Ozland Fashion Pty Ltd v Kingsmede Projects Pty Ltd

[2020] NSWSC 763

Supreme Court

New South Wales

Medium Neutral Citation:	Ozland Fashion Pty Ltd v Kingsmede Projects Pty Ltd [2020] NSWSC 763
Hearing dates:	On the papers
Date of orders:	18 June 2020
Decision date:	18 June 2020
Jurisdiction:	Equity
Before:	Darke J
Decision:	Defendants ordered to pay plaintiffs’ costs of the proceedings.
Catchwords:	COSTS — party/party — plaintiffs provided bank guarantee as security for performance of obligations under lease — dispute with defendants as to whether an amount of less than $5000 was owing — defendants made call on bank guarantee for full amount of $85,000 — plaintiffs sought urgent injunction against defendants — no final determination on central issue as Court made orders by consent — conduct of the defendants unreasonable in the circumstances — unreasonable conduct essentially invited the litigation — defendants ordered to pay plaintiffs’ costs of the proceedings
Legislation Cited:	Civil Procedure Act 2005 (NSW), s 98
Cases Cited:	Cargill International SA Antigua Geneva Branch v Bangladesh Sugar and Food Industries Corporation [1996] 2 Lloyd’s Rep 524 Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 Fletcher Constructions Australia Ltd v Varnsdorf [1998] 3 VR 812 Nichols v NSF Agribusiness Pty Ltd (2018) 97 NSWLR 681; [2018] NSWCA 84 O’Sullivan v National Australia Bank Ltd, unreported, 11 June 1998, Supreme Court of New South Wales Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622
Category:	Costs
Parties:	Ozland Fashion Pty Ltd (First Plaintiff) KXF Fashion Pty Ltd (Second Plaintiff) Kingsmede Projects Pty Ltd (First Defendant) KOM Industrial Pty Ltd (Second Defendant)
Representation:	Counsel: Mr T Maltz (Defendants)   Solicitors: The Law Shoppe (Plaintiffs) Herman Legal Pty Ltd (Defendants)
File Number(s):	2020/130770
Publication restriction:	None

Judgment

1. This judgment concerns the costs of proceedings brought by the plaintiffs as lessees against the defendants as lessors. The proceedings were commenced on an urgent basis on 1 May 2020, on which occasion Kunc J granted interlocutory relief including an order restraining the defendants until 8 May 2020 from paying out or disbursing any funds pursuant to a bank guarantee that had been provided under the terms of the lease. On 7 May 2020 consent orders were made the effect of which was to dispose of the matters in dispute save as to costs. Directions were made to facilitate the determination of that issue on the papers. The Court has received written submissions from each side accordingly.

2. There is no dispute as to the principles to be applied in circumstances such as this where there has been no hearing on the merits. Both sides referred to the well-known judgment of McHugh J in Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624-5. However, the plaintiffs submit that costs should be ordered in their favour because unreasonable conduct on the part of the defendants forced them to commence the proceedings. The conduct said to be unreasonable was the calling upon the bank guarantee for its full amount of a little more than $85,000. The defendants submitted that an application of the principles that apply to costs of proceedings that have settled would lead the Court to make no order as to costs (except that the plaintiffs should be ordered to pay the costs of this “misguided” application). The defendants submitted that it was entitled, or at least there was a real contest that it was entitled, to call on the bank guarantee for its full amount.

3. It is necessary to briefly describe the circumstances in which the proceedings were commenced.

4. The term of the lease was due to expire on 29 February 2020. The plaintiffs took steps to fulfil their make good obligations, and they vacated the premises on 28 February 2020. It appears that it was accepted by the defendants that the make good obligations had been satisfied apart from a requirement to replace the carpet. The plaintiffs contended that they were not required to replace the carpet.

5. On 2 March 2020 the plaintiffs made an offer that the parties agree to a mutual release, with the plaintiffs contributing $5,000 on a without admissions basis to the costs of the carpet “in full and final settlement of all claim [sic]” that the defendants may have against the plaintiffs, and the defendants returning the bank guarantee within 14 days.

6. On 3 March 2020 the defendants accepted the offer of a $5,000 payment “to finalise the outstanding make good issue”. An invoice for $5,000 plus GST was attached.

