Boral Formwork & Scaffolding Pty Ltd v Action Makers Limited [2003] NSWSC 557

New South Wales Supreme Court

CITATION : Boral Formwork & Scaffolding Pty Ltd v Action Makers Limited [2003] NSWSC 557 HEARING DATE(S) : 18 June 2003 JUDGMENT DATE : 18 June 2003 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Injunction restraining issuing bank from paying on unconditional letter of credit

CATCHWORDS : BANKING AND FINANCIAL INSTITUTIONS - unconditional letters of credit - injunction preventing payment when serious question to be tried about whether demand is unconscionable - TRADE AND COMMERCE - TRADE PRACTICES AND RELATED MATTERS - enforcement and remedies - interrelationship of remedy for unconscionable conduct under Trade Practices Act and autonomous contract involved in unconditional letters of credit LEGISLATION CITED : Trade Practices Act 1974 (Cth) CASES CITED : Ferro Corporation (Aust) Pty Ltd v International Pools Australia Pty Ltd (1993) 30 NSWLR 539 Olex Focas Pty Limited v Skoda Export Co Ltd [1998] 3 VR 380 Boral Formwork & Scaffolding Pty Limited - Plaintiff PARTIES : Action Makers Limited (In Administrative Receivership) - First Defendant National Australia Bank Limited - Second Defendant FILE NUMBER(S) : SC 3350/03 COUNSEL : R J Weber SC - Plaintiff SOLICITORS : Carter Newell, Lawyers - Plaintiff

