QS Retail Pty Ltd v Kingvest Pty Ltd
[2006] VSC 455
•29 November 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 9330 of 2006
| QS RETAIL PTY LTD | Plaintiff |
| v | |
| KINGVEST PTY LTD | Defendant |
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JUDGE: | HANSEN J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 November 2006 | |
DATE OF JUDGMENT: | 29 November 2006 | |
CASE MAY BE CITED AS: | QS Retail Pty Ltd v Kingvest Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 455 | |
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Agreement of lease – Banker’s undertaking provided by lessee – Payable by bank on demand – Lessor’s power to appropriate proceeds of security – For loss or damage “sustained or suffered” – Whether restricted right to convert security.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M D G Heaton QC and Mr P J Booth | Browne & Co |
| For the Defendant | Mr C R Northrop | Back Schwartz Vaughan |
HIS HONOUR:
In this application the plaintiff, QS Retail Pty Ltd (“QS Retail”), seeks the continuation, until the hearing and determination of the proceeding or further order, of an interim injunction granted by Whelan J on 23 October 2006, the day on which the proceeding was commenced. The injunction restrains the defendant, Kingvest Pty Ltd (“Kingvest”), from demanding payment of any amount or amounts from Westpac Banking Corporation (“Westpac”) under a Banker’s Undertaking issued by Westpac dated 29 July 2005. The Westpac undertaking was arranged by QS Retail pursuant to an obligation to do so in the Deed of Agreement of Lease with Kingvest referred to below. The case arises in the following circumstances.
In 2004/2005 QS Retail and its parent Quiksilver Australasia (“Quiksilver”), which carry on business as a specialist retailer of surf-related fashion, hardware (such as surfboards) and surf-related accessories, negotiated with the owners of six companies for the acquisition of the retail surf wear outlets operated by those companies. The owners with whom they negotiated were Victor Charles Comino and Christopher George Athanasakos. Comino and Athanasakos were the directors of three of the companies. Athanasakos was the sole director of the other three companies; Comino was not a shareholder in those three companies. The negotiations resulted in an agreement being reached in or about February 2005 for the acquisition of the subject assets (namely, the goodwill, plant and equipment of the retail surf wear outlets of the six companies) subject to a due diligence investigation to be undertaken by QS Retail and Quiksilver. The purchase price for the businesses exceeded $50M. The due diligence was completed and the agreement to acquire assets was settled in August 2005.
Conducted in or about the same time was a negotiation, also concluded in or about February 2005, between QS Retail and Quiksilver on the one hand and Comino as the director of Kingvest on the other hand as to an agreement to lease part of the ground and mezzanine floors (“the premises”) of a building at 77 King Street, Sydney (also known as 369 George Street, Sydney). Agreement having been reached, Kingvest as lessor, QS Retail as lessee and UG Manufacturing Pty Ltd (“UG Manufacturing”) as guarantor entered into a Deed of Agreement of Lease expressed as made on 29 July 2005. No question arises in this proceeding as to the guarantee of UG Manufacturing.
In August 2005 Athanasakos commenced employment with QS Retail as its retail director for Asia Pacific. As such he is a senior executive of QS Retail. His duties included reporting on new store proposals. I mention this employment because a curiosity of the case is that he has provided an affidavit in this proceeding on behalf of Kingvest. Athanasakos says in that affidavit that after commencing employment with QS Retail he became aware of the terms of the lease by which he meant, I infer, the Deed of Agreement of Lease and the attached lease. He said that he was not involved in the negotiations in relation to the Deed. For reasons which I mention below the point with which his affidavit was concerned does not now matter.
It aids in understanding the provisions of the Deed of Agreement of Lease that, having entered into the Deed, Comino had to (and did) obtain finance to assist in completing the purchase of the freehold of the 77 King Street property and negotiate a building contract to undertake the construction and refurbishment of improvements to the property including the premises. These works were to be undertaken prior to the commencement of the lease to QS Retail. And, of course, the lessee had to fit out the premises for its purposes.
