Kavo Dental GmbH v General Equity Building Society
[2014] NZHC 1470
•27 June 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-000121 [2014] NZHC 1470
BETWEEN KAVO DENTAL GMBH
Plaintiff
AND
GENERAL EQUITY BUILDING SOCIETY
Defendant
Hearing: 21 May 2014 Appearances:
N R Hall for Plaintiff
D A Campbell and M L Broad for RespondentJudgment:
27 June 2014
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 27 June 2014 at 3.30 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date..................................
KAVO DENTAL v GENERAL EQUITY BUILDING SOCIETY [2014] NZHC 1470 [27 June 2014]
Introduction
[1] A demand guarantee is an irrevocable promise by a bank to pay a named beneficiary on demand, usually upon presentation of specified documents. Its purpose is to provide the beneficiary with immediate payment upon an agreed event, typically default in an underlying contract between the beneficiary and another party (who will have applied for the demand guarantee).1 Generally, no regard is had to the underlying agreement.
[2] This summary judgment application concerns the construction of a demand guarantee issued by the defendant, General Equity Building Society (GE) for the benefit of the plaintiff, KaVo Dental GMBH (KV). KV is a supplier of dental equipment. In 2011 one of its customers was Dentofair G. Papadimitrou S.A (Dentofair). Following defaults by Dentofair under its supply agreement, KV required a demand guarantee as a condition of ongoing supply. Dentofair requested General Equity Building Society (GE) to issue a demand guarantee in favour of KV, which it did in January 2012.
[3] Dentofair subsequently defaulted again. KV made demand on GE for EUR
619,932.86. GE refused to pay on the ground that one of the prerequisites for payment had not been met, namely confirmation by GE itself that KV had complied with its obligations to Dentofair. KV asserts that, on a proper interpretation of the demand guarantee, it is Dentofair’s confirmation that is required, not GE’s. Alternatively, it contends for an implied term that GE will not withhold its confirmation unreasonably.
[4] GE does not accept KV’s interpretation of the demand guarantee. Nor does it accept that a term of the kind contended for can be implied into it; it maintains that,
in any event, it has not withheld its confirmation unreasonably.
1 In this case Dentofair is the applicant, GE the issuer and KV the beneficiary.
[5] The principles to be applied on summary judgment applications are established and are summarised in Krukzeiner v Hanover Finance.2 The question on such an application is whether the defendant has no defence to the claim.3 The onus is on the plaintiff and the Court must be left without any real doubt or uncertainty. Generally the Court will not embark on resolution of conflicts in evidence or the credibility of witnesses. No issue of credibility arises in this case, though there is
potential conflict between the expert deponents. KV will need to satisfy me that there is no genuine dispute arising from that evidence that could affect the outcome.4
[6] The issue to be determined are:
(a) Properly interpreted, does the demand guarantee require GE’s confirmation as to KV’s compliance with its contractual obligations as a pre-requisite to payment?
(b)If so, is there an implied term requiring GE not to refuse its confirmation unreasonably?
Interpreting the demand guarantee
Interpreting commercial documents
[7] The interpretation of a commercial document is an objective search for the presumed intention of the parties undertaken against the factual and commercial context in which the document was created. The approach is described by the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd:5
Nor does the objective approach require there to be an embargo on going outside the terms of the written instrument when the words in issue appear to have a plain and unambiguous meaning. This is because a meaning that may appear to the court to be plain and unambiguous, devoid of external context, may not ultimately, in context, be what a reasonable person aware of all the relevant circumstances would consider the parties intended their words to mean. An example of that situation is when plain words, read contextually, lead to a result which does not make sense, whether commercially or
2 Krukzeiner v Hanover Finance (2008) 19 PRNZ 162.
3 Pemberton v Chappell [1987] 1 NZLR 1 at 3.
4 MacLean v Stewart (1997) 11 PRNZ 66 (CA).
5 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 at [22], [2010] NZSC 5.
otherwise: a meaning that flouts business commonsense must yield to one that accords with business commonsense. The appropriate contextual meaning, if disputed, will, almost invariably, involve consideration of facts and circumstances not apparent solely from the written contract. While displacement of an apparently plain and unambiguous meaning may well be difficult as a matter of proof, an absolute rule precluding any attempt would not be consistent either with principle or with modern authority.
[8] Also helpful is Lord Hoffman’s summary in Chartbrook Ltd v Persimmon
Homes Ltd:6
What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal arrangement or correction which the Court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant …
[9] In finding the intention of the parties, evidence of previous negotiations are not relevant. In this case there was evidence of draft terms for the demand guarantee agreed on between KV and Dentofair. This is inadmissible to assist in the interpretation of the demand guarantee itself and neither counsel suggested otherwise. When I mention the draft I do so only to complete the narrative.
