credit were dated 15 November 1991. One application was for the sum in $C and the other for $US. The Bank's standard form of application was used. This states that the credit to be issued by the Bank is to be subject to the 1983 revision of the Uniform Customs and Practice for Documentary Credits. The letters of credit which were issued themselves specified the documents against production of which payment would be made as "Commercial invoice in duplicate", certain insurance policies or certificates and a "full set of clean on board bill of lading to the order of shipper and endorsed in blank marked 'freight paid'". We refer more fully to these documents later in these reasons.

In consideration of the Bank establishing the credits, Machine and Steel, in cl. 5 of the application documents had authorised:

"5. ... the Bank to retain as security the relative documents and goods by way of pledge and in the event of payments not being made by me/us as aforesaid I/We authorise the Bank to sell by public auction or private treaty, dispose of or otherwise deal with the relative goods as it may think fit and to collect any amounts due or to become due under the Insurance Policies and I/We undertake to pay on demand the amount of any deficiency on any sale or Insurance together with all usual commission, and all costs, charges and expenses incurred by the Bank in connection therewith or otherwise."

Other clauses contained an undertaking to the Bank by Machine and Steel to provide funds to meet the amount of payments under the credits and an authority to the Bank to debit its account with sums sufficient to meet all liabilities under the credits. As we have indicated, the expiry date was 15 January 1992.
The agreed facts disclose that only after the credits had expired did the Bank obtain the documents, including the bill of lading endorsed in blank. The documents were received by the Bank on 4 February 1992, were returned to Westpac (at the request of Westpac) on 12 February 1992, and redelivered by Westpac to the Bank on 13 March 1992. This was 4 days before the sums referred to in the letters of credit were supplied to Westpac for the benefit of the seller of the propulsion equipment.
These dealings in the documents were not, in our view, the retention of them by the Bank as security by way of pledge by Machine and Steel, within the terms of cl. 5 of the applications. After 15 January, any payments which the Bank might make would not be pursuant to its contractual obligations to the customer, the credits having expired. As the primary Judge pointed out, the Bank after 15 January 1992 was under no compulsion to make any payment under the credits. The purport of cl. 5 was to provide a security by way of pledge of outgoings incurred by the Bank pursuant to credits issued on the applications in question. The Bank's obligations in this respect had become spent before the first receipt by it of the bill of lading and other documents.
The Bank, further and in the alternative, relied, for the existence, from possession of the bill of lading, of a pledge to secure payments the Bank might make (and did make on 17 March 1992), purely upon the general law principles considered in such authorities as Sewell v Burdick (1884) 10 App Cas 74. But here also a difficulty arises. These principles operate only for so long as the goods in question are under the operation of a bill of lading which continues to be what Lord Chelmsford called "a living document": Barber v Meyerstein (1870) LR 4 HL 317 at 334. See also the authorities collected in "Chitty on Contracts", 25th Ed., Vol. 2, para. 2429.
Here, the exiguous material before the Court in the agreed facts states merely that the propulsion equipment arrived from Canada in Adelaide on or about 13 January 1992. That would not, in our view, provide sufficient foundation for the making of a finding as to the continued status of the bill of lading 2 months later.
Nevertheless, as will later appear, the existence of cl. 5 and the pledge contemplated by it is of significance in considering the general relationship between the parties leading up to the payment which was made by the Bank in March 1992.

The Construction Contract
27. In this document, North Western is defined as "Owner" and Machine and Steel as "Builder". The term "Components" is defined as meaning:

"... everything (whether completed or incomplete) which forms or is intended to form part of the Vessel or to be placed in or on the Vessel and without limiting the generality of the foregoing, includes the hull, engines, machinery, boilers, appliances, equipment, gear, fittings, furniture and furnishings of the Vessel and all stores, articles and materials thereof."

Sub-clause 23 (11) provides:

"23 (11) At all times prior to the delivery of the Vessel any components supplied by the Owner and delivered to the Builder shall be at the expense of the Builder cause such components to be insured against such risks and with insurers as are stipulated above and for such amounts as shall be specified by the Owner."