It is appropriate at this stage to refer to provisions of the Deed of Agreement of Lease. The Deed incorporated a lease in registrable form and also attached the formal lease to be entered into by the parties, the latter being a document of some 52 pages extensively providing for the rights and duties of the lessor and lessee under the lease. The Deed of Agreement of Lease itself provided for the rights and duties of the lessor and lessee in the period up to the commencement of the lease; the Deed ran to some 22 pages.
The Deed commenced with a number of definitions; see cl 1.1. Then, in cl 1.5, the lessor agreed to grant and the lessee agreed to accept the grant of the lease from and including the commencement date. The lease was for a term of 10 years with the option of one further term of 10 years. The commencing rental was $2,300,000 per annum (exclusive of GST) payable by equal monthly instalments. The premises were constituted by an area of approximately 1,500m2 in part of the ground floor, part of the first mezzanine floor and the second mezzanine floor as depicted in the lessor’s plans. The commencement date of the lease was to be the earlier of the commencement of trade and the date of completion. The date of completion was defined as the date that the lessee received notice from the lessor that the lessor’s works had reached completion and which date was estimated by the lessor to be 15 March 2007. In cl 1.21-1.23 provision was made for an extension of the time for completion of the lessor’s works. Clause 1.25 provided for the lessee, at any time before the date of completion, for the purpose of accommodating its fit out, to give notice to the lessor to vary the lessor’s works in respect of the premises. Then, as may be expected, the Deed made provision for the fit out of the premises; the lessee was responsible for all design documentation relating to the fit out and all of the cost of it (cl 1.29). Clause 1.30(a) and (b) provided that before commencing the fit out the lessee must submit its plans for approval, and submit “the Lessee’s Approvals” to the lessor for inspection. Notwithstanding the contention of counsel for QS Retail, made with reference to cl 1.27, it is clear enough that the approvals being referred to here, as distinct from those referred to in cl 1.27, are “Lessee’s Approvals” as defined in cl 1.1, namely “the approvals issued by any relevant authority in connection with the Fit Out and the use of the Premises as a retail clothing and accessories outlet”. As to such approvals it was stated in cl 1.28 that:
“Lessee’s Approvals
1.28The Lessee must obtain the Lessee’s Approvals in connection with the Lease at the Lessee’s cost as soon as practicable and must do everything necessary to have all applications in relation to any Lessee Approvals lodged by the 31st October 2005 and shall obtain all Lessee Approvals as expeditiously as possible.”
I can then pass to cl 1.50 which provided that the lessee commits an “event of default” if the lessee, among other things, repudiates it obligations under the Deed or does not comply with any of its obligations under the Deed and does not remedy the non-compliance within 14 days after service of a written notice requiring the lessee to do so. In the events which have happened it is not necessary to refer to the other lessee events of default specified in cl 1.50.
On the occurrence of a lessee event of default, the lessor may terminate the deed by not less than 21 days notice; see cl 1.52.
Clauses 1.53 and 1.54 then dealt with the damages payable by the lessee in connection with a lessee event of default. First, in cl 1.53 the lessee indemnified the lessor against any liability or loss arising from, and any costs, charges and expenses incurred in connection with, such an event. Clause 1.54 dealt specifically with the situation of the Deed being terminated as a consequence of a lessee event of default. As I state below, that is this case. In such a case, the lessor’s indemnity extends to any liability or loss arising from, and any costs, charges and expenses incurred:
“(a) in connection with the Lessor terminating this deed; and
(b)because the Lessor will not receive the benefit of the Lessee performing its obligations:
(i)under this deed; and
(ii)under the Lease from the Commencement Date until the Expiry Date; and
(c)in connection with anything else relating to that termination including, without limitation, in the Lessor attempting to mitigate its loss,
whether before or after termination of this deed including, without limitation, legal costs and expenses on a full indemnity basis or solicitor and own client basis, whichever is the higher. The Lessor’s rights under this clause 1.52 are in addition to its rights under clause 1.51. This indemnity will exclude or set off any mitigation of loss the Lessor has achieved. Nothing in this clause shall relieve the Lessor from its obligation to mitigate its loss arising out of an Event of Default and the Lessor agrees that on the occurrence of an Event of Default it shall take stepts [sic] to mitigate its loss arising out of an Event of Default.”
