ALYK (H.K.) Limited v Caprock Commodities Trading Pty Limited and Anor

Supreme Court of NSW|2012-10-05|Before: Slattery J

Judgment 1The point in issue in these proceedings is whether, in the events that have happened, a buyer of commodities may restrain the seller from making demand upon a standby letter of credit issued for the seller's benefit under their mutual commodity sale contract. The buyer contends it can restrain the seller's demand. The seller resists that contention. In the result the Court concludes in these reasons that the buyer cannot restrain the seller making the demand.

Introduction 2The plaintiff, ALYK (HK) Limited ("ALYK"), is a subsidiary of the Yankuang Group, a state owned enterprise of the People's Republic of China ("the PRC"). ALYK's business is manufacturing and trading. ALYK is the purchaser from the first defendant, Caprock Commodities Trading Pty Ltd ("Caprock"), under a contract for the sale of iron ore fines made on 18 August 2011 ("the Contract"), which contract was relevantly amended on 3 November 2011 and again on 21 July 2012. Caprock is a commodities trader and contracted as the trustee of a trust known as "the SAFE Fund". 3The second defendant, the China Construction Bank Corporation ("the Bank"), issued a letter of credit ("LC") and then a standby letter of credit ("standby LC") for the benefit of Caprock under the Contract as amended. The operation of the second of these two financial instruments, the standby LC, which the Bank issued on 11 November 2011, is the subject of the present contest between ALYK and Caprock. Caprock made demand on the standby LC to the Bank on 6 September 2012. Caprock has not made any deliveries under the Contract. Caprock's demand on the standby LC is not for the price of delivered iron ore fines, but for ALYK's alleged breaches of the Contract in other respects. 4On 7 September 2012 ALYK commenced these proceedings by Summons in the Equity duty list, seeking interlocutory relief enjoining the Bank from paying monies to Caprock under the standby LC. ALYK sought, in the alternative, the payment into Court of any monies paid on the standby LC, pending the final resolution of this dispute by arbitration. But, in the course of the hearing for interlocutory relief on 5 October 2012, and in response to the Court's inquiry whether the parties wanted a final hearing, they indicated their willingness to have the issues about the Bank's payment of monies under the standby LC determined on a final rather than an interlocutory basis. 5A single final hearing, rather than an interlocutory hearing followed by a final hearing, is more consistent with the Court providing a "just, quick and cheap" resolution of the real issues in these proceedings: Civil Procedure Act 2005, s 56. This is the better course where, as is the case here, the only matters in issue are questions, involving the construction of the parties' contract. With assistance of the legal representation and the consent of all parties the Court was able to turn the proceedings on 5 October 2012 into a final hearing, thereby achieving what judges have often encouraged in similar letter of credit cases: Barclay Mowlan Construction Ltd v Simon Engineering (Australia) Pty Limited (1991) 23 NSWLR 451, at 456. As a result it became unnecessary to consider the questions of interlocutory relief that were debated in submissions. 6It is important to distinguish what these proceedings decide on a final basis, from what they do not decide. The principle relief ALYK seeks in its Summons is an order that Caprock "not make any demand or further demand upon [the Bank] pursuant to [the standby LC] dated 11 November 2011 or otherwise": Summons, claim 1. The Summons seeks other supplementary relief: that Caprock notify the Bank that its demand on the standby LC is withdrawn (claim 2); and, an order that the Bank not make any payment to Caprock pursuant to the standby LC (claim 3). These reasons construe the Contract as amended only for the purpose of determining whether this relief should be granted on a final basis. The Bank appeared through counsel to see that its interest was protected but indicated that it did not otherwise seek to intervene and would co-operate with whichever course the Court ordered: to restrain or allow the call on the standby LC. 7But there are other issues between the parties which are yet to be determined by arbitration. Those other underlying contractual disputes between the parties are necessarily elaborated to a degree in these reasons. But they are not decided by this judgment. They only appear in these reasons to give background to the present dispute. Whether or not ALYK or Caprock is in breach of the Contract will be determined by arbitration. These reasons do not determine whether the Contract as amended has been breached. They only determine whether in the circumstances which include mutual allegations of breach of the Contract as amended, Caprock may be enjoined under the Contract from calling on the standby LC with the Bank. 8The final hearing was completed within a month of the commencement of these proceedings was a result of the efficient focus on the real questions for trial by all legal representatives, both solicitors and counsel. Mr J Hogan-Doran appeared as counsel for ALYK, Mr A Stewart for Caprock and Ms J Steele for the Bank. 9The parties' relevant commercial dealings all took place in the 12 months between August 2011 and August 2012. More detailed findings about some of these dealings are necessary to determine the point in issue.

The Contract 10The Contract required the delivery of the iron ore fines in shipments over a three year term. The Contract required the iron ore fines to be shipped from a main port in Chile or Mexico, as specified by the seller, Caprock, with delivery to a main port in China, as specified by the buyer, ALYK. 11The Contract provided for the sale and shipment of a substantial quantity of iron ore fines over this term. The proposed total traded quantity of the iron ore fines was approximated within the Contract, Schedule at 6.07 million Metric Tonnes ("Mt"), plus or minus 10 per cent, and was to be delivered in 160,000 Mt shipments to be made at approximately monthly intervals over the first 15 months of the term up until the end of 2012. The total Contract value of these shipments was also approximated at US$720 million (at an assumed rate of US$120 per Mt and further assuming 160,000 Mt shipments over the three years). The iron ore fines shipments were to be delivered on a free on board ("FOB") basis, plus an estimated US$48m for costs, insurance and freight ("CIF"). 12Issues arose between the parties in the performance of the Contract. This is not entirely surprising. There was, to use the parties' own words, a "dramatic" fall in the market price of iron ore fines imported into the PRC over the two months - September to November 2011 just after the Contract was signed. To attempt to resolve the issues that arose the parties twice agreed to amend the Contract: first, within three months by a Memorandum dated 3 November 2011; and later, by an Addendum dated 21 July 2012. There was another contractual adjustment in January 2012 but this was of minor significance. The terms of the Contract, of the Memorandum and of the Addendum all bear upon the matters in issue. But analysis starts with the Contract.

