Shoaeeyan Trading Pty Ltd v Liberty Oil South Australia Pty Ltd & Berkley Re Australia - [2009] SADC 108

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Application)
SHOAEEYAN TRADING PTY LTD & ORS v LIBERTY OIL SOUTH AUSTRALIA PTY LTD & BERKLEY RE AUSTRALIA
[2009] SADC 108
Reasons for Decision of Her Honour Judge McIntyre
16 October 2009
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS
Application for extension of interim injunction restraining defendants from enforcing guarantee undertaking granted by the second defendant in favour of the first defendant.
Whether this matter falls within the limited exceptions to the rule that injunctions should not be granted to restrain contracting parties from enforcing a performance bond granted by the other contracting party - whether there is a serious question to be tried as to whether the first defendant has breached a negative stipulation or whether its conduct is unconscionable within the terms of the Trade Practices Act 1974. Whether the balance of convenience is in favour of the plaintiffs
Held: That there is sufficient likelihood of the plaintiffs being successful at trial to justify the preservation of the status quo and that the balance of convenience favours the plaintiffs as disproportionate hardship or prejudice will ensue if interlocutory relief is refused.
American Cyanamid v Ethicon Ltd [1975] AC 396; Australian Broadcasting Corporation v O'Neill (2006) 229 ALR 457; Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 at 506; NWL Limited v Woods [1979] 1 WLR 1294; Clough Engineering Ltd v Oil & Natural Gas Corporation Limited [2008] 249 ALR 458; Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1988] 3 VR 812; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Ewing International LP v Ausbulk Limited [2008] SASC 25; Cayne v Global Natural Resources (1984) 1 All ER 225 at 237, considered.

SHOAEEYAN TRADING PTY LTD & ORS v LIBERTY OIL SOUTH AUSTRALIA PTY LTD & BERKLEY RE AUSTRALIA
[2009] SADC 108
What is this matter about?

The first plaintiff entered into a supply agreement with the first defendant. The second plaintiff guaranteed the performance of the first plaintiff’s obligations under that agreement by granting second mortgages over his home at Fosters Road, Greenacres and over a vacant block of land in Klemzig. Subsequently the first plaintiff entered into a guarantee undertaking to secure its performance of the supply agreement issued by the second defendant in favour of the first defendant. The circumstances surrounding that guarantee are contentious and relevant to this application.
The first defendant says that it is entitled to the benefit of the guarantee asserting that the first plaintiff has failed to pay the sum of $242,078.35. The first plaintiff disputes that it owes that sum and seeks an accounting.
The plaintiffs obtained an interim injunction on 17 September 2009 that “until further order the defendants be restrained from enforcing the guarantee undertaking dated 20 November 2008 granted by the second defendant in favour of the first defendant”.
The plaintiffs seek that this injunction remains in place pending the determination of the substantive proceedings. This is opposed by the first defendant who says that there are only limited circumstances in which parties are prevented from calling upon performance guarantees and that this case does not fall within those circumstances.
Legal Principles
The general principles governing the grant or refusal of an interlocutory injunction are well settled. First, the grant of an interlocutory injunction “... is a remedy that is both temporary and discretionary”.[1] In exercising this discretion, the court should consider all the relevant circumstances bearing in mind that the object of this equitable relief is to prevent irremedial prejudice arising pending the final resolution of the issues at trial.[2]
[1] American Cyanamid v Ethicon Ltd [1975] AC 396 per Lord Diplock at 405
[2] American Cyanamid, see note 1 above, per Lord Diplock at 406).
The applicant for an interlocutory injunction bears the onus of satisfying the court that it should be granted. The first matter to be established is whether there is a serious question to be tried or that there is a sufficient likelihood that the plaintiffs will be held entitled to relief at trial.[3] To give a plaintiff standing to seek interlocutory injunctive relief the serious question to be tried must involve some legal right that attracts injunctive relief.[4]
[3] Australian Broadcasting Corporation v O’Neill (2006) 229 ALR 457
[4] Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 at 506 per Gummow J
On the basis that it has been established that there is a serious issue to be tried, the second matter for the Court is to decide is whether the balance of convenience weighs in favour of granting the injunction or not. Issues such as irreparable injury, detriment and whether damages are an adequate remedy, are subsumed under this general banner of the balance of convenience.[5]
[5] NWL Ltd v Woods [1979] 1 WLR 1294 per Lord Diplock 1306
Issues
The parties agree that the guarantee undertaking is in the form of a performance guarantee or bond. To determine whether there is a serious issue to be tried it is necessary to look at the nature and legal effect of performance bonds. Specifically I must consider whether this matter falls within the limited exceptions to the rule that injunctions should not be granted to restrain contracting parties from enforcing a performance bond granted by the other contracting party.