It is evident that the reference to cl 1.52 and cl 1.51 in the final paragraph of the quote is meant to be, and should be read as, a reference to cl 1.54 and cl 1.53 respectively. There are other such errors of reference, and grammatical errors, in the Deed.
The lease concludes with a clause (apparently cl 1.100) headed Bank Guarantee and Security Deposit followed by a clause which stated the terms of UG Manufacturing’s guarantee; no point arises concerning that guarantee. However the preceding clause concerned with the bank guarantee and security deposit is critical; it provides as follows:
“BANK GUARANTEE AND SECURITY DEPOSIT
(1)The Lessee shall on or prior to the date of of [sic] Deed provide to the Lessor a bank a [sic] guarantee or undertaking from a bank (the “bank”) in a form approved by the Lessor (the “guarantee”) for an amount of not less than the amount referred to in Item 34 in the Reference Schedule of the Lease for the purpose of securing to the Lessor the due and punctual observance and performance of all convenants obligations and provisions on the Lessee’s part herein contained.
(2)The bank shall be a bank which carries on business in the State of New South Wales and is licensed under the Banking Act, 1959 (Cwth).
(3)The guarantee shall provide that the bank shall pay to the Lessor any amount demanded by the Lessor notwithstanding that the lessee may dispute liability for the amount demanded or that the lessee may direct the bank not to pay the same provided that the aggregate of all amounts demanded by the lessor shall not exceed an amount of not less than the amount referred to in Item 34 of the Reference Schedule (“the total sum”).
(4)If at any time during the term of this Deed [sic] fails to duly and punctually observe and perform any of the covenants obligations and provisions of this Lease to be observed and performed by the Lessee then the Lessor may appropriate and apply so much or the whole of the monies under the guarantee as may be reasonably necessary to compensate the Lessor for loss or damage sustained or suffered by the Lessor by reason of such breach or default by the Lessee.
(5)Any such appropriation by the Lessor of the monies under the guarantee or any part thereof hereunder shall not be deemed and shall not operate to waive the Lessee’s breach.
(6)Should the lessor draw down against the guarantee then the Lessee shall upon demand by the Lessor and within fourteen (14) days from the date thereof pay to the Lessor the amount of the sum so drawn down.
(7) The guarantee shall continue until such time as:
(i)the bank has received notification from the Lessor that the guarantee is no longer required by the lessor or,
(ii)payment by the bank to the Lessor of the total sum or,
(iii)the submission by the Lessee of a substitute guarantee from another bank (which carries on business and is licensed as aforesaid) on terms acceptable to the Lessor.”
It is evident, and counsel accepted, that the words “the lessee” were an inadvertent omission in the first line of para (4). Paragraph (4) should be read as though “the lessee” followed “this Deed”.
Item 34 in the Reference Schedule specified the amount of the bank guarantee and security deposit as an amount equal to eight months rent, outgoings and GST.
QS Retail duly procured from Westpac a Banker’s Undertaking dated 29 July 2005 for the amount of $1,533,333.32. The undertaking is addressed to Kingvest as “favouree” at the request of QS Retail as “customer”:
“and in consideration of the Favouree accepting this Undertaking for 8 months rent plus GST for the George Street Store at 367-373 George Street, Sydney NSW 2000 Bank Guarantee in lieu of retention monies to be refunded at practical completion. WESTPAC BANKING CORPORATION (the “Bank”) unconditionally undertakes to pay on demand any amount or amounts which may from time to time be demanded in writing purporting to be signed by or on behalf of the Favouree, up to a maximum aggregate sum of $1,533,333-32 (the “Amount”).
Payment of the Amount or any part thereof will be made by the Bank to the Favouree without reference to the Customer and regardless of any notice from the Customer to the Bank not to pay any amount.
