Sport Fashions Pty Ltd v Lectra Systems Pty Ltd

[1990] FCA 703

JUDGMENT NO. 703 I " - % ?

INTEFUOCUTORY INJUNCTION - whether establishment of a serious

question to be tried of breach of a contract of sale and contravention of S. 52 of the Trade Practices Act in relation thereto enabled the applicant to obtain relief against presentation to a bank of a letter of credit issued pursuant to the contract - principles relating to the use of letters of credit in relation to contracts - effect of claim to rescind contract - whether a term could be implied limiting the right to present the letter of credit.

MAREVA INJUNCTION - whether Australian subsidiary of an

overseas company was liable to such an order where it would be dependent on support from its parent - whether there was a danger of abuse or frustration of the court's process.

SPORT FASHIONS PTY LIMITED v. LECTRA SYSTEMS PTY LIMITED

NG 655 of 1990

Burchett J.
Sydney

19 December 1990

IN THE FEDERAL COURT OF AUSTRALIA )

1

NEW SOU TH WALES DISTRICT REGISTRY ) NG 655 of 1990

)

GENERAL DIVISION 1

BETWEEN:  SPORT FASHIONS PTY LIMITED

Applicant

AND :  LECTRA SYSTEMS PTY LIMITED

Respondent

CORAM: Burchett S.
PLACE: Sydney

DATE : 19 December 1990

SHORT MINUTE OF ORDERS OF THE COURT

THE COURT ORDERS THAT:

1.    The application be refused.

2.   The respondent's costs of the interlocutory application be its costs in the action.

NOTE:  Settlement and entry of orders is dealt with in
Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

)

I NEW SOUTH WALES DISTRICT REGISTRY ) NG 655 of 1990

)

GENERAL DIVISION 1

BETWEEN:  SPORT FASHIONS PTY LIMITED

Applicant

AND :  LECTRA SYSTEMS PTY LIMITED

Respondent

CORAM: Burchett J.
PLACE: Sydney

DATE : 19 December 1990

REASONS FOR JUDGMENT

BURCHETT J.:

By an application filed on 16 November 1990, the applicant seeks relief in contract and under S. 52 of the Trade Practices Act 1974 in relation to a contract to purchase from the respondent a computerised cutting machine (for use in the manufacture of garments) at a price in excess of $400,000. The applicant's case is disputed and a statement of defence

has been filed. One aspect of the case relates to an	irrevocable letter of credit established by the applicant with
Australia and New Zealand Banking Group Limited on about 9 February 1990 in favour of the respondent for an amount of $217,250, part of the purchase price of the machine. The letter of credit is payable on 20 December 1990.
The applicant claims to have validly rescinded the contract, and now seeks an interlocutory injunction to
restrain the respondent from presenting the letter of credit.

i~

The respondent, while disputing the applicant's case, very	t
I
fairly concedes that the applicant's affidavits do make out a serious question to be tried in respect of the alleged breach of the contract for the supply of the machine and the alleged contravention of S. 52. However, the respondent takes its stand upon the nature and incidents of a letter of credit, arguing that it would be wrong in principle to grant the relief sought, or that the balance of convenience, in such a case, would inevitably deny it.
The terms of the contract provided for a payment on delivery and a further payment ("to be covered by a Bank Guarantee or Bank Draft") of $217,250 on a date which became 20 December 1990. The contract also provided: "Payment on the due dates is an essential part of this contract." It was pursuant to this contract that the letter of credit in
I
question issued in favour of the respondent.	1 ;
r
L.'
l I
l
r

The respondent, which was incorporated in New South Wales, is a wholly owned subsidiary of a French company,	!	;
, .
!

Lectra Systsmes S.A., the head office of which is situated in	L,
: I
Bordeaux. It is plain that the viability of the respondent	,..
depends on its continuing to receive support from its French parent. However, the evidence is that the French company's

operations are on a substantial scale, and are worldwide. It I

has injected $430,000 capital into its Australian subsidiary.	I
While the respondent's accounts for the period up to the end	, . 1..

of 1989 show losses, that was an establishment period, during whlch the company's operations expanded substantially, and there is no suggestion that it owes any debts, ,unless the applicant's claim in the present case is to be considered a debt. I received, as a confidential exhibit, certain draft accounts as at June of this year. It is sufficient to say that the confidential exhibit does not lead me to make any revision, unfavourable to the respondent, of the general conclusions I derive from the other evidence. There is nothing in the evidence to suggest that the respondent is taking or threatening any steps to evade payment under any order which may be made in favour of the applicant, but if the applicant were wholly successful in the very large claims it makes the respondent would require considerable further support from its parent company.