7. The plaintiffs paid the invoice on 9 March 2020.

8. On 10 March 2020 the plaintiffs called for the return of the bank guarantee. The defendants responded by stating that two invoices (totalling $4,736.65) from its make good consultant remained outstanding and had to be paid by the plaintiffs. The plaintiffs denied that they were liable to pay the $4,736.65, stating that an agreement had been reached on 3 March 2020 in full and final settlement of all claims. The plaintiffs again sought the return of the bank guarantee. The defendants contended that the agreement did not affect the liability the plaintiffs had under the lease to meet the costs of the make good consultant. The defendants declined to return the bank guarantee.

9. The parties were thus in dispute over a sum of $4,736.65.

10. On 11 March 2020 the plaintiffs attempted to resolve the dispute by making an offer to pay $1,000. The offer was rejected. So, too, was an offer made by the plaintiffs on 17 March 2020 to pay $2,000. On 31 March 2020 the plaintiffs renewed the offer to pay $1,000. This offer was not accepted. It lapsed on 1 April 2020.

11. On 30 April 2020 the plaintiffs became aware that the defendants had called upon the whole amount of the bank guarantee, being an amount of $85,187. The plaintiffs complained that as the maximum amount the defendant was claiming was $4,736.65 it was clear that there was no basis for the defendants to claim the whole bank guarantee. The plaintiffs then made another offer, to the effect that the bank guarantee be returned to the plaintiffs on the basis that $4,736.65 be paid into a trust account pending determination by an arbitrator. This offer was also not accepted by the defendants. As noted earlier, the plaintiffs commenced the proceedings on 1 May 2020 and obtained an interlocutory injunction restraining the defendants until 8 May 2020 from paying out of disbursing any of the funds pursuant to the bank guarantee.

12. The orders made by consent and without admissions on 7 May 2020 included an order that the defendants withdraw the call upon the bank guarantee and deliver the guarantee to the plaintiffs, and an order that the plaintiffs pay $4,250 to the defendants in full and final satisfaction of any claims the defendants may have against them.

13. A central issue on the costs application is whether the defendants acted unreasonably in making a call upon the bank guarantee to its full extent. It is thus necessary to consider the terms of the lease in relation to the bank guarantee. The subject is dealt with in cl 21 of the lease. Clause 21 provides:

21   BANK GUARANTEE

21.1   Tenant must deliver

On or before the date on which the Tenant executes this Lease, the Tenant must deliver the Bank Guarantee to the Landlord. The Bank Guarantee will be security for the performance by the Tenant under this Lease. The Tenant must at all times ensure that any Bank Guarantee is kept current and enforceable.

21.2   Landlord may call on Bank Guarantee

If the Tenant does not comply with any of its obligations under this Lease, whether this Lease is registered or not, then the Landlord may call on the Bank Guarantee without notice to the Tenant.

21.3   Replacement Bank Guarantee

If the Landlord calls on the Bank Guarantee or the Rent or the Tenant’s Contribution is increased, then no later than 7 days after the Landlord gives the Tenant a notice asking for it, the Tenant must deliver to the Landlord a replacement or additional Bank Guarantee so that the amount of that guarantee is the amount in Item 12.

21.4   Return of Bank Guarantee

Subject to clause 21.2, the Landlord will return every Bank Guarantee to the Tenant promptly following the later of (as appropriate):

(a)   the date on which the Tenant has complied with all of its obligations under this Lease, including under clause 14; and

(b)   receipt by the Landlord of a replacement Bank Guarantee in accordance with clause 21.3.

21.5   Essential term

The Tenant’s obligations under this clause 21 are essential terms of this Lease.

Bank Guarantee is defined in cl 1.1 of the lease to mean:

…an irrevocable and unconditional undertaking which does not specify an expiry date and which is otherwise on terms acceptable to the Landlord (acting reasonably) by a bank (or, at the Landlord’s discretion, another financial institution) carrying on business in Sydney requiring the bank (or other financial institution) to pay on demand, whether by one or more requests, the amount in Item 12 (or any replacement or addition to it under clause 21).