The Contract Shipments 13The Contract as made on 18 August 2011 provided that before the end of calendar 2011 three shipments would take place: two smaller trial shipments and then one "standard" size shipment of 160,000 Mt. Monthly shipments of what would be a standard 160,000 Mt quantity would then follow throughout 2012. The Contract Schedule 1(8) provided a delivery program with pricing for the agreed quantities to be shipped over these first 15 months. The Contract anticipated that quantities to be shipped and the applicable prices for 2013 and 2014 would be agreed between the parties by September 2012, once their commercial relationship was well under way: Contract, clause 2. The Schedule's program anticipates that the first three shipments ("the 2011 shipments") were to be of 50,000 Mt, 100,000 Mt and 160,000 Mt respectively. Only the last of these 2011 shipments of 160,000 MTwould be the "standard" size of all subsequent contract shipments. 14The Contract fixed an initial iron ore fines price of US$155 per Dry MTat an Fe content of 64.5% and on a CIF basis, for the three 2011 shipments: Contract, clause 3. Thus, the two trial shipments totalling 150,000Mt (50,000 Mt and 100,000 MT) had a contract value of US$7.75 million and US$15.5 million respectively: Contract, clause 2. The first 2011 standard shipment of 160,000 Mt had a contract value of US$24.8 million. 15Thereafter, the Contract Schedule provides that each of the 2012 iron ore fines shipments of 160,000 Mt would take place at monthly intervals, which would each be priced at US$125 per Mt but on an FOB basis: Contract, clause 4. Each planned 2012 shipment therefore had a contract value of US$20 million (160,000 Mt x US$125 per Mt) calculated on an FOB basis. Delivery of the 2012 FOB shipments would be complete on the delivery of the iron ore fines to the vessel at the port specified by Caprock. 16The Contract contemplated that further iron ore fines shipments would occur in 2013 and 2014 in accordance with the delivery program under the Schedule: clause 2, "Delivery Period and Quality" and clause 4 "Base for Prices". Pricing for the 2013 in 2014 shipments was agreed to be negotiated annually between ALYK and Caprock on the anniversary of the Contract but exact quantities to be shipped were not agreed that far ahead. The parties' price negotiations were to be based on "the average Platts movement for the 3 months prior". The "Platts movement" used in this clause is a business information service providing up-to-date market commodity index prices for particular commodity and geographical markets.

Clause 6 and Payment 17Contract clause 6, which creates the Contract's contentious payment and associated letter of credit obligations, is the centrepiece of the parties' present dispute. Clause 6 is a somewhat clunky provision, exhibiting more then its fair share of mistakes and omitted words. The meaning of clause 6 and the provisions which amend it are central to the present contest. It is set out here:- "Clause 6. Payment The Buyer shall open an Irrevocable Transferable Documentary Letter of Credit (LC) and acceptable, at sight letter of credit to the Seller within 15 working days after signing the contract from one prime World Top 25 Bank in favour of the Seller by way of SWIFT MT700 with the Seller as first beneficiary for an amount in US Dollar sufficient to cover 100% of contract value each, including 95% contract value of provisional payment and 5% for balance payment. The buyer must provide within 10 working days of signing of this contract extra cover the LC, a transferable Stand By Letter of Credit (SBLC) in a format acceptable to the Seller for the value of $20,000,000 being 1 month's shipment of 160,000MT. The SBLC is not to expire earlier than 45 days after the last shipment. For each such shipment the Buyer shall 30 days before the date of each shipment establish the LC for each such shipment and Send a copy of the original by e-mail to the seller to comply with each shipment. The Seller reserves the right not to load in the even (sic) the Buyer does not produce the letter of Credit. In the event that the buyer fails to issue the 'Stand By Letter of Credit (SBLC)' and 'Letter of Credit (LC)', the payment, for the First (1) Shipment of 50,000 MT, then forty eight (48) hours after expired due date, the Buyer shall make payment via T/T (pay in advance) and via T/T at sight, of the rest shipment, if the buyer fails to issue the LC, upon demand by the seller without protest as a contract breach. Within 14 (days) banking days of receipt of buyer's swift MT700, the seller will issue the 5% CPB (Corporate Performance Bond) for non-delivery. The CPB is an irrevocable unconditional and guarantee to the buyer for all the shipments throught (sic) the Contract valid period. The buyer acknowledges that a claim under the performance bond will discharge the seller's obligations and will be adequate compensation against any loss or damage suffered by the buyer due to non-performance by the seller. 4.Provisional Payment The first payment of 95% CIF shipment value, and FOB where applicable will be made on basis of loading port report both as per quantity and quality certificates issued by SGS accompanied with documents provided in clause 7A. 4.Final Payment The balance of payment due to the Seller after provisional payment shall be affected under the same L/C against Seller's final invoice in five copies delivered through the Bank. The invoice is to be based on CIQ's certificates as provided in clause 7 and clause 8 issued within 80 (Eighty) days after completion of loading at the loading port." 18Certain other machinery provisions in clause 6, relating to CIQ (the Inspection and Quarantine Service of the PRC) certificates, are not important and have been omitted from the reproduced text. 19Clause 6 can now be briefly introduced. But some important basic matters of construction are dealt with now. Clause 6's first paragraph deals with establishing both the LC and the standby LC, both of which were, in fact established. 