The applicant's case was first put on the basis that there should be implied into the contract a term that the respondent would not be entitled to present the letter of credit unless the primary obligation of the applicant to pay

put that the letter of credit, no less than the contract	for the machinery remained valid and subsisting. It was also
itself, was procured by the misleading and deceptive conduct
of which complaint is made in the statement of claim.
Reliance was placed on the decision of the Court of Appeal in
Elian and Rabbath itradina as Elian & Rabbath) v. Matsas and
Matsas (1966) 2 Lloyd's Rep. 495; the decision of Giles J. in
Tenore Ptv Ltd v. Rolevstone Ptv Ltd (unreported, 14 September ,

1990); and Pearson Bridae (NSW) Ptv Limlted v. State Rail Authoritv of New South Wales (unreported, Yeldham J., 28 June

1982).

However, each of these cases must be regarded as exceptional. In Lord Denning M.R. (at 497) said:

"NOW I quite agree with M r Goff that a .bank guarantee is very much like a letter of credit. The Courts will do their utmost to enforce it according to its terms. They will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. . . . But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction. The question is whether this is such a case."

He went on to hold: "I think this is a special case in which an injunction should be granted. " The basis for his so holding was that the party enjoined had acted "in breach of [an] understanding" on the faith of which the bank guarantee had issued. Danckwerts L. J . , who delivered a concurring judgment, roundly described the case (at 498) as one of "a

what might be an irretrievable injustice".	breach of faith", requiring the court to interfere to "prevent	In Pearson Bridae, the decision was based on the presence in the principal contract of a clause which, it was held,	j
"does define and limit the circumstances under which the
I
defendant may convert into money any security which does not	! ,.

consist of money. " Giles J., in Tenore Ptv Ltd, followed the

l-

decision of Yeldham J. in Pearson Bridae. He construed	. I
I '. /

, >

certain clauses of the contract as disentitling the party claiming to enforce a bank undertaking from relying on the rights conferred on it by the undertaking.

The general principle is well established. In Hamzeh Malas & Sons v. British Imex Industries Ltd (1958) 2 QB 127 at 129, Jenkins L.J. said:

"We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute that may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with that established

practice. "

In Edward Owen Enqineerina Ltd v. Barclavs Bank International

- Ltd [l9781 QB 159 at 169 Lord Denning M.R. said:

"It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. ...

To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank. . . . (T)he bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment."

Lord Denning added (at 171):

"All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has

notice. "

He quoted from another decision the following passage:

"It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life- blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration. ... The courts are not concerned with their difficulties to enforce such claims ; these are risks which the merchants take. In this case the

plaintiffs took the risk of the unconditional
wording of the guarantees. The machinery and
commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international commerce could be irreparably

damaged. "

That the courts will not generally permit this principle to be circumvented at the suit of a party to a contract, who will ultimately be liable upon payment under a letter of credit, is made clear by Lord Diplock in gnited Citv Merchants

IInvestments) Ltd v. Roval Bank of Canada [l9831 1 AC 168 at

183. Lord Diplock said:	1..
l .

"If, on then face, the documents presented to the confirming bank by the seller conform with the requirements of the credit as notlfied to him by the confirming bank, that bank is under a contractual obligation to the seller to honour the credit, notwithstanding that the bank has knowledge that the seller at the time of presentation of the conforming documents is alleged by the buyer to have, and in fact has already, committed a breach of his contract with the buyer for the sale of the goods to which the documents appear on their face to relate, that would have entitled the buyer to treat the contract of sale as rescinded and to reject the goods and refuse to pay the seller the purchase price. The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non- payment or reduction or deferment of payment."

1. 1;

In Wood Hall Limited v. The Pineline Authority (1979) 141 CLR 443, the High Court took a view of a performance guarantee	!. :' '.
, .
that is consistent with the English authorities to which I	r ,
have referred. Stephen J. (at 457-458) referred to the	!

1 .

convertibility of performance guarantees to cash as "the	t:
quality which gives them commercial currency". He said:

"Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is 'as good as cash' can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being 'as good as cashr in the eyes of those to whom it is issued is essential to its function. ...

Accordingly the Bank was, in my view, obliged to pay in accordance with the Authority's demands made under the guarantees issued to it by the Bank; it was irrelevant to the existence of this obligation on the part of the Bank whether the giving of any of those demands involved the Authority in breach of contract with the contractor."

; '

The approach evinced in these cases is also consistent with the established rule that no set-off for unliquidated	!	.	8	.
i
damages can be pleaded against an action on a bill of	:. L
l
exchange. The reason for that rule, as Gleeson C. J. said in Riaa v. Commonwealth Bank of Australia (Gleeson C.J., Meagher	i	!
I i 1
J.A. and Hope A.J.A., unreported, 24 October 1989),	!:
1-

"is that courts treat the execution of a bill of exchange as being, for relevant purposes, analogous to a payment of cash or at least as involving an independent contract to be dealt with apart from the other aspects of the specific transaction giving rise to its existence."