[10] Nor is evidence of a party’s subjective intentions admissible to assist in the interpretation of a commercial document. I mention this specifically because GE’s evidence contains several statements of this kind.
The commercial context – the nature of a demand guarantee
[11] Pagets Law of Banking7 describes the characteristics of demand guarantees:
The principle which underlies demand guarantees is that each contract is autonomous. In particular, the obligations of the guarantor are not affected by disputes under the underlying contract between the beneficiary and the principal. If the beneficiary makes an honest demand, it matters not whether as between himself and the principal he is entitled to payment. The guarantor must honour the demand, the principal must reimburse the guarantor (or counter-guarantor) and any disputes between the principal and the beneficiary, including any claim by the principal that the drawing was a breach of the contract between them, must be resolved in separate proceedings to which the bank will not be a party.
[12] Demand guarantees are governed by the Uniform Rules for Demand Guarantees (URDG) which apply to any demand guarantee or counter-guarantee that expressly indicates that it is subject to them.8 It is not in dispute that the demand guarantee sued on in this case is subject to the URDG. The terms of the URDG make explicit the independence of the demand guarantee from the underlying contract, which is sometimes referred to as the autonomy principle. Article 5(a) provides:
A guarantee is by its nature independent of the underlying relationship and the application, and the guarantor is in no way concerned with or bound by such relationship. A reference in the guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the guarantee, the undertaking of a guarantee to pay under the guarantee is not subject to claims or defence arising from any relationship other that a relationship between the guarantor and the beneficiary.
[13] Article 6 provides that:
Guarantors deal with documents and not with goods, services or performance to which the documents may relate.
[14] The principle of autonomy was explained by the Privy Council (in the context of a letter of credit) in Westpac Banking Corpn v South Carolina National Bank:9
… It is well settled that a bank which issues a letter of credit is concerned with the form of the documents presented to it, and not with the underlying facts. It forms no part of the bank’s function, when considering whether to pay against the document presented to it, to speculate about the underlying facts.
The factual context
[15] Dentofair had been a customer of KV for some decades. It struck problems at the time of the global financial crisis and defaulted on its payment obligations under the supply agreement that then existed. In late 2011 Dentofair and KV entered into a supplementary agreement to provide ongoing supply. KV required a demand guarantee of EUR 700,000 to secure outstanding receivables under the supplementary agreement. Dentofair agreed to this and, as further assurance,
provided a letter dated 9 December 2011 confirming that KV had complied with its contractual obligations under the supplementary agreement.
[16] In December 2012 KV approved draft terms for the demand guarantee provided by Dentofair. Under the draft terms KV would be entitled to make demand by presenting the guarantee “accompanied by the applicant’s confirmation that beneficiary has complied with all contractual obligations towards Dentofair …”.10
[17] That wording was not acceptable to GE. Without reference to KV Dentofair agreed a different wording with GE. When it was issued the demand guarantee required that any demand under it be “accompanied by the issuer’s confirmation that beneficiary has complied with all obligations towards Dentofair …”.11
[18] The demand guarantee was sent to KV in those terms in January 2012 but the change in wording appears to have gone unnoticed. There is, however, no dispute that the demand guarantee sent by GE in January 2012 is the only agreement.
[19] By June 2012 Dentofair was in default of its payment obligations under the supply agreement and had not responded to several reminders. KV made demand on GE by letter dated 28 June 2012. GE refused to pay on the ground that the “issuers confirmation that the beneficiary has complied with all contractual obligations [was] not presented”. There followed a period of confusion caused by KV’s belief that the demand guarantee was in the terms it had approved.
[20] KV supplied a letter from Dentofair date 7 September 2012 confirming that KV had complied with its obligations.12 Still GE refused to pay. In a somewhat Kafka-esque exchange GE advised that:
… what is required is the issuer (sic) confirmation that the beneficiary has complied with all contractual obligations … What has been provided has not come from the “issuer” so is non-responsive to meet the requirements set out in the instrument.
10 Emphasis added.
11 Emphasis added.
12 It had previously supplied a copy of the 9 December 2011 letter which was justifiably rejected as pre-dating some of the subject transactions.
[21] When the problem finally became clear KV asked GE to provide the confirmation, only to be met with the response that:
We advise that we are not in a position to issue the confirmation as requested.
The provisions of the [demand guarantee] are clear. The discrepancy which has been identified in the discrepancy notice is a precondition of the [demand guarantee]. The missing document is a document which must be provided at the time of making a demand for payment.
[22] What GE did not tell KV was that on 21 June 2012, even before KV had made demand under the demand guarantee, Dentofair had emailed GE urging GE not to pay on any demand by KV because of alleged breaches by KV of its contractual obligations. That piece of information did not surface until GE’s Legal and Compliance Officer, Mr Scott, filed an affidavit in opposition to the summary judgment application, annexing a copy of the email.