The Bank’s obligations under this Undertaking cease on the earliest of the following:
· written notification is received by the Bank from the Favouree that the Undertaking is no longer required
· the Undertaking is returned to the Bank
· all payments by the Bank to the Favouree under the Undertaking total the Amount
· the Favouree notifies the Bank that the payments made by the Bank constitute the total amount required to be paid
Notwithstanding any other obligations of the Bank under this Undertaking the Bank may at any time, without being required to do so, extinguish any liability it has under the Undertaking by paying to the Favouree the Amount less any amount or amounts it has previously paid under this Undertaking, or any lesser amount the Favouree notifies the Bank as being acceptable to it.”
It is not clear that the statement that the undertaking was provided “in lieu of retention monies to be refunded at practical completion” was apt in the present circumstances. Not only is there no reference to retention in the Deed, but the lessor and lessee were obliged to carry out their respective works at their own cost. However no point was made of this and, accordingly, I do not consider it further. The argument proceeded on the basis that the undertaking was properly provided pursuant to QS Retail’s obligation in that behalf and, implicitly, that it was in a form approved by Kingvest.
For whatever reason, QS Retail did not press forward with plans for the premises. In particular it did not lodge any application in relation to any lessee approval as referred to in cl 1.28 by 31 October 2005 or at any time subsequently. Time went by until on 3 October 2006 Kingvest’s solicitors wrote to QS Retail stating that the failure to comply with cl 1.28 was an event of default giving Kingvest the right to terminate the Deed under cl 1.52. Without prejudice to Kingvest’s rights under the Deed the solicitors enclosed a notice requiring QS Retail to remedy the breach of cl 1.28 within 14 days. QS Retail did not respond to the notice until 17 October when its solicitors wrote disputing that the failure to seek and obtain lessee approvals under cl 1.28 constituted a breach. Kingvest’s solicitors responded on 20 October with letters to QS Retail and its solicitor. In summary, the letters advised that Kingvest terminated the agreement consequent on the failure of QS Retail to comply with the notice or on account of its repudiation of the Deed. It was further stated that Kingvest would draw down against the bank guarantee, would exercise its additional rights under the Deed and at law, and would take steps to mitigate its loss. On the same day (20 October) Kingvest’s solicitors wrote to Westpac requesting payment of the total sum guaranteed “forthwith”, and advice when arrangements may be made to attend at the bank to exchange the undertaking for a cheque in favour of Kingvest.
QS Retail’s solicitors responded by facsimile on 21 October disputing that Kingvest was entitled to draw down on the guarantee stating that no payment had been demanded and contending that Kingvest had not “actually sustained or suffered” any loss or damage. It was requested that by 9.30 am on 23 October Kingvest confirm that it would not proceed under the bank guarantee failing which an injunction would be sought. On 22 October Comino himself advised the chief executive officer of Quiksilver, Kenneth Craig Stevenson, that he would not withhold action pending a meeting.
On 23 October QS Retail acted to meet the threatened draw down by filing the writ in this proceeding and seeking and obtaining the interim injunction referred to earlier. The writ was endorsed with a statement of claim. I refer to the statement of claim to indicate how the case was framed at that stage. Among other things it was alleged that there was an implied term of the Deed that the guarantee would not be called until the amounts demanded were quantified and QS Retail had been informed of the amounts; these terms were to be implied to give business efficacy to the agreement. It is sufficient to say of this allegation of implied terms that before me counsel for QS Retail did not press it at all, even when it was referred to by Kingvest’s counsel late in the argument.
Proceeding on in the statement of claim, it was alleged that:
(a)QS Retail had not obtained any lessee approvals;
(b)no lessee approvals were required to be lodged or obtained prior to 31 October 2005 or at all;
(c)further or alternatively, Kingvest had not sustained any loss or damage by reason of any failure to lodge or obtain lessee approvals.
In those circumstances, in breach of the deed Kingvest had:
(a)not been entitled to terminate the Deed;
(b)not provided QS Retail with details of the amounts intended to be the subject of a demand under the guarantee;
(c)wrongfully threatened to make demand under the guarantee.
The relief sought was damages for breach and an injunction to restrain Kingvest from demanding payment under the banker’s undertaking.