The second issue is whether, if there is a serious issue to be tried, the balance of convenience weighs in favour of the granting of the injunction.
What are the exceptions to the rule that injunctions should not be granted to restrain enforcement of a performance bond?
The principal authority referred to by the parties was Clough Engineering Ltd. v Oil & Natural Gas Corporation Limited[6] a decision of the Full Court of the Federal Court of Australia. In that case the Full Court held that:
…A court will not enjoin the issuer of a Performance Guarantee or Bond from performing its unconditional obligation to make payments subject to three principal exceptions as follows:
1.     Where the person in whose favour the guarantee has been given is acting     fraudulently.
2.     The person in whose favour the Performance Bond has been given may be enjoined from acting unconscionably in contravention of the Trade Practices Act.
3.     If the party in whose favour the bond has been given has made a contract      promising not to call upon the bond, breach of that promise may be prevented on normal principles    relating to the enforcement by injunction of negative         stipulations in contracts.
[6] [2008] 249 ALR 458
The plaintiffs contend that this matter falls within the second or third exceptions.
What is the nature and legal effect of a performance bond?
The purpose of a performance bond is to allocate commercial risk between parties. Plainly, this often occurs in a situation where there is a dispute. The dispute in this case being whether the first plaintiff owes the first defendant a debt under the supply agreement and, if it does, whether the quantum of that debt is sufficient to enable to first defendant to call upon the performance bond.
There is no dispute that the first defendant has a bona fide belief that a debt is owed in the sum of about $240,000. That is a debt in excess of the performance guarantee. The first defendant contends that once the existence of a bona fide belief is established then it is entitled to make a demand under the performance guarantee. The validity of the first plaintiff’s challenge to the quantum of any debt is not therefore a relevant consideration to the first defendant’s entitlement under the performance guarantee.[7] I agree and I do not understand the plaintiffs to be contending otherwise although affidavit material filed with the Court suggests that there is some basis to the first plaintiff’s position in relation to the quantum of the debt. The validity of that position will require full discovery of documents, consideration of those documents and, in all probability, expert accounting evidence.
[7] Clough at p 480.
The plaintiffs however contend that there is a serious issue to be tried in relation to the first defendant’s entitlement to make a demand under the performance guarantee that arises out of the circumstances in which that guarantee was obtained. That issue, it is said, falls within the exceptions outlined by the Federal Court in Clough.
What were the circumstances in which the performance bond was obtained?
The plaintiffs’ pleadings at paragraphs 31- 33 of the Amended Statement of Claim deal with the circumstances in which the performance bond is said to have arisen. The plaintiffs say that the first defendant agreed to release the Fosters Road and Klemzig mortgages upon the plaintiffs obtaining the guarantee undertaking. This is described as “the securities agreement”. The plaintiffs say that the securities agreement includes a negative stipulation (express or implied) by which the first defendant is not entitled to benefit from the undertaking unless and until it has released both the Fosters Road and Klemzig mortgages. This, it is said, brings the matter within the third exception in Clough.
The plaintiffs further say that the conduct of the first defendant in calling on the performance bond whilst it retains the benefit of the Fosters Road and Klemzig mortgages is unconscionable conduct in breach of the Trade Practices Act 1974 and specifically sections 51A(c) and 51A(a). This is said to bring the matter within the second exception in Clough.
Does the securities agreement include a negative stipulation?
The first defendant denies the existence of the security agreement but, more relevantly for present purposes, denies the negative stipulation asserted by the plaintiffs. The first defendant says that the terms of the agreement asserted by the plaintiffs are, in effect, that upon entry into the performance guarantee the first defendant will release the plaintiffs from the second mortgages but that there is nothing in that agreement that expressly goes on to state that if this does not occur the first defendant is restrained from calling upon the performance bond. The first defendant contends that clear words are required to support a construction that inhibits it from calling on a performance guarantee where a breach is alleged in good faith[8].
[8] Clough at p480
This is however a different situation to that which obtained in Clough. The comments of the Full Court were in the context of a written contract requiring construction of the words used in the contract. Here, there is no written contract. I am not in a position to determine the existence of the securities agreement or its terms on the basis of the material presently before me. Determination of these issues will require oral evidence subject to cross-examination following full discovery.
Even if I could find that there were no clear words establishing a negative stipulation, it is sufficient for the agreement between the contracting parties to contain an implied prohibition on the contracting party’s entitlement to call upon a performance bond.[9]Whether such a prohibition could be implied requires careful consideration of all of the evidence in the context of the applicable case law.[10]
Is there conduct capable of constituting unconscionable conduct in breach of the Trade Practices Act 1974?
