NSW Court departs from general rule on drawing down of bank guarantee

Courts have traditionally treated an interlocutory application to restrain the calling upon or use of money secured by a bank guarantee or other performance bond as being in a special category.

The authorities were summarised in Cerasola TLS AG v Thiess Pty Ltd & John Holland [2011] QSC 115 as follows:

“On the basis of those authorities, it is sufficient for present purposes to note that the general rule is that a court will not enjoin the issuer of a performance guarantee from performing its unconditional obligation to make payment. A number of exceptions to that general rule have been identified. They are identified in Clough Engineering at [77] as:

(1)       An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting fraudulently.

(2)       An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting unconscionably in contravention of the Trade Practice Act 1974 (Cth).

(3)       While the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay if the party in whose favour the guarantee has been given has made a contractual promise not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.”

See: also Otter Group Pty Ltd v Wylaars [2013] VSC 98 at [16] where the summary was referred to with approval.

This general rule is the product of appellate authorities. See: Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1983] 3 VR 812; Bachmann Pty Ltd v BHP Power New Zealand Ltd (1999] 1 VR 420 and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd & Ors (2000) 249 ALR 458.

The rationale for the general rule is that by providing for security to be given, the parties implicitly agree that the party giving the security deposit shall be out of pocket pending resolution of the underlying dispute.

In Clough, the Full Federal Court said at [83] that “clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently.”

The Supreme Court of New South Wales in Universal Publishers Pty Ltd v Australian Executor Trustees [2013] NSWSC 2012 appears to have departed from the general rule in circumstances where there were no clear words preventing the landlord calling on the bank guarantee and there was no issue that the landlord was acting in good faith.

In Universal the tenant obtained an ex parte injunction restraining the landlord from drawing on the bank guarantee. The proceeding then concerned whether the injunction should be discharged.

Clause 19.1 of the lease required the tenant to provide an “unconditional” bank guarantee to “secure the Lessee’s obligations under this Lease”.  Clause 19.4 provided that:

“19.4. In the event that the lessee:

19.4.1.1 defaults in the payment of Rent or in the performance or compliance of any other obligations under this Lease; or

19.4.1.2 breaches any other obligation, term, condition or covenant under this Lease,

the Lessor is hereby authorised to demand that the guaranteeing bank pay to the Lessor such amount that (in the reasonable opinion of the Lessor) may be due to the Lessor as a result of such default, breach or non-observance by the Lessee or termination of the Lease pursuant to it.

The lease did not contain any negative stipulations on the landlord’s right to call on the guarantee.  The tenant disputed that there was any breach. The landlord submitted that the authorities referred to above made it clear that the existence of a dispute as to whether there was an actual breach was not an answer to an invocation of the guarantee. See: para [21].

The Court determined that there had to be an actual breach before the landlord could form an opinion as to the amount that might be due. See: para [25]. As to whether there was an actual breach did not depend on a judicial determination but on whether the tenant could establish that there was a serious question to be tried about whether there was a breach. See: paras [27] and  [71].

The Court held that clause 19.1 did not provide for an allocation of the risk as to who should be out of pocket while a dispute as to the lessee’s asserted breach was determined. See: para [60].

The lesson from Universal is that the parties to a lease should ensure that the provisions concerning the drawing down of the guarantee specifically define the circumstances when the landlord can draw down on the guarantee. In particular, solicitors acting for landlords should, rather than relying on the general rule referred to above,  ensure that the lease refers to the landlord’s entitlement to draw down on a guarantee where the landlord believes in good faith that the tenant has breached the lease.

From 31 July 2014, liability limited by a scheme approved under Professional Standards Legislation

Most tenants who provide services engaged in retail provision of services

Please note for members of the public or practitioners in the legal profession where English is your second language a translation key in all languages of the world is available on this blog to assist you. The plain English blog without translation facilities is located at http://roberthaypropertybarrister.wordpress.com

Many readers will be familiar with the "ultimate consumer" test that is commonly used to determine whether premises are "retail premises" within the meaning of s.4(1) of the Retail Leases Act 2003. If the premises are "retail premises" the Act applies; if premises are not "retail premises" the Act does not apply. Premises are "retail premises" if "under the terms of the lease relating to the premises" they "are used, or are to be used, wholly or predominantly for.....(a) the sale or hire of goods by retail or the retail provision of services". See: s.4(1). Nathan J in Wellington v Norwich Union Life Insurance Society Limited [1991] VR 333 held that patent attorneys (and other professional businesses such as solicitors, architects and medical specialists) conducted a business providing retail services.  His Honour held that the  "essential feature of retailing" was the provision of an item or service "to the ultimate consumer for fee or reward".  The end user might be a member of the public but was not necessarily so. The problem has been to identify the "ultimate consumer". Nathan J did not regard it as significant that a patent attorney's advice might pass through the hands of an intermediary on the way to the ultimate consumer. But what would the position be if the patent attorney's advice was used as "input" into a solicitor's advice to the solicitor's client? Would the solicitor be the "ultimate consumer"?