20Clause 6 first requires ALYK to open an LC in favour of Caprock "from one prime World Top 25 Bank" within 15 days after signing the Contract. It is not in issue that the Bank qualifies as a "prime World Top 25 Bank". This first part of clause 6 requires that the LC name Caprock as first beneficiary, for an amount "in US Dollar (sic) sufficient to cover 100% of contract value each (sic), including 95% contract value for provisional payment and 5% for balance payment". The word "shipment" should appear after the words "contract value each" in this sentence. Its omission, in my view, is an obvious error. It is difficult to make sense of the last sentence of Clause 6's first paragraph unless an LC is raised for each shipment, rather than for the whole Contract: the second last sentence of the first paragraph speaks of the buyer's obligation "for each shipment" to "establish the LC for such shipment and Send a copy of the original by e-mail to the seller to comply with each shipment". 21Clause 6 also provides for the standby LC. Clause 6's second sentence requires ALYK, the buyer, to "provide within 10 working days of signing of this contract extra over the LC, a transferable Stand By Letter of Credit (SBLC) in a format acceptable to the Seller [Caprock] for the value of $US20,000,000 being 1 month's shipment of 160,000Mt". The use of the expression "extra over", an expression not uncommonly found in building and engineering contracts, to describe categories of additional expenses, emphasises that the parties intended that the standby LC would in all respects create obligations additional to those of the LC. 22Clause 6 also specially provides for the duration of the standby LC. Clause 6's third sentence requires that the standby LC not expire earlier than 45 days after the last shipment. This was no doubt to ensure that the standby LC was always available to meet financial contingencies that arose after the last shipment. 23But clause 6 does not specify the form of the standby LC to be issued. Specifying the precise form of a proposed bank guarantee or a performance bond is not an uncommon contractual feature: see for example Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136 and (2008) 249 ALR 458, see especially [30]. Here instead clause 6's first paragraph requires that the standby LC to be "in a format acceptable to the Seller [Caprock]". The form of the standby LC was ultimately mutually adopted was "acceptable to the Seller". 24The obligations created in clause 6's fourth and fifth sentences return to the subject of the LC. Clause 6's fourth sentence requires ALYK to establish the LC "for each shipment", "30 days before the date of each shipment" and "Send a copy of the original by e-mail" to Caprock. Clause 6's fifth sentence reserves the seller's right not to load "in the even[t] (sic)" ALYK does not produce the LC. 25The Contract provides for the parties' rights upon ALYK's failure to issue a LC, or a standby LC, in certain circumstances. The Contract requires the telegraphic transfer "T/T" of funds as a backup mechanism. But just how this backup arrangement would work and in respect of what shipments is discussed later in these reasons. Clause 6's second paragraph provides that if ALYK fails to issue a standby LC and the LC for payment for the first shipment, then 48 hours after "expired due date", ALYK must make payment via telegraphic transfer "of the rest shipment (sic)". And these words are followed by the words, "if the buyer fails to issue the LC, upon demand by the seller without protest as a contract breach (sic)", which appear to mean that failure to produce the LC in the circumstances contemplated will not itself be a contract breach, but payment, of course, can still be demanded. 26The Contract provided for electronic transmission of the LC and the corporate performance bond, by way of "SWIFT MT700". The MT700 swift system is a secure system for the means of delivery of documentary letters of credit in soft copy form. 27Contract clause 6 also obliged the seller to issue a "corporate performance bond" to protect the buyer against the consequences of non-delivery. Clause 6's third paragraph requires Caprock to issue a 5% corporate performance bond for non-delivery within 14 banking days after receipt of ALYK's LC. The corporate performance bond is "an irrevocable unconditional and (sic) guarantee to the buyer for all the shipments throught (sic) the Contract valid period". The clause provides that a claim under the corporate performance bond will discharge Caprock's obligations and will be adequate compensation against any loss or damage ALYK suffered due to Caprock's non-performance. 28The error-prone middle paragraph of clause 6 is difficult to construe but in the context of the rest of the clause its meaning can be discerned. In my view it covers two situations: the first shipment of 50,000 Mt, and all other shipments, that is "the rest shipment". In relation to the first shipment, the paragraph deals with the possibility that the standby LC and the LC are not available for that shipment. Presumably the proximity of the first shipment date to the Contract signing date made this a risk which the parties anticipated should be provided for. But if the standby LC and the LC were not in place by then, the buyer, ALYK, was required to pay by telegraphic transfer in advance. The obligation is to pay 48 hours after the "expired due date", being the date on which the last of the LC and the standby LC were due to be put in place. 29But this middle paragraph also contemplates that the LC and the standby LC may not be in place for subsequent shipments. In those circumstances if the buyer "fails to issue the LC" upon further demand then the buyer must pay by telegraphic transfer at "sight", but the failure to further issue the LC is not a contract breach. The provision seems to assume that with these subsequent shipments the standby LC would not also have been issued. Otherwise there would be no need for payment "via T/T at site". As it turned out a standby LC was issued.

