New South Wales Supreme Court CITATION : Manzel Equipment Pty Ltd v APE Pte Ltd [2000] NSWSC 1172 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4702/00 HEARING DATE(S) : 24 November 2000 JUDGMENT DATE : 27 November 2000 Manzel Equipment Pty Limited (P) PARTIES : APE Pte Ltd (D1) National Australia Bank Limited (D2) JUDGMENT OF : Hamilton J J M Atkin (P) COUNSEL : No appearance (D1) Ms T Walsh, Solicitor (D2) Smith Monti & Costa (P) SOLICITORS : No appearance (D1) Bernadette Baynie, Solicitor (D2) CATCHWORDS : BANKING AND FINANCIAL INSTITUTIONS [104] - Instruments - Letters of credit - Irrevocable letter of credit - Right to refuse payment - Bank with notice of fraud - EQUITY [338] - Equitable remedies - Injunctions - Interlocutory injunctions - Balance of convenience - Delay by applicant. Austal Ships Pty Ltd v National Australia Bank Ltd Supreme Court of Western Australia Templeman J 13 February 1997 unreported Carlton & United Breweries Ltd v Bond Brewing Company (NSW) Ltd (1987) 76 ALR 633 Commonwealth Bank of Australia v White [1999] VSC 400 CASES CITED : Inflatable Toy Company Pty Ltd v State Bank of NSW (1994) 34 NSWLR 243 Pedna Pty Ltd v Sitep Society per Azioni NSWSC Santow J 8 January 1997 unreported United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] AC 168 Meagher, Gummow and Lehane, Equity: Doctrines and Remedies (3rd ed, 1992) [2174] DECISION : Interlocutory injunction to restrain payment refused but injunction to freeze proceeds granted. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J MONDAY, 27 NOVEMBER 2000 4702/00 MANZEL EQUIPMENT PTY LIMITED v APE PTE LTD & ANOR JUDGMENT HIS HONOUR: 1 This is an application to restrain payment of moneys under a banker's letter of credit which was issued in respect of the sale from Singapore into Australia of a crushing machine. The defendant is a Singapore proprietary company and, so far as the evidence goes, has no presence in Australia. The crushing machine was described in the invoice, the bill of lading and, indeed, in the letter of credit itself, as a used Cedarapids 45 Rollercone 2. The machine was delivered some time ago, although the letter of credit has not yet been drawn on. It would seem that today, 27 November 2000, is the last day on which it can be drawn against. 2 These proceedings were commenced only last week but, as long ago as August 2000, the plaintiff had discovered that the machine was not a Rollercone 2, but a Cedarapids Classic, a machine which is almost identical externally to the Rollercone 2 variety, but is significantly different in its mechanical operation and has a lower production output. The suggestion is that the difference in value between a used Rollercone 2 and a used Classic is of the order of $40,000 or $50,000. The plaintiff has put the machine into use, but its throughput, as expected, is lower than would have been that of a Rollercone 2. Despite its discovery of the difference in August, the plaintiff did not commence these proceedings to restrain drawing under the letter of credit until last week. 3 Pursuant to an earlier direction, the defendant was given notice of the proceedings in Singapore by facsimile transmission. Furthermore, on Friday, 24 November, there were delivered at its office in Singapore (which is stated, although not yet proved, to be its registered office) a summons, a notice of proceedings and a temporary ex parte order which the Court made last week. That order expires today and its extension is sought. After the delivery of the documents in Singapore on Friday, the principal of the plaintiff tried again, as he had previously, to contact the principal of the defendant by telephone in Singapore. I shall not set out in detail the results of the calls, but they suggest a deliberate avoiding, at the defendant's end, of meaningful telephone communication between the principals of the plaintiff and the defendant. 4 Mr Atkin, of counsel for the plaintiff, has usefully referred me to recent reported authorities on the restraint of drawings under bankers' letters of credit. The most recent of these (which usefully summarises the authorities up to that point, both in this Court and generally) is the decision in this Court of Young J in Inflatable Toy Company Pty Ltd v State Bank of NSW (1994) 34 NSWLR 243. Subsequent unreported decisions include the decision in this Court of Santow J in Pedna Pty Ltd v Sitep Society per Azioni 8 January 1997; a decision of Templeman J in the Supreme Court of Western Australia in Austal Ships Pty Ltd v National Australia Bank Ltd 13 February 1997; and a decision of Byrne J in the Supreme Court of Victoria Commonwealth Bank of Australia v White [1999] VSC 400. Young J, in the Inflatable Toy Company case supra (at 251) cited the dictum of Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] AC 168 at 183, where his Lordship said: "… there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue." 5 The Courts have generally adopted a "hands off" policy towards bankers' letters of credit, particularly in international transactions. As Santow J said in Pedna supra: "It is important that courts be particularly sensitive in cases such as this to the obvious risks for international commerce if doubt is cast on the commercial efficacy of bankers' undertakings and like obligations. These depend on the bank's point of view on the bank being able to make payment without regard to the contractual situation that may exist underlying the transaction which gave rise to the undertaking or letter of credit and to which the bank is not a party." However, Santow J in that case adopted a course of action which, it seems to me, it may be appropriate to follow in the present case. In that case, his Honour did not think it appropriate to restrain a drawing under the letter of credit, but there, where the payment made under the letter of credit would be made from the Westpac Bank into an account in the NAB, his Honour granted Mareva relief in the form of an order temporarily freezing that account to prevent the removal of the funds from the country. 