It is apparent that the words "who will" have been omitted between the words "Builder" and "cause".
Clause 22 is headed "Property in Vessel and Components". So far as material, it states:

"22 (1) The Vessel as it is constructed AND ALL COMPONENTS WHETHER WHOLLY OR PARTIALLY FINISHED FROM TIME TO TIME APPROPRIATED TO OR INTENDED FOR THE VESSEL OR APPROVED BY THE OWNER OR THE OWNER'S REPRESENTATIVE OR READY TO BE SO APPROPRIATED OR APPROVED WHETHER IN THE BUILDER'S YARD OR WORKSHOP OR ELSEWHERE ON OR OFF THE BUILDER'S PREMISES AND WHETHER OR NOT NUMBERED PURSUANT TO SUB-CLAUSE (2) OF THIS CLAUSE immediately on payment of the first instalment to the Builder of the basic contract price payable hereunder in respect of the Vessel or UPON THE SAME subsequently thereto BEING SO appropriated INTENDED or approved or ready so to be (as the case may be) BECOME AND REMAIN THE ABSOLUTE PROPERTY OF THE OWNER (BUT AT THE RISK OF THE BUILDER) notwithstanding that any components shall subsequently be worked upon by the Builder or otherwise processed or incorporated into the Vessel and shall not be within the ownership order or disposition of the Builder but the Builder shall at all times have a lien thereon for any unpaid purchase money PROVIDED HOWEVER that the passing of property under this sub-clause shall in no way affect or impair any right of cancellation or discharge of this contract which the Owner has under this contract or otherwise by law.

(Emphasis supplied - IN CAPS)

(2) Immediately upon any component becoming the property of the Owner under the provisions of sub-clause (1) of this clause the Builder shall as far as practicable place or cause to be placed on or near such component the yard number of the Vessel and shall place such number at the bow of the Vessel without prejudice to the Owner's right hereunder. The Builder shall take all necessary steps to cause each of the components to be numbered as aforesaid by itself or its subcontractors with all reasonable expedition.

(3) The Builder shall so effect and arrange its contracts and other arrangements with all the sub-contractors that full effect will be given to the provisions of this clause and in particular shall:

(a) Use every reasonable endeavour to ensure that all components shall be supplied on the following conditions:

(i) that the property therein (whether in the course of construction or completed and whether before or after delivery to the Builder) shall vest in the Builder (and thence pursuant to sub-clause (1) hereof in the Owner) subject only to any lien which the sub-contractor may have for any unpaid balance of the purchase price of such component; and

(ii) that the sub-contractor shall not upon receipt by it of the due price be entitled as against the Owner to claim any property therein by reason of obligations or liabilities of the Builder to it in respect of other deliveries made by the sub-contractor to the Builder or for any other reason.

...

(b) Pay for all components promptly in accordance with the terms of payment agreed with sub-contractors and if so required by the Owner supply proof of all payments made to sub-contractors.

(c) Where the price to the builder of any component exceeds $5000 or the equivalent thereof in another currency, ensure that the contract or other arrangement with the sub-contractor contains a clause or agreement to the following effect:

'The goods material or machinery to be delivered to G.J. Machine and Steel Construction Pty Ltd (hereinafter called "the Builder") under this contract are intended for a new Vessel under construction by the Builder for the North Western Shipping and Towage Company Pty Limited (hereinafter called "the Owner"). In the event of any failure by the Builder to pay the purchase price or any part thereof the Owner shall then be entitled on payment by it to the sub-contractor of any outstanding amount of the purchase price to demand delivery of the said goods materials or machinery and the sub-contractor undertakes to effect delivery thereof on or to the order of the Owner thereof to the exclusion of the Builder.'

(4) All the components not used in the construction of the Vessel revert to and become the property of the Builder upon the construction of the Vessel.

(5) In the event of this contract being cancelled by the Owner under clause 25 hereof or otherwise by law or in the event of the lawful rejection or refusal to accept delivery of the Vessel by the Owner the property in the Vessel and all its components and (so far as it is not already in the Builder) the risk shall upon payment by the Builder of any sum due to the Owner revert to the Builder."