Since the grant of the injunction the facts have been enlightened by a series of affidavits. The first and most significant point is that on 2 November QS Retail advised Kingvest that it did not wish to proceed with the lease of the premises. It was common ground before me that the Deed had been terminated as a result of QS Retail’s repudiation of its obligations under the Deed. As a result, the argument was confined to questions as to the interpretation and operation of the banker’s undertaking clause in the Deed, in particular as to whether in the circumstances Kingvest was entitled to call the undertaking and, if so, apply the proceeds received in payment of any and what amount or amounts of alleged loss and damage. Counsel for QS Retail submitted that in accordance with the Deed Kingvest’s entitlement to call for payment under the undertaking was limited to the amount or amounts “reasonably necessary to compensate the Lessor for loss or damage sustained or suffered by the Lessor” by reason of breach or default by the lessee. Before dealing with this submission there are one or two other matters to mention.
Apprehending (for reasons it is not necessary to refer to) that QS Retail may not proceed with the lease of the premises Comino took steps to secure a replacement tenant. On 10 October 2006 Kingvest entered into a Deed of Agreement for Lease of the premises with Apple Computer Australia Pty Ltd. The operation of this deed was conditional on the QS Retail Deed coming to an end. Comino deposed to his belief that the terms of the new Deed were the best that could have been negotiated.
Comino further deposed to items of loss and damage which Kingvest had suffered as a result of termination of the QS Retail Deed. He listed these items in a schedule to his affidavit. He said that the monies to be paid by Westpac were to be applied in part satisfaction of Kingvest’s loss and damage. The items are:
(a) Agent’s commission on new lease
$220,000.00
(b) Legal costs and disbursements in respect of new lease $27,307.50 (c) Lease incentive to new tenant – six months at $2,150,000 per annum $1,075,000.00 (d) Costs of building contractor and consultant’s fees to change building works for new tenant Not ascertained (e) Kingvest’s costs in negotiating new lease Not ascertained (f) Rental difference under new lease $2,307,907.80 On their face these amounts far exceed the total amount payable by Westpac under the undertaking. Thus, Kingvest has demanded the full amount of the guarantee which will be applied in part satisfaction of the overall loss and damage, as it may turn out to be. Kingvest will then commence proceedings against QS Retail and its guarantor, UG Manufacturing, to recover the balance of its loss and damage.
It remains to mention a matter that is background only. That is a reference in the affidavits of QS Retail to the business as purchased not producing the revenue and profit Quiksilver had been led to believe it would receive. This was a matter of discussion between the parties (including Athanasakos) in August 2006. Stevenson deposed that QS Retail was considering commencing legal proceedings against the vendor companies, Comino and Athanasakos in relation to misleading and deceptive conduct. It seems that a meeting with Comino on 31 October 2006 was convened to discuss options concerning the lease.
I now consider the interpretation and operation of the bank guarantee clause. The structure of the clause is important. The first step, in para (1), is that the guarantee or undertaking is provided as security for the due and punctual observance and performance by the lessee of the covenants obligations and provisions on its part contained in the Deed. The second step, in para (3), is that the bank shall pay any amount demanded by the lessor notwithstanding that the lessee may dispute liability for the amount or that the lessee may direct the bank not to pay the amount. The third step, in para (4), is that the lessor may appropriate and apply monies under the guarantee as may be reasonably necessary to compensate it for loss or damage sustained or suffered by reason of a breach or default by the lessee in observing and performing any of the covenants obligations and provisions of the lease.
Implicit in this scheme is the distinction between the right of the “favouree” to (a) convert a security into cash in its hands; and (b) appropriate that cash to payment of an amount payable under the parties’ agreement. As Callaway JA pointed out in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd[1] where, in accordance with the subject agreement, the security is converted into cash, “the cash is held on the same terms as the guarantee”. But the mere fact that the agreement permits conversion of the security does not mean that the favouree or beneficiary is free to appropriate such cash. Recourse may be permitted but whether, and the extent to which, it is permitted will depend, as does the existence of a right to convert the security, on the terms of the parties’ underlying agreement: Wood Hall Ltd v Pipeline Authority[2]; Bachmann Pty Ltd v BHP Power New Zealand Ltd[3]; Anaconda Operations Pty Ltd v Fluor Daniel Pty Ltd[4]; Hudson’s Building and Engineering Contracts, 11th Ed, paras 17-072 - 17-075.