Other Relevant Contract Clauses - 12, 15, 19 and 21 30The Contract makes detailed provision for the machinery of delivery and acceptance of iron ore fines under the Contract: the documents required for provisional payment and for final payment (clause 7), weighing either at the load port by STS or at the destination port by the PRC inspection and quarantine service (CIQ) whichever is applicable (clause 8), sampling analysis by SGS or CIQ (clause 9), particular terms applying to FOB delivery from the commencement of 2012 (clause 10), and particular terms of applying to delivery and discharge on CIF terms (clause 11). The last of these (clause 11) was applicable to the first three shipments in 2011 which were to take place on a CIF basis. Clause 11.6I provided that the "shipment shall be effected within 30 (thirty) days from receipt of the conforming and operative letter of credit from the buyer, subject to the delivery schedule enclosed in schedule 1". It was necessary to complete the shipment because letters of credit generally contained provisions for limiting the right to call upon them up to a nominated last day for shipment. 31A number of other clauses, namely clauses 12, 15, 19 and 21, bear upon the parties' contentions about the Contract's construction. 32Contract, clause 12 deals with force majeure. In summary the clause provides that if there is a force majeure event such that either party is unable to perform in whole or in part its obligations under the Contract, and that force majeure event exceeds three months, either party has the right to refuse further performance of the contract, in which case neither party will have the right to claim eventual damages. Clause 12 provides as follows:- "Clause 12. Force Majeure: If at any time during the existence of this contract either party is unable to perform whole or in part any obligation under this contract, because of war, hostility, military operation of any character, civil commotion's, sabotage, quarantine restriction, acts of Government, fire, floods, explosions, epidemics, strikes or other labour trouble, embargoes, then the date of fulfilment of any obligation shall be postponed during the time when such circumstances are operative. Any waiver/extension of time in respect of the delivery of any instalment or part of the goods shall not be deemed to be waiver/extension of time in respect of the remaining deliveries. If operation of such circumstances exceeds three months, either party will have the right to refuse further performance of the contract in which case neither party shall have the right to claim eventual damages. The party which is unable to fulfil its obligations under the present contract must within 7 days of the occurrence of any of the causes mentioned in this clause, shall inform the other party of the existence of the circumstances preventing the performance of the contract. Certificate issued by a Chamber of Commerce or any other competent authority connected with the cause in the country of the Seller or the buyer shall be sufficient proof of the existence of the above circumstances and their duration. Non-availability of material will not be an excuse to the Sellers for not performing their obligations under this contract. The Force Majeure event does not exonerate the Buyer from paying for the goods already delivered under Payment documents or Bill of Lading. Should the delay caused by a Force Majeure event last for more than 1 (one) month the sides will attempt to allow measures to allow contract to continue. Should such an agreement not be reached within 30 (thirty) days from the date of certified Force Majeure event, the sides are entitled to terminate the contract. The performance of either party's obligations will be in such a case postponed with the period of the existence of the Force Majeure event plus a reasonable period to remobilising production and shipping. No penalty shall be payable for the duration of this delay". 33Contract, clause 15 headed "Governing Law and Arbitration", provides that the Contract is to be governed by and construed in accordance with the International Chamber of Commerce ("ICC") rules with the seat of arbitration being Geneva, Switzerland. The parties indicated to the Court at hearing that a clause 15 arbitration has commenced in relation to some of the matters now before the Court. Clause 15 provides as follows:- "Clause 15. Governing Law and Arbitration Clause This Contract shall be governed by and construed in accordance with the ICC rules and INCOTERMS 2010. Any dispute arising out of or in connection with this Contract, including any question regarding its existence, validity or termination, shall be resolved by friendly negotiations and if not resolved then the matter shall be referred to and finally resolved by arbitration. Either party may serve notice on the other requiring any dispute to be settled within 30 (thirty) days after such notice and, if not settled to refer it to arbitration in accordance with this contract. The arbitration will be heard by one or more arbitrators appointed mutual agreement of the parties and in accordance with the Rules and the Arbitration Act 1996. The seat of arbitration shall be Geneva, Switzerland. The award shall be enforceable in any country, and a Rogatory Letter shall be deemed acceptable without contest or protest. Should there be any breach under this contract, and Seller or Buyer declare breach of contract then Summary Judgment under the Laws of Geneva, Switzerland shall apply and be deemed automatic for the full contract value and damages claimed therein under ICC law with the authority therein to recover those costs in any country." 34Contract, clause 19 deals with "Material Breach" and provides a contractual right of termination. It provides that if there is a failure by either party to comply with any obligation under the contract, and if that failure to comply is material in nature, and if remediable, is not remedied within fourteen days, the other party is entitled to consider that failure to comply as a breach of the Contract and to terminate the Contract. Clause 19 also provides for damages claims by the party not in breach, and is in full as follows :- "Clause 19. Material Breach Subject to a force majeure event, in the event of failure by the Seller or Buyer to comply with any of the obligations assumed under this contract and should that breach be material in nature, and in respect of which, if capable of remedy, was not remedied within 14 days of notice, this shall entitle the other party, without prejudice to any other recourse available to it, to consider such failure as a breach of this contract and to terminate the same, or to unilaterally suspend its performance until such failure is corrected, and in both cases, may claim damages in respect of the direct loss suffered as a result of the breach." 35Contract, clause 21 notes that Caprock enters into the Contract as trustee of the SAFE Fund, a trust, and its liability is limited to the assets of the trust. One of ALYK's balance of convenience arguments for interlocutory injunctive relief against Caprock was that the SAFE trust's balance sheet shows that the trust disbursed $2 million in funds that ALYK paid to it in July 2012 and now has but limited net assets. But that issue no longer has to be considered at what is now a final hearing.