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

CAMPBELL J

WEDNESDAY 18 JUNE 2003

3350/03 BORAL FORMWORK & SCAFFOLDING PTY LIMITED v ACTION MAKERS LIMITED & ANOR JUDGMENT – Ex Tempore 1 HIS HONOUR: This is an application for an ex parte injunction that the National Australia Bank be restrained from paying on an unconditional letter of credit, which was issued to Action Makers Limited, an English company. The letter of credit was designed to provide practical security for the payment by Boral Formwork & Scaffolding Pty Limited ("Boral") of the price of goods which it was to acquire from Action Makers Limited. Those goods were supplied under terms of an agreement made in 2002, which made provision in clause 7, for Boral to provide an irrevocable standby letter of credit to the value of each order which it placed. That clause provided: "Boral shall throughout the term of this agreement provide to Action Makers an irrevocable standby letter of credit in a form acceptable to Action Makers to the value of each order. Payment shall be made by Boral to Action Makers, in Australian Dollars, within 90 days of the date of invoice provided that if the Product is packed for transportation by a third party packing has been completed within seven days of dispatch to them otherwise the invoice will be credited and re invoiced from the date upon which packing is completed." 2 It appears, on the comparatively brief perusal of the agreement which is open to me in the present circumstances, that the letter of credit was designed to secure the payment, within ninety days of invoice, of the purchase price of the goods. 3 A letter of credit was issued by National Australia Bank, Sydney, to Action Makers Limited on 16 July 2002, in a total amount of what appears, on a rather smudgy copy, to be AUD$2,300,000. That letter of credit contains a term: "Payment under this credit will be made upon receipt by us of the above drafts and the following document in duplicate; beneficiarys certificate stating the amount claimed and certifying that such amount represents funds due to be paid to the beneficiary by Boral Formwork and Scaffolding Pty Ltd. Such amount was not paid to the beneficiary when due by Boral Formwork and scaffolding Pty Ltd in accordance with the unpaid invoice No …………. dated ……….. demand for payment of such amount has been made by the beneficiary on Boral Formwork and Scaffolding Pty Ltd and such demand has remained unsatisfied." 4 The Supply Agreement expressly adopts New South Wales law as its governing law. 5 It is undisputed that Boral received goods, the invoice value of which was a little over $808,000, concerning which invoices dated over a period from 5 November 2002 to 30 January 2003 were issued. Thus, the ninety-day period for payment of those invoices has clearly expired by now. 6 Boral alleges that some of the goods were defective upon receipt. It admits that it owes an amount of $634,821.53. It asserts that it has incurred expenditure in repairing the goods, and on other items arising from the goods being defective, in the sum of $174,065.39, and says that it is entitled to set off that amount against the purchase price of the goods. 7 The English company has gone into administrative receivership. The receivers propose to call on the letter of credit. Brisbane solicitors for Boral questioned their ability to do so, given the defects in the goods. The solicitors for the receivers responded by pointing out the uncontroversial proposition that it is an essential characteristic of a letter of credit that it is an autonomous contract and its performance is independent of the underlying contract to which it relates. They said nothing, beyond a general statement that the receivers were acting in good faith, to challenge Boral's statement that the goods were defective. 8 The Brisbane solicitors for Boral replied pointing to the condition of the letter of credit requiring the beneficiary to certify that the amount claimed represented funds due to be paid to the beneficiary by their client. They asserted that given that a dispute has arisen with respect to the sum that is outstanding, they could not see how the beneficiary of the letter of credit could certify that the total amount of $808,886.90 was due under the agreement. 9 The matter has come before me on a very urgent basis, late in the afternoon in a duty judge list. The advice that has been given to Boral is that the letter of credit will be paid on if there is no injunction restraining payment today. 10 Mr Weber, senior counsel for Boral, directs my attention to Olex Focas Pty Limited v Skoda Export Co. Ltd [1998] 3 VR 380, where Batt J was prepared to restrain payment on some unconditional bank guarantees when there was a serious question to be tried concerning whether making demand on those guarantees would amount to unconscionable conduct, contrary to the Trade Practice Act 1974 (Cth). However, his Honour was not prepared to exercise his discretion to grant an injunction with respect to certain performance bonds where no serious question on unconscionable conduct had been established. He said that the reason for not doing this (at 403) was: "… having regard to their nature and to the effect on commerce and especially international commerce that the grant of an injunction or the repeated grants of injunction might have. The balance of convenience favours refusal." 11 His Honour noted, at 404, that the effect of the Trade Practices Act "is to work a substantial inroad into the well-established common law autonomy of letters of credit and performance bonds and other bank guarantees". 12 To somewhat similar effect is the decision of Rolfe J in Ferro Corporation (Aust) Pty Ltd v International Pools Australia Pty Ltd (1993) 30 NSWLR 539 which denied summary judgment on a bill of exchange when there was a cross-claim which sought to vary the bill, under section 87 Trade Practices Act 1974 (Cth), by reason of conduct breaching sections 52, 53 and 53A of that Act. 13 In the present case there is, in my view, a serious question to be tried about whether the making of demand for the full invoice value constitutes unconscionable conduct. 14 It could not be doubted that in the usual case there is a powerful reason for not undermining the institution of the issue of irrevocable letters of credit by the granting of injunctions. The usual rule which must be applied to such documents is that the person who holds such a document should be paid first, and any fight about whether payment ought to have been made should occur later. 15 In the present case, there is a special factor, however. The receivers of Action Makers have said that if payment is received by Action Makers in full, and Boral then brings a claim for damages arising from defects in the goods, Boral would be an unsecured creditor for that claim. The receivers candidly say that Action Makers is likely to go into liquidation, and they understand that there will be a nil dividend to unsecured creditors. Thus, if payment is made on the letter of credit, Boral will suffer a detriment for which any right to claim damages, or right of proof, which it has against Action Makers will not be an adequate remedy. 16 In those circumstances, it seems to me that the balance of convenience favours the grant of an interlocutory injunction, for a very short period. It is an important factor in the decision I am making that the decision is one which needs to be made in circumstances of pressing urgency and when it has not been possible to examine even a fraction of the relevant case law. 17 What I am proposing is that the injunction should be for only as long as is necessary to enable there to be a better informed argument before the court than is possible in the present circumstances. 18 Upon the plaintiff by its counsel giving to the court the usual undertaking as to damages, I make orders in accordance with short minutes of order, which I initial, date today's date and shall place with the papers. These orders shall be entered forthwith. **********