[1][1998] 3 VR 812 at 825-826.
[2](1979) 141 CLR 443 at 459.
[3][1999] 1 VR 420 at 429-430, [28]-[30].
[4][1999] VSCA 214 at 4, [8].
In the present case the subject clause authorises both conversion of the security and appropriation of the security sum. However, as mentioned, regard must be had to the terms of the clause, read as a whole, to determine its operation. The question that immediately arises is whether the lessor’s right to convert the security is conditioned on it having “sustained or suffered” loss or damage within the meaning of para (4). The effect of that interpretation, were it correct, would be to conflate the right to convert the security to cash and the right to appropriate the cash so received to one and the same set of circumstances. That is in fact how counsel for QS Retail approached the matter. They identified the question for consideration as being whether Kingvest was presently entitled to demand payment under the Banker’s Undertaking. It was submitted that Kingvest was only entitled to do so when it had sustained or suffered loss or damage and, if so, only to the extent of that loss or damage. It is thus apparent that the effect of QS Retail’s submission was to read paras (1) and (4) together with the effect that the right to demand payment was conditional on the suffering of loss or damage as provided in para (4). In essence, it was submitted, para (4) was in the nature of a guarantee to be called up in the circumstances prescribed in para (4). It was therefore not to be understood as an allocation of risk provision as to who should bear the loss pending determination of a claim for loss and damage. From that point counsel submitted that none of the items of loss and damage specified by Comino had been sustained or suffered by Kingvest within the meaning of para (4). All of this, if it were correct, would provide the foundation for ordering the injunction sought. In other words, there would be established serious questions to be tried as to the right to convert and appropriate.
I should mention that counsel sought support for these submissions in the decision of Byrne J in Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd[5]. In that case the building contract provided three conditions on which a party might have recourse to a security, one of those conditions being that the party “has become entitled to exercise a right under the Contract in respect of the security”. Having analysed the contract Byrne J concluded (at [37]) that the expression “has become entitled” indicated a determination of that entitlement by certificate, agreement, arbitral award or otherwise. Thus, Byrne J held, the party wishing to exercise rights against the security had to demonstrate the existence of the liability. That not having been established there was a serious question to be tried as to the existence of the entitlement and for that reason and having regard to the balance of convenience it was appropriate to grant an injunction pending trial. Counsel submitted that a like approach should be taken to the resolution of the present case. That is, notwithstanding differences in the contractual language, there was a serious question to be tried as to whether Kingvest had sustained or suffered any of the alleged loss and damage and, such sustaining or suffering being a condition of the right to demand payment under the undertaking, there was a serious question to be tried as to whether that right had arisen.
[5][2002] VSC 579.
As against this, Kingvest’s counsel drew the distinction between the conversion of the security to cash and appropriation of the proceeds of conversion. As to the former he referred to paras (1) and (3), and as to the latter he referred to para (4). They were separate and distinct rights which came into play at two distinct stages, namely conversion to cash and appropriation. The present case was at the first stage and, as such, there was no serious question to be tried. The right to require conversion was clear and unqualified. Further, the present case was unlike Rejan Constructions in that here the right to require conversion was not restricted by a condition concerning any type of claim. In other words the right to convert the security and the right to appropriate were separate rights and the condition for operation of the latter right did not restrict the exercise of the former right.
I note that I did not understand either counsel to rely on para (6) of the clause. Nor was it argued that the use of the expression “this Lease” in para (4), in contrast to the expression “herein contained” (referring to the Deed) in para (1), meant that the right of appropriation was restricted to breach or default of a provision in the lease as distinct from a provision of the Deed. I note the absence of any such argument but in any event, in my view the right of appropriation in para (4) was intended to be applicable in the event of a breach or default under the Deed. And, of course, the premise of QS Retail’s submission is that para (4) was applicable in such event. In truth what the language reflects is a degree of inexactness seen elsewhere in the Deed.