6 Whilst the first defendant has not appeared in this case, the second defendant, the National Australia Bank, has appeared by Miss T Walsh, solicitor. It has indicated that it does not consent to, nor oppose, the making of any order against it by the Court. Miss Walsh has had instructions to indicate to the Court that the Bank raises no objection to the Court making an order, if the Court does not restrain the payment under the letter of credit, and the Bank chooses to pay under it, that the Bank pay the money into a manager's suspense account which may be frozen by order of the Court for so long as the Court deems appropriate. 7 In this case, in my view, the plaintiff does have an arguable case that a drawing would fall within the fraud exception enunciated by Lord Diplock and adopted in the Australian courts. One way in which it is suggested that the first defendant's conduct could be characterised as fraudulent is that it would be fraudulent for the first defendant to present and make a drawing under the letter of credit by use of the existing documentation, where it has not only been discovered, but made plain to the defendant, that the machine shipped is significantly different from the machine referred to in the invoice, the bill of lading and the letter of credit. It may be, although this would have to be the subject of further evidence as to the circumstances, that it was fraudulent to select and ship a machine inferior to that described in the documents under which it was shipped. However, in my view, there is a fatal objection to the granting of an injunction to restrain a drawing under the letter of credit. 8 As I have already noted, the plaintiff was aware of the difference between the machine delivered and the machine promised as early as August this year. There could be no question of a total failure of consideration (even if this be a ground for restraining a drawing under a letter of credit: see Inflatable Toys), since the machine has been taken and used. The problem now is that the plaintiff, which discovered the discrepancy in August, has not applied for an injunction restraining a drawing under the letter of credit until a few days before the last day on which the letter of credit must be honoured. I have not gone in detail into the evidence of, and practices relating to, the payment of letters of credit, but there must be, on the material available to me, at least a substantial fear that today is the last day on which the bank can be obliged to meet a drawing against the letter of credit. 9 The effect of delay in relation to interlocutory injunction applications has been often discussed: see Meagher, Gummow and Lehane, Equity: Doctrines and Remedies (3rd ed, 1992) [2174]. I refer, in particular to Carlton & United Breweries Ltd v Bond Brewing Company (NSW) Ltd (1987) 76 ALR 633, where the Full Court of the Federal Court upheld the refusal of an interlocutory injunction on the ground alone of the delay in bringing the application. 10 However, I am minded, in the circumstances of this case, to grant relief of a Mareva nature by use of a mechanism similar to that employed by Santow J in the Pedna case. The evidence there was stronger, in that it suggested that, if the money were removed from the country, the plaintiff might go into liquidation and thereupon be in default under the very contract under which the letter of credit or bank guarantee had been provided. But, in my view, there is a substantial case here for the grant of Mareva relief. As I have said, on the evidence, there is no presence of the defendant in Australia and the defendant's principal in Singapore has avoided even speaking to the principals of the plaintiff company by telephone over a protracted period. These facts combined, it seems to me, raise an apprehension which would justify relief on Mareva grounds. 11 Since the Bank does not object to such an order, I propose to order that, if the second defendant makes a payment to the plaintiff under the relevant letter of credit, then that payment shall be made by paying the moneys into a manager's suspense account in the name of the defendant. I shall order that no moneys be paid out of that suspense account up to and including 1 December 2000. 12 This order I shall make for a limited time on an ex parte basis because, although efforts have been made to communicate the currency of these proceedings and the application today to the defendant, there has not technically been service of the process on it. The documents were handed to a female person in the defendant's office in Singapore, who stated that she was authorised to receive "these documents", but there is no evidence that the process server, at the time, stated the nature of the documents to her and there is not, at the moment, evidence that that office is the registered office of the company in Singapore. 13 I shall not be prepared to keep the whole of the moneys frozen in the manager's suspense account for an extended period, if they be paid into it. The plaintiff has offered, in the course of the hearing, that, if drawing under the letter of credit were prohibited, it would forthwith pay $120,000 into Court, since it would seem that this sum would constitute an excess over what is needed to meet its claim for breach of contract against the defendant and reasonable costs of the proceedings. If the defendant appears on the next occasion, then the matter will take its course from there. If it does not, without in any way purporting to bind the exercise of my discretion at that time in the light of the facts then proved, I shall very likely be minded to permit the payment of $120,000, or whatever sum then appears to be appropriate, to the defendant, but to bind the rest of the sum to abide the result of proceedings for breach of contract. 14 The costs of the proceedings to date will be reserved. The proceedings will be stood over to 2 pm on 30 November 2000 before me, at which time the plaintiff will have leave to move for further relief. …oOo… Last Modified: 12/18/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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