Events from August 2011 to January 2012 - the Memorandum 36About a month after contracting as vendor to ALYK, Caprock contracted on 23 September 2011 for the purchase of iron ore fines from BQI Mining Group ("BQI"), a Mexican iron ore miner (the Caprock-BQI Contract). Under the Caprock - BQI Contract Caprock agreed to acquire 160,000 Mt of iron ore fines each month for 36 months, starting in October 2011 at a price of US$107 per Mt, FOB Mexico. I infer that Caprock entered this contract to fulfil its supply obligations under its Contract with ALYK. 37Over the period 11 to 14 October 2011 the Bank issued an LC for the first trial shipment of 50,000Mt of iron ore fines. ALYK says though that in breach of Contract, clause 6, Caprock did not issue a corporate performance bond within 14 days of the issue of the LC. 38The LC for the first shipment was for an amount in US$11,625,000 and covered 75,000 Mt of iron ore fines with an expiry date of 20 October 2011; with Caprock as beneficiary. But at the time that ALYK was arranging this LC iron ore markets were going through upheaval. Market prices fell from approximately $177 per metric tonne in September 2011 to $135 per metric tonne in November 2011, a fall of approximately 23%. This placed pressure on both vendor and purchaser in different ways and caused them to renegotiate aspects of the Contract. 39The parties agreed to amend the Contract on 3 November 2011, which amendments they recorded in a further mutual memorandum of that date ("the Memorandum"). The commercial purpose of the Memorandum was to overcome the obstacles to performance of the original Contract which the parties perceived had arisen, due to the changed market conditions. This purpose is evident from the Memorandum's introductory words:- "All the parties concerned with this Contract tried their best to eliminate the barriers in implementing the Contract so that so far all the requirements have been met for the commencement of execution of the Contract. In order to guarantee a smooth implementation of the Contract, the parties concerned have reached the agreement with the following terms and conditions." 40A priority for the parties was to adjust the standby LC which had already been issued and which is (generally referred to in the Contract and its amending instruments as "the SBLC") to accommodate changed supply arrangements in the performance of the Contract. ALYK now agreed to accept the supply of iron ore fines from the BQI Mining Group, Mexico. The credit of the ALYK's parent in the PRC, the Yankuang Group, was to be deployed for funding the amended standby LC. In making these adjustments the Memorandum referred to the issue of a standby LC in the following terms:- "1) SBLC According to the seller's requirements, both parties have agreed to use the Yankuang's parent company in the Mainland of China to apply for the SBLC to provide the Counter Guarantee for one Australian bank who is to issue the transferable SBLC, in which the first beneficiary is the Seller and the second beneficiary is the BQI (mining Group Mexico). Of all the terms and conditions of the transferable SBLC, those that have been accepted by the both parties should remain unchanged. The seller shall be responsible for all the costs on the Australian bank occurring in the course of issuing the SBLC. The seller shall also provide the buyer with the information/documentation in relation to the second beneficiary's qualifications, Supply Capacity, Quality of the goods, records of supplied good etc, will be supplied at loading." 41The Contract as amended was to operate from the issue of the further standby LC. The Memorandum provided for this in Clause 2:- "2) Execution of the Contract The Contract shall start to be executed from the date of Yankuang issuing the SBLC. Before that day. Any delays, failure to implement the original Contract or behaviours conflicting with the terms or conditions in the original Contract, caused by the efforts by all the parties as well as the second beneficiary to eliminate the barriers to the implementation of the Contract, shall not be taken to the breaches of the terms and conditions in the Contract. 4.date of the execution of the contract. As result of the various changes of the SBLC Yankuang is not breach of the contract." 42The Memorandum then made adjustments to minimize the impact of the market changes in the price of iron ore by amending the price and delivery arrangements for the first shipment: Memorandum, clause 3. "3) The First Shipment Payment To ensure the interests and benefits of all the parties and minimise the impact of the market changes, the Contract stipulates that the one of the terms of the first iron ore shipment trading payment be adjusted by changing CIF China North Port USD$155/Mt into FOB Manzanillo Port of Mexico USD$125/MT, so that the buyer shall pay the shipping and shipping and other relevant costs while the seller shall do it's best to cooperate with the buyer. " 43And the parties decided, to use their own words, that "because of the dramatic market changes" they would also have to renegotiate the following year's iron ore trading prices. But the completion of the first shipment was seen as an important platform for these further negotiations, which the parties provided for in the following way:- "4) Price and delivery- Because of the dramatic market changes, after the execution of the first shipment the parties shall enter urgent negotiations/consultations to reach new agreements on next year's iron ore trading prices and payment terms before issuing the DLC for the second shipment." 44The parties contemplated in the Memorandum that the fluidity of the then current market situation would mean that they would probably need yet another amendment to the Contract which they called an "Addendum", by the end of 2011: Memorandum, clause 5. 45But the parties realised that the relationship between the Contract and the Memorandum would need to be defined. They did this in Memorandum, clause 6:- "6) Signing of this Memorandum- This Memorandum shall be signed electrically by all the parties on 3 November 2011 and the signed Memorandum shall come into effect immediately from the date of the signatures and shall have the same legitimate effect as the original Contract, functioning as the adjustment and addition to the original Contract. In case of dispute, this Memorandum shall prevail." 46The Memorandum also amended the Contract by recording that neither ALYK or Caprock was at the time of execution of the Memorandum then in breach of the contract. 47On 4 November 2012, on the application of Yankuang Aluminium International Trade Co Ltd, a corporate entity related to the plaintiff, ALYK, the Bank's Shandong branch requested the Bank's Sydney branch to issue an amended standby LC for US$20m. 48The standby LC was issued to Caprock by the Bank's Sydney branch on 11 November 2011. The standby LC required that compliant demands for payment under it must include a statement of five matters: (1) the number and date of the standby LC; (2) the amount claimed; (3) that ALYK is in breach of its obligations under the contract; (4) the respect in which ALYK is in breach; and, (5) that Caprock has fulfilled its obligations under the Contract such that ALYK cannot ascribe its breach to Caprock or exempt itself from its obligations. 