The submissions come down to this. Does Kingvest as lessor have an unrestricted right to convert the security of the Banker’s Undertaking into cash in its hands and apply the amount received in compensation for loss or damage sustained or suffered? QS Retail’s submission is that the sustaining or suffering of loss or damage is a condition of the right to convert the security. If that is correct, the point that arises is whether the loss or damage referred to in para (4) is loss or damage generally or each item of loss or damage resulting from the breach. The latter view accords with QS Retail’s submission. I have to say that I did not receive developed submissions on this point including as to the meaning of the expression “sustained or suffered”. The submissions tended more to the assertive, doubtless because of the nature of the application and the time available. I do not however mean to criticise counsel who presented their submissions with commendable brevity.
As between them the bank is bound by the terms of its undertaking to meet Kingvest’s demand. That is, of course, in the absence of fraud and possibly some other special circumstances as Brooking JA noted in Anaconda[6]. But, as Brooking JA further pointed out in Anaconda, the terms of the underlying contract, in the present case of the Deed between Kingvest and QS Retail, may be such as to make it wrongful to make a demand on the bank in which case an injunction may go to restrain Kingvest from making the demand.
[6]At 4, [8].
There is no suggestion of fraud or any other special circumstance that might be invoked to restrict or preclude Kingvest’s right to demand, and Westpac’s obligation to make, payment under the Banker’s Undertaking.
Assuming that payment is made under the undertaking, how is the amount received to be treated by Kingvest? In my opinion Kingvest is required to hold such funds in a separate account. They retain the character of security. The change that has occurred is that the security is now held by Kingvest. The relevant provision in this case is different from those in Anaconda under which the proceeds of conversion of the security became part of the general funds of the owner[7]. To the contrary, the proceeds of conversion in the present case continue in the character of a security sum in the hands of Kingvest. The structure and language of para (4) indicates that. Hence, Kingvest is not free to apply the proceeds as it may wish. The proceeds are earmarked from the time of their receipt and may be dealt with by Kingvest only for the single purpose specified in para (4) of compensating Kingvest for loss or damage sustained or suffered. It is then and only then and only in relation to an item of such loss or damage that Kingvest “may appropriate and apply” the proceeds of conversion. Until that time the amount received from Westpac is held and retained by Kingvest as security for the purpose stated in para (1). It is implicit that Kingvest is accountable for its use and disposition of the security. And it must follow that an appropriation of the proceeds other than in accordance with the requirements of para (4) would constitute a misapplication of the security of money, and breach of the clause.
[7]Anaconda at 12, [26].
Then it is significant that the right of appropriation is conditioned on loss or damage having been sustained or suffered. It is not loss or damage that may be suffered, although as I have said I did not have the benefit of developed argument as to the exact scope of the loss or damage that might be regarded as sustained or suffered within the meaning of para (4). Accordingly I do not speculate on the scope of the loss or damage comprehended by para (4). Nevertheless para (4) does not seem to me apt to comprehend a possible or inchoate claim. Yet, at the same time the expression “as may be reasonably necessary” might indicate that the exactness of a curial determination of loss or damage may not be required. Such a determination could occur, if necessary, at a later time. A factor urged by Kingvest’s counsel is that Kingvest would be liable to repay with interest any amount appropriated to the extent it may be determined by a court or other binding process including agreement of the parties, that the amount appropriated was greater than the loss or damage actually sustained or suffered; see Fletcher[8]. Indeed, QS Retail wishes to amend the statement of claim in order to raise for determination the loss or damage suffered by Kingvest as a result of termination of the Deed. Kingvest’s counsel also referred to a curial determination of the issue.
[8]At 822.
It should further be noted that whereas the parties’ agreement, reflected in the undertaking, is that Westpac pay the proceeds on demand notwithstanding that QS Retail may dispute liability for the amount demanded, para (4) contains no such restriction. That is, para (4) does not in terms preclude QS Retail from disputing, even by application for injunction, appropriation of the security proceeds. That may not be surprising having regard to the terms of para (4) by which the circumstances in which an appropriation may be made are specified and thereby limited.