This, his Honour added, "is an important principle which, in

its practical operation, supports the commercial efficacy of	r
i l

bills of exchange."

In my opinion, the present case is governed by the

general rule. There is here nothing in the nature of fraud or breach of faith, nor is there any specific provision of the	1
1 I
contract, pursuant to which the letter of credit issued, which	j
i
limits the right of the seller to demand payment in accordance with the terms of the letter of credit. I am unable to see any basis for implying such a term; on the contrary, the reasoning in the authorities to which reference has been made suggests no such implication would ordinarily be permissible. A claim to have rescinded the contract is not sufficient, as is made clear by the reasoning of Lord Diplock in the passage I have cited from his speech in United City Merchants v. Roval Bank of Canada.
That leaves the question, which was also argued, whether relief should be granted in the form of a Mareva injunction. The proper approach to the issue of a Mareva injunction has now been laid down by the High Court in Jackson v. Sterlinq Industries Limited (1987) 162 CLR 612. In that case, Deane J. (with whom Mason C.J. agreed) referred (at 623) to a statement of Lord Denning M.R. that

"a Mareva injunction can be granted .. . if the circumstances are such that there is a danger of [the defendant's] absconding, or a danger of the assets being removed out of the jurisdiction or disposed of within the jurisdiction, or otherwise dealt with so that there is a danger that the

Deane J. added, of the power to grant such an injunction: plaintiff, if he gets judgment, will not be able to get it satisfied". "That general power should, however, now be accepted as an established part of the armoury of a court of law and equity to prevent the abuse or frustration of its process in relation to matters coming within its jurisdiction."

!.

, i~

His Honour (at 625) also referred to the purpose of Mareva	!S
I~
I
relief as being "to prevent a defendant from disposing of his actual assets (including claims and expectancies) so as to frustrate the process of the court by depriving the plaintiff of the fruits of any judgment obtained in the action". Similarly, Wilson and Dawson JJ., in their joint judgment (at 617), said that "the purpose of the Mareva injunction was to prevent the abuse of the process of the court by the frustration of its remedies". They also said (at 617-618):

"Its use must be necessary to prevent the abuse of the process of the court. As Ackner L.J. pointed out in A.J. Bekhor & CO Ltd v. Bilton [l9811 QB 923 at 941-942, the Mareva injunction represents a limited exception to the general rule that a plaintiff must obtain his judgment and then enforce it. He cannot beforehand prevent the defendant from disposing of his assets merely because he fears that there will be nothing against which to enforce his judgment nor can he be given a secured position against other creditors. The remedy is not to be used to circumvent the insolvency laws."

While observing the restricted boundaries which mark out
the proper area for the operation of Mareva injunctions, the

court should be conscious of the warning which was given by

Gleeson C.J. in Patterson v. B.T.R. Enaineerinq (Aust) Ltd	C19891 l8 NSWLR 319 at 324: "To impose a complete or partial
freeze on the assets of a person is no light matter."
I have come to the conclusion that it is not open to me, on the evidence in this case, to issue a Mareva injunction. I cannot find any reason to fear that the respondent will take steps so as to frustrate an order the court may make in the future in this proceeding. There is no reason to think the
respondent will do other than pursue its business in a normal and appropriate manner. Furthermore, the making of the order sought would amount to giving the applicant security (to the extent of the value of the letter of credit) for an alleged unsecured right. During the course of the argument, I referred to the unreported decision of Lockhart J. in Benlist Ptv Limited v. Olivetti (Australia) Ptv Ltd, delivered 20 December 1989. However, I think that decision must be seen as one of fact, dependent upon very unusual circumstances under which it appeared extremely likely the party enjoined would otherwise have become entirely denuded of any asset. Lockhart J. appears to have so regarded the case when, on the same day, he refused leave to appeal, saying:
"If there be any error, it could only be I thlnk one of fact
... .
For these reasons, I refuse the application for interlocutory relief. Subject to anything counsel may put to me in respect of the appropriate order for costs, I think the
respondent's costs of the interlocutory application should be its costs in the action. I certify that this and the preceding ten (10) pages

are a true copy of the Reasons for Judgment herein

of his Honour Mr Justice	. .
Dated: 19 December 1990

Counsel for the Applicant:	Mr A Whitlam Q.C. with
KC J.T. Gleeson
Solicitors for the Applicant:	Messrs Blake Dawson Waldron
Counsel for the Respondent:	Mr H.K. Nicholas Q.C. with
~r P.J. McEwen
Solicitors for the Respondent:	Messrs C.G. Gillis & Co.
Date of hearing:	17 December 1990