49The standby LC did not require, before payment, the presentation of any transport documents to the Bank, but merely a statement by the beneficiary of those five matters. Its terms are important for the present issues, especially paragraphs (3) and (4) which define the relevant content of the beneficiary's demand relating to the principal's breach. The standby LC is reproduced here in full:- "We (the Issuing Bank) have been informed that ALYK (H.K.) LIMITED (hereinafter called 'the Principal') has entered into contract dated 2011-8-18 with you ('the contract') for the supply of Iron ore fines. Furthermore, we understand that, according to the conditions of the contract, an irrevocable Standby Letter of Credit is required. At the request of YANKUANG ALUMINIUM INTERNATIONAL TRADE CO LTD, we hereby Irrevocably undertake to pay you an amount not exceeding in total of USD20,000,000.00 (SAY U.S. DOLLARS TWENTY MILLION ONLY) after receipt by us of your first demand in writing stating: 4.The number and date of our Standby Letter of Credit under which your claim is made and 4.the amount you claim and 4.that the principal is in breach of his obligation(s) under the contract conditions, and 4.the respect in which the Principal is in breach and 4.that you have fulfilled your obligation(s) in accordance with the contract and thus the Principal can neither ascribe the breach of his own obligations to the beneficiary nor exempt himself from the obligations thereof. For the purpose of identification your written statement must be duly signed and presented through your local bank and your signature(s) on the demand in writing must be verified and authenticated by the presenting bank which must confirm to this effect through authenticated Swift message to us. This Standby Letter of Credit shall expire on 2014-10-04. Any demand for payment and documents required under this Standby Letter of Credit must be received by us before its expiry at our address stated above. Upon expiry please return the original Standby Letter of Credit to us. But this Standby Letter of Credit will become null and void upon expiry whether the original Standby Letter of Credit is returned to us or not. This Standby Letter of Credit can be transferred to BQI MINING GROUP MEXICO SAPI DE CV with the consent of CHINA CONSTRUCTION BANK Shandong Branch through authenticated Swift message. Multiple drawings are allowed. This Standby Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision) International Chamber of Commerce Publication Number 600 and this Standby Letter of Credit is subject to Laws of New South Wales, AU." 50Perhaps as ALYK and Caprock had anticipated, the Memorandum did not solve the parties' problems in a changing iron ore market. This became evident from their experience over the next three months.

November 2011 to January 2012 51On 14 November 2011, a new LC was issued for the first planned shipment from Manzanillo, Mexico. 52Then Caprock made new supply arrangements. On 19 November 2011, Caprock entered into a sale and purchase agreement with Grupo Martinez for 2,950,000 Mt of iron ore fines at US$100 per Mt FOB Mexico. On 1 December 2011, Caprock entered into a sale and purchase agreement with Network Scrap Metals for 300,000 Mt of iron ore fines at US$118 per Mt CFR, which sale was to take place in two 150,000 Mt shipments to China. 53But the first trial shipment of 50,000 Mt FOB from Manzanillo, Mexico did not take place. Nor did Caprock make the other two trial 2011 shipments of 100,000 Mt and 160,000 Mt respectively, scheduled for November 2011 and December 2011. Thus by the end of 2011 the parties did not yet have the platform of a completed first shipment from which they hoped to further negotiate the rest of the Contract. 54On 11 January 2012, Caprock entered into a purchase contract with AGR Global Resources for a trial shipment of 300,000 Mt to be followed by 36 monthly shipments priced at US$128 per Mt CIF. And on 14 January 2012, Caprock issued the corporate performance bond required under Contract clause 6. 55On 17 January 2012 the parties made another minor amendment to the Contract and the Memorandum ("the January 2012 Memorandum"). In this further amendment, ALYK and Caprock agreed to an effective "catch up" arrangement to adjust for the three deliveries of iron ore fines that had by then not been made under the Contract in 2011. ALYK and Caprock agreed in the January 2012 Memorandum to a first delivery of 300,000 Mt at US$141 per Mt CFR for delivery at a North China main port. The January 2012 Memorandum is not otherwise of importance to the issues of construction and is not reproduced. They also agreed in the January 2012 Memorandum to amend the agreed Contract, clause 6 ratio between the provisional and final payments under the LC. These had been 95% to 5%. In the LC soon to be issued there would be a 97% to 3% split.

Events from February to July 2012 - the 19 July 2012 Demand 56But the first trial shipment of 50,000 Mt was further delayed, this time due to problems in the export port of Manzanillo in Mexico. The Mexican Government was now restricting the crushing of iron ore fines at port before export, so the iron ore planned for export had to be returned to its source mine for crushing to comply with the Contract specification. On 12 April 2012 Caprock asserted that this was a force majeure event causing delay to this first shipment due to "acts of Government". 57On 9 May 2012, Caprock proposed to ALYK an alternative supplier of iron ore fines; this time from Chile. And on 21 May 2012, Caprock proposed yet another alternative supplier of iron ore fines on the same terms as the 9 May 2012 proposal, but with the current supply proposal being sourced either from Chile or Mexico. 58Caprock issued a default notice to ALYK on 30 May 2012. Caprock followed its default notice on 16 July 2012 with a demand to the Bank on the standby LC. The Bank's Sydney branch rejected that demand on 19 July 2012 as non-compliant with the terms of the standby LC. 59To overcome the issues the Bank's 19 July rejection had raised, on the same day, Caprock issued a further demand ("the 19 July demand") to the Bank on the standby LC. On 20 July 2012, the Bank's Sydney branch advised its Shandong branch that this demand was compliant with the standby LC and the Sydney branch called for the transmission of funds from the bank's Shandong branch. The 19 July demand triggered the Bank to make a demand against ALYK for US$20m plus a US$140,000 issuance fee. But it also triggered immediate legal action and became the occasion for the parties to commence further negotiations about their contract.