The submission of Kingvest’s counsel that the case was only at the first stage of the security being converted to cash in Kingvest’s hand, so that questions of appropriation did not now arise, was not entirely apt to describe the present circumstances. It is true, as it appears, that Westpac has not paid the security sum to Kingvest. It is, however, sufficiently clear from the correspondence that Kingvest’s intention is to appropriate the proceeds to its claimed loss and damage when the proceeds are received. I would infer that unless restrained or failing agreement between the parties it will do so.
As to the items of loss and damage identified by Comino counsel for QS Retail submitted as follows. He first submitted generally that none of the items had been sustained or suffered, and that is clear enough in respect of two of the items which Comino stated were not ascertained. As to the other four items he submitted more particularly as follows. The agent’s commission had not been paid, and thus had not been sustained or suffered. I would merely say as to this that it would not seem to me that actual payment by Kingvest would be required before it could be said that loss of the amount in question had been sustained or suffered. That is to say in terms of an obligation having been incurred to make the payment. The second item was legal costs and disbursements and as to these it was said that the evidence as to the incurring of them was mere assertion and, further, there was no evidence of payment. Each submission is correct. Thus it was not established before me that any such loss or damage has been sustained or suffered. The next item is the lease incentive which, it was submitted, would not be sustained or suffered until the commencement of the new lease which was a long way away. Similarly, the rental difference was not sustained by reason of neither lease having commenced. Each of these latter points is correct. Until an item is “sustained or suffered” it would be wrong, and constitute a breach, for Kingvest to appropriate proceeds of the security as compensation in respect of it. If I may say so with respect the sensible course for the parties to adopt is to agree on a present figure as representing Kingvest’s loss and damage suffered as a result of the termination of the Deed.
On the basis that it was concluded that QS Retail established there was a serious question to be tried counsel addressed the balance of convenience.
Counsel for QS Retail submitted that in addition to the usual undertaking for damages, there was the comfort that QS Retail is a subsidiary of a substantial company and there is in addition the guarantee of another subsidiary, UG Manufacturing. Further, the statement of claim would be amended to raise the issue of Kingvest’s loss and damage for determination and QS Retail would press the case with expedition. For those reasons the balance of convenience favoured retention of the status quo. I note, however, that there was no suggestion that if Kingvest were to appropriate the proceeds of the security and it were later found that it had appropriated more than the amount of its loss and damage such that it had to repay money to QS Retail, Kingvest would not be able to repay any such amount.
On the other hand, counsel for Kingvest submitted that the parties should be left to their rights under the Deed. That is Kingvest should be free to convert the security and appropriate the proceeds in compensation for loss and damage. If and to the extent that QS Retail considered that the amount appropriated exceeded the loss or damage sustained or suffered as a result of QS Retail having repudiated the Deed it could have the position determined at law. That was its proper course of action.
If I were of a view that there was a serious question to be tried that the right to convert the security was conditional on Kingvest having sustained or suffered loss or damage I would have been inclined to grant an injunction to the effect of restraining conversion, or appropriation, of all items of loss and damage other than the agent’s commission. The balance of convenience would have favoured doing so. I am however of the view that QS Retail’s submission rests on an interpretation of the subject clause that is not correct. In my view the clause entitles Kingvest to convert the security the proceeds of which, when received, retain their character as security in its hands unless and until appropriation is made under para (4). Such appropriation may be made ahead of a curial determination as to whether Kingvest has suffered any and if so what loss and damage as a result of QS Retail’s repudiation of the Deed. In making an appropriation Kingvest must have regard to the limiting terms of para (4) and doubtless ought act in good faith if for no reason other than that the security monies are held by it not as an asset of Kingvest but as a security sum on the terms of the Deed. It is axiomatic that QS Retail has an interest in the security sum being held and applied in accordance with the Deed, and that Kingvest is accountable to it in that respect.
I consider that at least in the circumstances as they are at present the Court should not intrude on the operation of the scheme by way of injunction. If an appropriation occurs and the amount appropriated is greater than the amount of loss and damage found by a curial determination the excess amount will be repayable with interest.
For these reasons the application for an interlocutory injunction will be refused. I will hear counsel as to the orders to be made for the further conduct to the proceeding and as to costs.
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