At all times prior to the delivery of the vessel, and acceptance by the owner, the vessel "and all its components" were to be at the risk of the builder (sub-cl. 23 (1)). At its own cost the builder was to cause the vessel "and all components (wherever in the World the components may be and whether they are in storage in transit or otherwise howsoever and whether or not they have been delivered to the builder)" to be insured at all times until delivery to the owner in accordance with the contract and acceptance of delivery by the owner (sub-cl. 23 (3)).
Counsel for North Western supported the conclusion of the primary Judge (who on this sub-issue had been in his client's favour) that the Construction Contract manifested a clear intention of North Western as owner, and Machine and Steel as builder, that property in "components", such as the propulsion equipment, would pass to North Western at an earlier stage than incorporation into the tug boat or appropriation for that purpose.
Counsel for the Bank urged the contrary, and referred to authorities such as Seath v Moore (1886) 11 App Cas 350, Reid v Macbeth and Gray (1904) AC 223 and Re Blyth Shipbuilding and Dry Docks Company Limited (1926) 1 Ch 494.
The primary Judge discussed these authorities and continued:

"So far therefore, the authorities are clear that title to chattels 'intended for' or 'appropriated for' a vessel does not pass from the shipbuilder to the vessel's purchaser unless there is an 'affixing' to the vessel or a 'definite agreement'. It would seem that the draftsman of clause 22 of the construction contract was alert to this situation for there is no doubt that the language of clause 22 goes much further than the terms that were considered in Reid v Macbeth and Gray and in Re Blyth. I refer, in particular, to the words 'ready to be so appropriated'. They suggest, along with the rest of the language in the clause, a readiness on the part of the contracting parties to permit title to pass in detached chattels before an act of affixing. What then of the propulsion equipment? Had it, on 17 March 1992, advanced to that necessary stage in the progress of the vessel's construction so that one could say that the propulsion equipment stands 'ready' to be appropriated, that is, ready to be affixed to the vessel? I think not. The information that is before the Court is limited to the agreed fact that the propulsion equipment arrived from Canada in Adelaide on or about 13 January 1992. That would not amount to the necessary readiness. At the least, the equipment would need to be under the control of the builder and worked up (if any such work was necessary) to the stage that it was ready for installation in the vessel."

Counsel for North Western questioned the conclusion in the last paragraph. The submission was that the primary Judge had failed to take the further step and conclude that the language of cl. 22 as a whole was designed to secure a release from the strictures of the authorities and was not any attempt to apply them. So, it was submitted, once the builder, Machine and Steel, had acquired components "whether wholly or partially finished" which were "intended" for the tug boat, property in them passed to North Western under the Construction Contract.
It is unnecessary to resolve these issues because, as will appear, the failure of North Western on other parts of the case necessarily means that the appeal fails in any event.

The Supply Contract
37. The terms of the Supply Contract incorporated the General Conditions for the supply of Plant and Machinery for export, prepared under the auspices of the United Nations Economic Commission for Europe, Geneva, March, 1953 ("the General Conditions"). Clause 8 of the General Conditions is headed "Payment" and is in the following terms:

"8.1 Payment shall be made in the manner and at the time or times agreed by the parties.

8.2 Any advance payments made by the Purchaser are payments on account and do not constitute a deposit, the abandonment of which would entitle either party to terminate the Contract.

8.3 IF DELIVERY HAS BEEN MADE BEFORE PAYMENT OF THE WHOLE SUM PAYABLE UNDER THE CONTRACT, PLANT DELIVERED SHALL, TO THE EXTENT PERMITTED BY THE LAW OF THE COUNTRY WHERE THE PLAN IS SITUATED AFTER DELIVERY, REMAIN THE PROPERTY OF THE VENDOR UNTIL SUCH PAYMENT HAS BEEN EFFECTED. If such law does not permit the Vendor to retain the property in the Plant, the Vendor shall be entitled to the benefit of such other rights in respect of as such law permits him to retain. The purchaser shall give to the Vendor every assistance in taking any measures required to protect the Vendor's right of property or such other rights as aforesaid. 8.4 A payment conditional on the fulfilment of an obligation by the Vendor shall not be due until such obligation has been fulfilled unless the failure of the Vendor is due to an act or omission of the purchaser. 8.5 If the purchaser delays in making any payment, the Vendor may postpone the fulfilment of his own obligations until such payment is made, unless the failure of the purchaser is due to an act or omission of the Vendor.