The 21 July Addendum 60Before any payment was made by the Bank to Caprock on the 19 July demand, ALYK instructed solicitors to seek Court orders enjoining payment by the Bank to Caprock. On 25 July 2012 ALYK obtained ex parte interim orders preventing payment. But, in the background to the proceedings to enjoin payment, the parties were developing a compromise that would end the dispute. By 21 July 2012, the parties had reduced the terms of their compromise to writing; a compromise which they had partly anticipated in their November 2011 Memorandum, and which they now called, "the Addendum". With the Addendum finalised, on 25 July 2012 Caprock communicated, via its solicitor HWL Ebsworth, that there was nothing to be gained in debating the issue of payment on the 19 July demand and as such it would withdraw the 19 July demand. On 26 July 2012 the orders of 25 July 2012 were vacated. 61The Addendum substantially amended the parties' obligations with respect to the standby LC. It deleted clauses 4 and 5 of the Contract with respect to the first shipment (clause 1). It made detailed provision, for issuing two further LC's (clause 2) and for amending the standby LC (clause 3). The Addendum shows all the internal evidence of the parties' 11 months of frustrating negotiations in a dynamic market environment. It provides (in clause 4) for ALYK to pay Caprock a deposit of US$2 million "to the account of the seller", which Caprock could apply as it wished pending its further performance under the Contract. "This Addendum shall form part of the contract for sale of iron ore fines between Caprock Commodities Pty Ltd as Trustee for the SAFE Fund (the Seller) and ALYK (H.K.) Limited (the Buyer) executed on 18 August 2011 (the 'Contract'), and supersedes addendum No. 1. 1.Clause 4 and 5 of the Contract shall be deleted and replaced with the following terms for the shipment only: A. The Price CFR North China Main Port shall be calculated as at the 15th of the month prior to loading in accordance with the midpoint of Percentage 63.5% Fe Grade CFR North China Platts Index minus 3%. 2.The Buyer shall within five (5) banking days from the Seller's instruction to issue two documentary Letters of Credit, with the following terms: a) Quantity 50,000DMT b) Price $132.16/DMT c) Tolerance +/-10% d) Partial Shipments allowed e) Irrevocable Transferable f) Origin: Mexico/Chile g) Valid for 120 days h) Date of Last shipment - 90 days from issue i) Advising Bank - China Constructions Bank - Sydney Branch (details previously provided) j) Value of LC i)USD$4,459,760.00 (97%) ii)USD$138,240.00 (3%) 3.The Buyer shall give instructions to the Issuing Bank to amend the Standby Letter of Credit Number SBLC20110101 dated 11 November 2011, and copy of SWIFT MT799 from CCB Shandong to CCB Sydney requesting CCB Sydney to reissue the SBLC upon withdrawal of the demand, and that the the SBLC is to be negotiable, assignable and transferable in whole or in part by the beneficiary without presentation to the issuing bank and without payment of any transfer fees. The SBLC is to be issued by China Construction Bank Sydney to Caprock or its nominee by MT760 and not just in hard copy. 4.The Buyer shall deposit to the account to the Seller the amount of USD$2 million to be credited against first shipment, in exchange for a corporate Advance Payment Guarantee dated 21 July, 2012 and a commercial invoice from the Seller. This payment is not to be held in trust or on account of the Buyer and may be used by the Seller to meet its expenses. The Seller hereby seeks to amend the account details in The Contract for the purpose of the Deposit as follows..." 62Other consequential matters were provided for in clauses 5 to 7 and 10 and 11 of the Addendum, which, in its material terms, is reproduced below:- 5.This Addendum shall, subject to its terms, be binding on the parties and form part of the Contract which shall continue with full force and effect subject to the terms herein. Clause 1 to this Addendum shall not however apply to any shipment after the first shipment made pursuant to the Contract. 6.This Addendum is without prejudice to the rights of the parties that exist or may accrue on before the date of execution hereof. 7.A delivery Schedule for 2012 delivery is to be issued to the Buyer after first Shipment is completed. ... 10.Once clause 3 and 4 herein are satisfied, the Seller is obliged to promptly withdraw the demand made on the SBLC. The Amended SBLC in accordance with clause 3 above is to be issued to the Seller by MT750 in exchange for the withdrawal of the demand. 11.This Addendum is binding on all parties on and from the date on which the last party executes this addendum. ALYK (H.K.) Limited acknowledges and accepts the terms and conditions of this Addendum, in accordance with the laws of its country of registration." 63Addendum, clause 3 became an obstacle to implementing the Addendum. The Bank raised problems with this clause. But this clause's treatment of the existing standby LC also became an important point in the Contract's construction. Within a further two months the problems with clause 3 had generated the current litigation. The Present Dispute 64The present dispute arose at this point. After the Addendum the Bank did not issue an amended standby LC. The Bank's reasons for this and the course of events need only be explained in a summary form. The Court does not have to make findings on these matters in these proceedings. 65Caprock claims there is no evidence that ALYK ever instructed the Bank to amend the standby LC. ALYK disputes this and says that on 22 July 2012, it and another company in the Yankuang Group, made an application to the Bank to amend the standby LC, in accordance with the Addendum. There is certainly some evidence that this is what happened. ALYK also says that on 23 July 2012 the Bank replied to ALYK to the effect that the Bank would only consider the application following the withdrawal of the first demand made by Caprock. 