Was KV required to present GE’s confirmation as a pre-requisite for payment?
[23] Ms Hall, for KV, submitted that, as it currently stands, the terms of the demand guarantee flout business commonsense and that “issuer’s confirmation” should be read as “applicant’s confirmation”. Her argument was that a demand guarantee is a form of protection allowing the beneficiary to receive a pre-agreed amount of compensation in the event the beneficiary does not perform its obligations. Under the URDG demand guarantees are irrevocable and independent of the underlying commercial relationship and it would make no commercial sense if payment under the demand guarantee was conditional upon the guarantor itself confirming compliance by the beneficiary of its obligations. Ms Hall suggested that if the wording stood as it was KV would be placed in the situation of having to keep supplying product when it did not know whether the demand guarantee would be honoured until after the product had been supplied and demand made.
[24] KV provided an affidavit from an experienced banker in support of this argument. Mr Atkins has 28 years’ experience in international banking transactions and practice, including international demand guarantees. He has expressed the view that:
… The use of the wording “issuer’s confirmation” in the Guarantee does not make commercial sense. In my opinion, the word “issuer” should be read as “applicant”. I say that because in the context of a demand guarantee of this nature it is the “applicant’s confirmation” that is required to trigger the payment under the guarantee. This is because it is the applicant rather than the guarantor who is in a position to confirm whether obligations under the underlying contract have been fulfilled. Further, as noted above, demand guarantees are by their nature irrevocable. If it were open to a guarantor to withhold confirmation of compliance with the underlying contract, a guarantee would be revocable at the will of the guarantor.
[25] Mr Atkin’s opinion is, however, countered by an experienced international banker who has provided an affidavit in support of GE’s position. Mr Khan has a similar length of experience in international trade finance and is familiar with demand guarantees. In response to Mr Atkins’ view Mr Khan deposes that:
Whether [the wording makes commercial sense] is, in a strict sense, wholly irrelevant. Demand guarantees are read according to their wording and not whether they are favourable or unfavourable to a beneficiary. In any event, I disagree. In my role as head of trade finance at VTB Bank I was at times asked to confirm letters of credit or provide counter-guarantees to instruments where there was a document under the control of the issuing bank. These are known as “soft” instruments as the issuer maintains control over whether they are honoured or not. The use of such instruments is not unknown in Europe and internationally. It is clear that this was the intention of [GE].
The guarantee issued by [GE] was worded in such a manner that [GE] could have full control over the guarantee in case it was called upon.
Moreover, given that as the use of “soft” instruments is not unknown, the use of the word “of the wording ‘issuer’” could never be regarded as a mistake. For that reason, I also disagree with Mr Atkins’ opinion that the word “issuer” should read “applicant”. An experienced trade finance banker would be familiar with and alert to a “soft” instrument (and the terms of the instrument).
[26] Mr Khan’s view that whether the document makes commercial sense is irrelevant is not correct in terms of the New Zealand approach to contractual interpretation. I note, too, that Mr Khan did not actually refer to ever having seen a demand guarantee in the terms that exist in this case. This is a point that Mr Atkins identified in his response Mr Khan’s evidence about “soft” instruments. Mr Atkins acknowledged that such instruments do exist but considered that the two examples given by Mr Khan (letters of credit and counter-guarantees) are very different in type to demand guarantees. After explaining the difference between them Mr Atkins added that:
I agree with Mr Khan that the issuer retains control under both of those examples. However, the position is different in the case of a demand guarantee. As Mr Khan confirms a demand guarantee is by its nature independent of the underlying relationship. In my 28 years’ experience in the international banking field I have never seen a “soft” demand guarantee (i.e. one where the sole discretion rests with the issuing bank to confirm whether or not there has been compliance with the underlying contract). Banks are not in the business of going behind the underlying commercial transaction to ascertain whether performance has occurred. A bank’s role is to finance and facilitate those transactions.
[27] Mr Campbell, for GE, however, challenges the view that, as a matter of law, there is a significant difference between letters of credit and demand guarantee.
[28] The wording issued by GE certainly raises concerns. On its face it runs counter to the principle of autonomy that underlies the purpose of demand guarantees. There is no evidence that this kind of wording is known to be used in demand guarantees. There are also obvious issues over how it would actually operate. The terms of the demand guarantee do not include any process for KV to obtain GE’s confirmation prior to making demand (in order that its demand would be accompanied by GE’s confirmation). GE cannot have expected that it would have the information needed to confirm as to KV’s compliance with its contractual obligations in the event of demand being made but there is no process for GE to obtain information that would allow it to ascertain whether KV had complied with its contractual obligations. There is no obligation on GE to even make the necessary enquiries.