[9] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
[10] BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
The first defendant says that the high watermark of the plaintiffs’ case on the issue of unconscionable conduct rests upon the securities agreement and a letter from the first defendant’s solicitors to the plaintiffs’ solicitors dated 18 May 2009.[11] This, it is said, indicates that if there was such an agreement there was a further condition that the account was in order. The first defendant says that the account was never in order and so this condition was not satisfied.
[11] Exhibit SS3 to Affidavit of Mr Shoaeeyan sworn 15 September 2009
The letter further only refers to the Klemzig mortgage. The first defendant says that it will forthwith discharge the mortgage in relation to the Klemzig property, making no admissions that this was a condition of any agreement, in the event that the performance guarantee is honoured or the court allows it to call upon the guarantee. This concession does not however address the issue of unconscionability that the plaintiffs raise if the first defendant is permitted to call on the guarantee and yet maintain the security over the second property at Fosters Road.
I do not agree that this letter represents the high water mark of the plaintiffs’ case. The plaintiffs do not assert that the letter accurately records the securities agreement. Rather the plaintiffs point to the letter as representing an apparent inconsistency with the first defendant’s denial of the existence of the security agreement. Again the existence of the securities agreement and any of its terms or conditions cannot be determined without further discovery and oral evidence.
Is there a serious issue to be tried?
The plaintiffs do not need to establish nor need I determine whether the first defendant has breached a negative stipulation or whether its conduct is unconscionable within the terms of the Trade Practices Act. It is sufficient for the plaintiff to show that there are serious issues to be tried in relation to these issues in order to bring this matter within the exceptions as outlined in Clough. As will be seen from the discussion above there is dispute between the parties on both of the claimed exceptions. I am unable to resolve those matters on an interlocutory basis. It is my view that there is a serious issue to be tried and a sufficient likelihood that the plaintiffs will be held entitled to relief at trial.
Does the balance of convenience weigh in favour of granting the injunction?
The first defendant submitted that the plaintiffs have not supplied sufficient evidence relating to the issue of balance of convenience and specifically as to why damages are not an adequate remedy. I do not accept that this is the case.
The material contained in the affidavits of the second plaintiff clearly establishes a basis upon which both plaintiffs are likely to suffer economic harm. Once the first defendant calls upon the performance bond, the second defendant will make an immediate call upon the plaintiffs for the sum of $180,000. The second defendant has caveats over both the Klemzig and the Fosters Road property. Even if the First defendant discharges the mortgage over the Klemzig property as indicated in submissions, the second mortgage on the Fosters Road property remains. In these circumstances, the first plaintiff may well become insolvent and unable to continue trading as is asserted in the affidavit material. This clearly suggests that damages are an inadequate remedy.[12] Further, the second plaintiff may be put out of his home in consequence of either the first defendant pursuing its second mortgage or the second defendant pursuing its caveat. The second plaintiff may also be subject to some call by the second defendant on the Klemzig property.
[12] Ewing International LP v Ausbulk Limited [2008] SASC 25
The performance guarantee presently expires on 20 December 2009. The plaintiffs agree to extend the period of the guarantee’s operation to permit the underlying issues to be determined. The first defendant says that it will be necessary for the second defendant to agree to that extension. There is no indication of the second defendant’s position in relation to that issue. Even if there were no such agreement the affidavit material indicates that there is equity in the Fosters Road and Klemzig properties to the extent of $220,000 and the plaintiffs have paid the sum of $51,000 into court.
There is a clear detriment to the first defendant in not being able to call upon the guarantee immediately. There is however no evidence that the first defendant is dependent upon immediate payment of this sum for its survival. The first plaintiff no longer receives its fuel from the first defendant. Whatever the quantum of the debt owed to the first defendant, that amount has crystallised and is subject to interest under the terms of the supply agreement. The first defendant presently has the benefit of security well in excess of the debt that it asserts is due.
I respectfully adopt the comments of May LJ in Cayne v Global Natural Resources[13] concerning the approach to be taken to the issue of balance of convenience:
... the balance that one is seeking to make is more fundamental, more weighty, than mere ‘convenience’. I think that it is quite clear from both cases that, although the phrase may well be substantially less elegant, the ‘balance of the risk of doing an injustice’ better describes the process involved.
[13] (1984) 1 All ER 225 at 237
I consider that there is sufficient likelihood of the plaintiffs being successful at trial to justify the preservation of the status quo and that the balance of convenience favours the plaintiffs as disproportionate hardship or prejudice will ensue if interlocutory relief is refused.. In my view the proper order is to confirm the injunction.
Orders
I will hear the parties upon the appropriate orders to be made and in particular as to the issue of the expiry of the performance bond on 20 December 2009.