14. The defendants submitted that neither cl 21.2 nor the definition place any express limit on the amount of a call that may be made on the bank guarantee. That may be accepted. The defendants further submitted that in accordance with established authority (including Cargill International SA v Bangladesh Sugar and Food Industries Corporation [1996] 2 Lloyd’s Rep 524 at 528-529; O’Sullivan v National Australia Bank Ltd, unreported, 11 June 1998, Supreme Court of New South Wales, Young J; Fletcher Constructions Australia Ltd v Varnsdorf [1998] 3 VR 812 at 826-7; and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 at [83]), bank guarantee provisions such as this should be construed so as to operate on a “call first, and account later” basis. Again, so much may be accepted. The defendants then submitted that cl 21.2 allows a call to be made for the whole of the guarantee if there is an event of default provided the call is made in the absence of fraud, that is, in good faith (see Cargill International SA v Bangladesh Sugar and Food Industries Corporation (supra) at 528). The defendants further submitted that in the circumstances the amount that could be retained could well exceed $4,736.65 if the plaintiffs ultimately failed in their assertion that the entirety of the contest had been settled by the agreement made in early March 2020. This was said to be the case because the plaintiffs would be required to pay the defendants’ legal costs in those circumstances, and these would be recoverable under the lease.

15. I am satisfied that in the circumstances that existed in late April 2020 the defendants had a contractual entitlement to make a call on the bank guarantee. The guarantee was security for the performance by the plaintiffs of their obligations under the lease, and the defendants were entitled to call on the guarantee if the plaintiffs failed to comply with any of their obligations under the lease. I am prepared to accept that it was arguable that the plaintiffs remained bound to pay the $4,736.65 pursuant to cl 18(d) of the lease. On that basis, the defendants, acting in good faith, could make a call on the guarantee pursuant to cl 21.2. That is so even if it might later turn out that the plaintiffs were correct and they were thus not in default.

16. However, reading the lease as a whole (see Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (supra) at [85]), I do not think that the defendants, acting in good faith, could make a call for the whole amount of the guarantee pursuant to cl 21.2. In late April 2020 the term of the lease had expired and the only possible breach of the lease by the plaintiffs was their failure to pay the $4,736.65 that had been demanded by the defendants. The definition of Bank Guarantee, which refers to one or more requests, and the terms of the bank guarantee itself which refer to the bank paying “any sum or sums up to an aggregate amount”, indicate that the possibility of calls being made for only part of the full amount was contemplated. The situation differs from that in Cargill International SA v Bangladesh Sugar and Food Industries Corporation (supra) where cl 13 provided only for forfeiture of a performance bond in whole. I note in this regard that on 11 March 2020 the defendants stated that if the $4,736.65 was not paid “we will claim the amounts [totalling $4,736.65] from the bank guarantee without further recourse to you”. As at late April 2020, the amount of loss the defendants might sustain as a result of the plaintiffs’ failure to pay the claimed amount could not reasonably be regarded as any greater than that amount together with perhaps a very small amount of interest and the costs of making the call. The defendants could have made a call of that order, in which case they would also be entitled to keep the bank guarantee in place against the possibility that the plaintiffs would mount an unsuccessful challenge and thereby incur a liability for costs. The defendants instead chose to call for an amount that was vastly out of proportion to the loss. I do not think that the defendants, acting in good faith, could make such a call and they were thus not entitled to do so under the terms of the contract.

17. The defendants’ conduct was in my view plainly unreasonable. It had the practical effect of turning a dispute over less than $5,000 (which the plaintiffs were making every effort to compromise) into a dispute over more than $80,000. The conduct was the effective trigger for the commencement of the proceedings. The plaintiffs were facing financial pressures at that time, such that the effect of the call was by no means a trivial matter. The plaintiffs accept that it would not have been reasonable to commence proceedings in this Court in relation to the $4,736.65 dispute, but submit that in the circumstances that arose they were justified in commencing the proceedings. I agree. The plaintiffs were justified in seeking to prevent the call being executed. The costs of the proceedings can thus be seen to have been brought about by the unreasonable conduct of the defendants. This is a case where the defendants’ unreasonable behaviour essentially invited the litigation. This can be seen from a review of the undisputed circumstances that gave rise to the proceedings (see Nichols v NSF Agribusiness Pty Ltd (2018) 97 NSWLR 681; [2018] NSWCA 84 at [8]).

18. For the above reasons, I consider that the proper exercise of the Court’s discretion as to costs pursuant to s 98 of the Civil Procedure Act 2005 (NSW) is to order that the defendants pay the plaintiffs’ costs of the proceedings (including the costs of this application).

**********

Decision last updated: 18 June 2020