8.6 ...

8.7 ..."

(Emphasis supplied - IN CAPS)

Clause 13.2 provided that unless otherwise agreed (and no such agreement was suggested to us) the contract was to be governed by the "law of the Vendor's country"; that is to say, the law of British Columbia. It was not suggested that the retention of title provision in cl. 8.3 was ineffective under either the law of British Columbia or South Australia; see Armour v Thyssen Edelstahlwerke AG (1991) 2 AC 339 at 351-3.
The correspondence forming part of the Supply Contract states that, save for the deposit, payment to Ulstein was to be "covered by an irrevocable letter of credit established by shipyard on an acceptable bank allowing part shipments". However, the agreed fact is differently expressed. Its terms are:

"When the contract between (Machine and Steel) and the Supplier of the propulsion units was entered into in February 1991, payment by means of irrevocable letters of credit was one means of payment within the contemplation of the parties."

On the appeal, counsel for North Western and the Bank accepted that, in the event of any conflict, the terms of the agreed fact should be treated by the Court as prevailing.
Counsel for North Western submitted that:

(i) The Supply Contract provided for the passing of property in the propulsion units from Ulstein to Machine and Steel either on delivery ex works, in British Columbia, or, because of the retention of title provision in general condition 8.3, on payment of the price, whichever last occurred.

(ii) In the events that happened, property passed from Ulstein to Machine and Steel when payment was effected.

(iii) Payment by acceptable irrevocable letters of credit was the method by which payment was agreed to be effected under the Supply Contract.

(iv) Payment in this sense occurred on 20 November 1992, upon acceptance by Westpac, banker for TSF the agent for Ulstein.

(v) It was not to the point that actual payment was never made whilst the letters of credit were current, nor that funds were supplied by the Bank to Westpac on 17 March 1992, the day after the purported fixing of the Bank's floating charge.

In E.D. and F. Man Ltd v Nigerian Sweets and Confectionery Co. Ltd (1977) 2 Lloyds Rep 50 at 56, Ackner J drew a distinction between buyer who promises TO PAY by letter of credit and a buy who promises TO PROVIDE by letter of credit a source of payment which, in the event, is not made. Further, in their work "The Law of Bankers' Commercial Credits", 7th Ed., p. 35, Mr Gutteridge QC and Mr Megrah QC state:

"The effect of a commercial credit in constituting payment pursuant to and sufficient to discharge the payment provision of a contract for the purchase and sale of goods must depend upon the facts of the particular case. The credit may, unusually, by the contract of sale be made absolute payment. Acceptance by the seller of a commercial credit constituting absolute payment would debar him from his ordinary right to pursue the buyer if he (the seller) did not receive payment under the credit."