[29] In these circumstances there is a question as to whether the wording does make commercial sense as it stands. However, the conflicting expert evidence as to the commercial use of the subject wording means that I cannot be completely confident about reaching that conclusion. Nor can I be sure that KV would be any better off on the proposed interpretation because, even when KV made demand in the mistaken belief that it was the applicant’s confirmation that was needed, it did not provide a document that would have satisfied that requirement. Thirdly, given Dentofair’s email to GE of 21 June 2012, there is no certainty that the applicant’s confirmation could have been obtained, even if the wording had required that.
[30] For these reasons I do not accept that Ms Hall’s first argument can justify
summary judgment.
Implied term
[31] Ms Hall’s second argument was that a term should be implied into the demand guarantee to the effect that GE’s confirmation could not be unreasonably withheld.
[32] The well known requirements for implying a term into a contract are that the term to be implied must be reasonable, it must be necessary to give business efficacy to the contract, it must be so obvious that “it goes without saying”, it must be capable of clear expression and it must not contradict any express term of the
contract.13 Ms Hall submitted that the term she proposed satisfied these
requirements.
[33] Mr Campbell did not accept that it was appropriate to imply a term into the guarantee. He relied on the decision in Cauxwell Ltd v Lloyds Bank plc in which Bank Melli provided a demand guarantee to a meat supplier against a counter- guarantee to Lloyds.14 The latter provided that Lloyds would be liable on receipt by Bank Melli of confirmation from Lloyds that the underlying contract had been signed and the associated letter of credit was satisfactory. On the question whether the counter-guarantee was subject to an implied term that Lloyds would take reasonable steps to inquire into the position regarding the contract Cresswell J
declined to imply any such term on the basis that there was a need for certainty in commercial transactions:15
I do not consider that international bankers would expect Lloyds to take reasonable steps to fulfil the condition precedent and/or to take reasonable steps to ascertain the position with regard to the contract and the letter of credit. International bankers would expect Lloyds to act upon instructions from its principals before confirming that the underlying contract had been signed and that the terms and conditions of any subsequent letter of credit confirmed by a UK clearing bank in respect of the mentioned contract were acceptable to Lloyds’ principals …
13 Devonport Borough Council v Robbins [1979] 1 NZLR 1 at 29 citing BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363 at 376; 52 ALJR 20 at 26.
14 Cauxwell Ltd v Lloyds Bank Ltd (The Times Law Reports, 26 December 1995).
15 Cauxwell Ltd v Lloyds Bank Ltd, above n 14
The Courts will rarely imply terms into letters of credit or first demand guarantees. There is a need for certainty in commercial transactions and this is, as I have emphasised, particularly important in the case of obligations assumed by banks under letters of credit and first demand bonds and associated counter-undertakings.
[34] Those observations are of some relevance to this case. However, the term Ms Hall seeks to imply is much less extensive and would not require positive steps to be taken.
[35] Mr Campbell also relied on Oliver v Dubai Bank Kenya Ltd, which concerned a standby letter of credit that required a telex from the issuing bank confirming the beneficiaries’ fulfilment of their obligations.16 One of the beneficiaries’ arguments was that there was an implied obligation on the bank to issue the telex in some circumstances. Notwithstanding the concession by the bank’s counsel that this was so, Andrew Smith J expressed reservations that the concession
was properly made:
I am not convinced that Mr Blackwood is right to concede that the bank is under any obligation as onerous as any of [the suggested formulations] or that it was obliged to do more than act in good faith … I need say no more about this because, however an obligation is formulated, I am unable to accept that the bank is in breach of it. I am also unable to accept that the bank is obliged to look behind the information that it was given by Colonial’s solicitors and also it has not been shown that had it done more, it would have determined that it should issue the telex.
[36] On an unsuccessful application for leave to appeal that judgment, the Court of Appeal considered that whether the bank was simply liable for a breach of bad faith or for some other obligation did not matter because there could have been no assertion of a breach in any event.17 So, although this case has some helpful siimilarities with the present cae the fact that there was no argument on the nature of the bank’s obligation means it is of limited assistance.
[37] However, without more extensive evidence about the commercial practices surrounding demand guarantees I cannot resolve the question of whether the proposed term is required to give business efficacy to the guarantee. Nor, without
evidence as to commercial practice, could I embark on a determination as to whether,
16 Oliver v Dubai Bank Kenya Ltd [2007] EWHC 2165 (Comm), [2007] All ER (D) 135 Sep).
17 Oliver v Dubai Bank Kenya Ltd [2007] EWCA Civ 1496.
if such a term were required to be implied, GE’s conduct was reasonable. In this regard, I particularly note that GE was confronted with a statement by KV that it had complied with its contractual obligations and conflicting statements of Dentofair on that issue. Mr Campbell submitted that in these circumstances GE’s refusal to provide confirmation was not unreasonable. That is a matter that I cannot determine on the evidence before me.
Result
[38] KV’s application for summary judgment is refused.
P Courtney J
0