It will be much easier to answer these questions following the recent decision of Fitzroy Dental Pty Ltd v Metropolitan Management Pty Ltd [2013] VSC 344. The effect of the decision is that most tenants whose business provide any sort of service will be engaged in the "retail provision of services" and the Act will apply.

In Fitzroy Dental the landlord leased premises premises comprising a cafe/restaurant and a conference centre and facilities to a tenant who in turn received bookings from conference or function providers to conduct functions and conferences. The cafe/restaurant was used only for the provision of food and drink to the attendees at the functions and conferences. The landlord commenced a proceeding against the tenant in the Supreme Court. The tenant contended that VCAT had exclusive jurisdiction to hear and determine the  dispute because it was "retail tenancy dispute" within the meaning of s.81(1) of the Act. See: s.89(4). The permitted use under the lease was "Conference Centre, Cafe/Restaurant Area and associated office and storage area".

Justice Croft held that the dispute between the landlord and the tenant was a "retail tenancy dispute" that had to be determined by VCAT. The conference facilities were open to the public in the sense that a member of the public (ie the conference provider) could approach the tenant to book the conference facilities. After reviewing the authorities His Honour held that conference provider was the "ultimate consumer" of services provided to him by the tenant. Those services were in turn an "input" into the different services provided to the attendees at functions and conferences.  Thus, there were two transactions involving the retail provision of services. The transaction between the tenant and the conference organising entity was for monetary consideration while the second transaction with the attendees did not always involve a fee or reward for the provision of services. It did not matter that the bodies organising the conferences and hiring the premises from the tenant were governmental authorities or public bodies such as a university, the Metropolitan Fire Brigade, the Police Federation or an industry association because such bodies had the capacity to enter into ordinary commercial agreements.

The case contains a helpful analysis of the relevant caselaw.

Author: Robert Hays Barrister subject to copyright under DMCA.

My clerk can be contacted via this link http://www.greenslist.com.au/ if you wish to retain my services for any legal matter which is within the gamut of my legal experience. Green

Be wary of unrepresented parties at mediations

Please note for members of the public or practitioners in the legal profession where English is your second language a translation key in all languages of the world is available on this blog to assist you. The plain English blog without translation facilities is located at http://roberthaypropertybarrister.wordpress.com/

Mediations at which parties are unrepresented or not represented by lawyers are fraught with risk. Even with legal representation mediations are stressful, particularly where the mediation is only fixed for a half day and there is pressure to avoid long winded discussions about the facts. Experienced mediators invariably offer unrepresented parties an adjournment so that legal advice can be obtained. VCAT recently decided case in which landlords sought to set aside terms of settlement agreed at a half day mediation conducted by the Small Business Commissioner. In Wong v Hook Line and Sinker Fish and Chips Pty Ltd [2013] VCAT 263 the landlords sought to have the terms of settlement set aside on the grounds of undue influence or duress by the mediator and a barrister.  At the mediation the parties had been in dispute about whether the tenant was being required to pay “key money” under a lease contrary to s.23 of the Retail Leases Act 2003. The terms of settlement required the parties to appoint a valuer to determine the market rent. The landlords were not represented by a lawyer at the mediation but were represented by an advocate who held himself out as an expert in retail tenancy matters and who prepared written submissions. The mediator was highly experienced and was accompanied by a trainee mediator. The tenant was represented by an experienced barrister. The mediator offered the landlords the opportunity to adjourn the mediation to enable them to obtain legal advice but the offer was declined. The landlords subsequently refused to appoint the valuer to determine the market rent and commenced a proceeding alleging that the terms of settlement had been obtained by undue influence or duress. At the hearing the mediator, the trainee mediator, the tenant's barrister at the mediation, representatives of the tenant, the landlords and the landlords' advocate all gave evidence. The Tribunal rejected all of the the landlords’ claims. An application for leave to appeal has been filed.

My clerk can be contacted via this link http://www.greenslist.com.au/ if you wish to retain my services for any legal matter which is within the gamut of my legal experience. 

Author: Robert Hays Barrister subject to copyright under DMCA.