The learned authors discuss various authorities including Saffron v Societe Miniere Cafrika (1958) 100 CLR 231. In that case, the bank properly refused to honour a letter of credit for reason of deficiencies in the documents presented thereunder. The letter of credit expired without any payment against it having been made. The question was whether the seller remained entitled to sue the buyer for and recover the price. The High Court held that the stipulation in the contract between buyer and seller for payment by letter of credit did not go beyond requiring the establishment of such a letter as the primary but not the exclusive source of payment.
The question must, of course, be one of construction of the particular contractual arrangements between the buyer and the seller. In the present case, the agreed fact that when the Supply Contract was entered into, payment by means of irrevocable letters of credit was one means of payment within the contemplation of the parties, does not sufficiently assist North Western. At best, it indicates a contemplation of PAYMENT by irrevocable letters of credit, not merely the PROVISION of irrevocable letters of credit, with the acceptance by Westpac on 20 November to stand as "payment". Further, if it matters, in our view, the correspondence to which we referred does not strengthen the case in favour of North Western.
In the present case, the further agreed facts establish that payment for the equipment by Machine and Steel was due by 25 September 1991. This payment was not made. On 12 November 1991, Ulstein or TSF offered to accept the full amount due by telegraphic transfer by 15 November 1991. This offer was not available of by Machine and Steel. Instead Machine and Steel offered to provide payment by irrevocable letters of credit which, in the form offered and accepted by Ulstein, provided for payment of the price against delivery of conforming documents. The documents were a commercial invoice in duplicate, insurance policies or certificates endorsed in blank covering specified risks and a full set of clean "on board" bills of lading to the order of the shipper and endorsed in blank and marked "freight prepaid". It is to be remembered that the supply contract was not merely for the supply of the propulsion units, but also included the shipping of them. The cost of the shipping comprised a specific component in the price quoted and accepted.
After the agreement in November 1991, the supply contract had all the characteristics of a CIF sale of goods. It is unnecessary to determine whether or not it was in terms such a contract because it is clear that payment was to be made against conforming documents. Retention of those documents, including the bill of lading to the order of the shipper, until payment under the letter of credit upon presentation of the documents by Ulstein or its agent, evidences an intention to reserve to Ulstein the JUS DISPONENDI as seller until payment. Thus, property in the goods in question was not to pass to Machine and Steel as buyer until payment and with it acceptance of the documents which stood as token of the goods.
We should add that the authorities, eg National Australia Bank Limited v K.D.S. Construction Services Proprietary Limited (1987) 163 CLR 668 at 676, dealing with the general position where a cheque is given as a conditional payment of a debt (which were relied upon by North Western), do not provide an apt analogy. Here the task of the Court is to construe the contractual arrangements between buyer and seller, calling expressly for the provision of irrevocable letters of credit, and providing for the time at which and circumstances in which property in the goods is to pass from the buyer to the seller; cf E.D. and F. Man Ltd v Nigerian Sweets and Confectionery Co. Ltd supra at 56-57. The Position of the Bank
It is appropriate now to recapitulate. The property in the propulsion equipment did not pass from Ulstein until payment to Westpac on 17 March 1992; property had not passed previously to Machine and Steel and there had been no occasion for the operation of cl. 22 of the Construction Contract to pass title from Machine and Steel to North Western, even on the construction of cl. 22 which is contended for by North Western.
But what was the position of the Bank which furnished the funds for payment by Machine and Steel to Ulstein?
After 15 January 1992, Machine and Steel had no arrangement with the Bank to finance the purchase of the equipment. In consequence Machine and Steel had to negotiate with the Bank and Ulstein an acceptable agreement to finance and pay for the equipment.
The Charge gave the Bank a floating charge over all its assets "both present and future". The Charge was a floating charge as regards all present and future stock in trade. It was not suggested in argument that the propulsion equipment would be other than stock in trade. The consequence of this was that if no additional steps were taken, the propulsion equipment, as and when acquired by Machine and Steel, would be drawn under the floating charge. But, as such, the security of the Bank might be displaced by a dealing with the propulsion equipment by Machine and Steel in the ordinary course of trade before crystallisation of the floating charge.
In this situation, the intention of the parties, Machine and Steel and the Bank, in March 1992, is clear enough. Before 15 January, the Bank had what it quantified on that date as a contingent liability of $565,000 on letters of credit, and the Bank had been awaiting conversion of this to what it had called "outright debt". The credits expired, and in the period which followed the Bank had suggested to its customer, Machine and Steel, that it "liaise" with TSF, the agent of Ulstein, to remedy the defects to the documents. In the course of the dealings that followed, the Bank itself had possession of the documents and was holding them on and after 13 March.
For several months at least, Machine and Steel had been in financial difficulties which were a cause of anxiety to the Bank. On 16 March, the Para Hills Branch of the bank received from its International Trade Department the documents and a memorandum noting the discrepancies in the documents in terms of the letters of credit which had been previously issued. The memorandum provided for written acceptance by Machine and Steel of the documents as presented. The documents were accepted and the memorandum was signed by Machine and Steel acknowledging acceptance. Inferentially, acceptance and execution occurred on 16 March. On 17 March, the funds to pay for the propulsion equipment were advanced by the Bank. But the inference clearly to be drawn is that the Bank did so on the footing, accepted by Machine and Steel, that the advance was against acquisition by the Bank of a fixed charge over the propulsion equipment. In such circumstances, ordinarily a party in the situation of Machine and Steel acquires a legal title which is immediately subject to the security interest of the provider of the funds for the purchase; see the authorities collected and discussed in Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1.
The Bank had sought to give effect to its intentions on 16 March by addressing to Machine and Steel a notice headed "Re Debts at our Para Hills Branch". The notice stated:

"Notice is hereby given pursuant to clause F.1 of the Equitable Mortgage dated 3 day (SIC) of October 1989 in favour of Commonwealth Bank of Australia and registered at the Corporate Affairs Commission for South Australia and numbered D00200905 that the floating nature of the charge created thereby over the Company asset (Marine Z drives 360 degrees rotatable propulsion units model 1350-H. Serial numbers 1739-001 and 1739-002) is hereby determined whereby the charge in respect of the abovementioned asset only is to become and operate as a fixed charge."

It will be seen that the notice assumes that there was already in existence a floating charge over the asset of Machine and Steel, being the propulsion equipment. Were that not so, there would have been nothing to determine and reconstitute as a fixed charge.
The terms of the notice reflected cl. F.1 of the Charge. This spoke of the effect of such a notice upon any particular asset specified therein as the cessation of the floating charge in favour of the operation of a fixed charge. The clause does not provide for a notice to operate prospectively in relation to an asset the title to which is yet to be acquired by the company. But that was the case here. The propulsion equipment was not an asset of Machine and Steel on 16 March. However, Machine and Steel had on that day accepted the documents tendered by Ulstein as representing the equipment and entitling Ulstein to payment of the price. At best, the company had an equitable interest under the Supply Contract commensurate with what might be the availability of equitable remedies to protect its contractual rights and to compel Ulstein to accept payment; see Kern Corporation Limited v Walter Reid Trading Proprietary Limited (1987) 163 CLR 164 at 191-2. The paucit of the agreed facts does not permit any informed conclusion on that question.

However, we would infer that in the circumstances of the case, as between Machine and Steel and the Bank, the Bank was advancing the moneys for completion by the company of the purchase of the propulsion equipment on the footing, accepted by the company, (i) that in its immediate operation upon the propulsion equipment, as assets of the company, the charge would operate forthwith, not merely as a floating charge, but as a fixed charge, and (ii) that the notice which had been given on 16 March would be deemed sufficient as a notice given EO INSTANTI the passing of title to Machine and Steel from Ulstein upon payment to Westpac.
This case where, in any event, a floating charge will operate, is stronger than Metway Leasing Limited v Narien Holdings Pty Limited (In Liquidation) and Ors (Supreme Court of New South Wales, 12/4/91, unrep.). In that case, Cohen J found there was an oral agreement between a financier and a developer that in consideration of advances to permit the purchase of certain land the developer would give a legal mortgage over that land. The advances were made and a legal mortgage given over only some parcels of the lands. The other parcels were subsequently acquired by the developer. Cohen J held that, equity looking on that as done which ought to be done, at the moment of transfer of the remaining parcels to the developer the financier took an interest as equitable mortgagee and this took priority over the prior fixed charge of a third party over the assets of the developer.
In the present case, there was no need for an agreement to give security where otherwise none would have existed. The circumstances of the case give strong support for the inference that the banker and customer acted on the footing that the notice expressed as given under cl. F.1 on 16 March was to be treated as speaking effectively when the funds were advanced on the next day.
In argument, no question arose, and we do not mean to suggest that any might properly arise, as to the necessity in these circumstances for the registration of a notice of variation of the Charge under ss. 266 and 268 of the Corporations Law. There was no variation in the terms of the Charge itself.
After the propulsion equipment became subject to the fixed charge in favour of the Bank, the equipment could not fairly be described as components appropriated, intended or approved, or ready to be appropriated to the tug boat under construction by North Western, within the meaning of cl. 22 (1) of the Construction Contract
The appeal should be dismissed. The appellant should pay the costs of the respondents, those of the second respondent being the costs of a submitting party.

[1993] FCA 842

22 NOVEMBER 1993