66On 23 July 2012, ALYK paid the US$2m deposit provided for by Addendum, clause 4 to Caprock, which confirmed receipt of this sum the same day. The month after this payment was made a legal standoff had developed between ALYK and Caprock. 67On 25 July 2012, ALYK obtained orders from the Court restraining the Bank from paying against the 19 July demand. But on 26 July 2012, ALYK and Caprock filed consent orders dismissing the summons and vacating the orders of the previous day. As part of the settlement Caprock agreed to withdraw the first demand. 68Between 26 July 2012 and 31 July 2012 ALYK and Caprock corresponded about amending the standby LC. But by 1 August 2012, the standby LC had still not been reissued as was contemplated by Addendum, clause 3. So, on 1 August 2012, Caprock issued a notice of default to ALYK asserting the failure to reissue the amended standby LC in accordance with Addendum clause 3. Yet on the same day ALYK responded that it had instructed the Bank to issue the amended standby LC in accordance the Addendum. 69ALYK says it gave further instructions to the Bank to comply with Addendum, clause 3. ALYK says that it made a further request to the Bank on 6 August 2012. ALYK says that it also communicated with Caprock on 10 August 2012, in order to pass on to Caprock the Bank's comments that the Bank was unwilling to reissue an amended standby LC, when Caprock had not nominated who would be the transferee. ALYK's case is that on 14 August 2012, it gave yet further instructions consistent with Addendum clause 3, to both the bank's Shandong and Sydney branches. 70But why was there a standoff at this time? There were two main reasons: one had its origins with the Bank, and the other with Caprock. 71Perhaps no-one had consulted the Bank before Addendum, clause 3 was drafted. The Bank had problems with executing it. A close reading of the correspondence in my view shows that the Bank's position was not unreasonable. The Bank had a concern about a standby LC which "is to be negotiable, assignable and transferable in whole or in part by the beneficiary without presentation to the issuing Bank and without the payment of any transfer fees". The Bank was not prepared to accept the risk of the standby LC being divided into portions which may add up to claims against it that were greater than whole value of the standby LC. Nor was it prepared to accept the risk of the standby LC being assigned to multiple parties whose identities were unknown to it. The Bank's position was not unreasonable. 72But Caprock was also making allegations of breach that seem somewhat to stretch the words of clause 3 which requires the buyer, ALYK, to "give instructions to the issuing Bank to amend the standby LC". The instructions were to include a request to the Bank's Shandong branch to its Sydney Branch, asking the Sydney Branch to "reissue the standby LC upon withdrawal of the demand". Yet Caprock has insisted in correspondence that the provision required ALYK to ensure the issue of an amended standby LC. I do not have to decide this question, but though arguable that does not seem to be compelling reading of clause 3. 73There were many other small disputes between the parties in this period into which the Court does not have to enter. Suffice it to say that the standoff was contributed to by the Bank taking a reasonable view of its own future commercial exposure, and the parties' mutual point taking. 74Caprock then acted on what it claimed were ALYK's Contract defaults. On 22 August 2012, Caprock issued a notice of default: it cited ALYK's alleged failure to give proper instructions to the Bank and the non-issuance of the standby LC, as defaults. 75Then, on 6 September 2012, Caprock acted on its 22 August default notice: it gave ALYK notice of termination of the contract; and, made demand on the Bank under the standby LC for US$20m ("the 6 September demand"). In the 6 September demand Caprock recited: the 11 November 2011 standby LC, the amount of its claim of US$20 million and that "ALYK (HK) Ltd (the Principal) is in breach of his obligations in accordance with the contractual conditions" and, that it was not in breach of contract. The particulars of the "respect in which the principal is in breach" as required by the standby LC (4) were stated in the 6 September demand:- "In accordance with clause 6 of the Contract, ALYK (HK) Limited (the Principal) failed to issue a Documentary Letter of Credit at least thirty (30) days before the date of the first shipment, being 20th May, 2012. On 12 June 2012, Caprock Commodities Pty Ltd ATF SAFE Fund (the Beneficiary) issued to the Principal a Notice of Default complaining of the breach. As at the date of this Demand the breach by the Principal has not been rectified and the Principal remains in breach (the First Breach). On 19 July 2012 the Beneficiary issued a First Demand in respect to the First Breach which was withdrawn on 25 July 2012 on the basis of an agreement between ALYK and Caprock Commodities Trading Pty Ltd (the 'Addendum') dated 21 July 2012. The terms of the Addendum have not been complied with. Clause 3 of the Addendum requires the Principal: 'to give instructions to the Issuing Bank to amend the Standby Letter of Credit Number SBLC20110101 dated 11 November 2011, and copy of SWIFT MT799 from CCB Shandong to CCB Sydney requesting CCB Sydney to reissue the SBLC upon withdrawal of the demand, and that the SBLC be negotiable, assignable, and transferable in whole or in part by the beneficiary without presentation to the issuing bank and without payment of any transfer fees. The SBLC is to be issued by China Construction Bank Sydney to Caprock or its nominee by MT760 and not just in hard copy'. Clause 10 of the Addendum provides that the 'Amended SBLC is to be issued to the Beneficiary by MT760 in exchange for the withdrawal of the demand'. The First Demand was withdrawn on 25 July 2012 and the amended SBLC has not been issued to the Beneficiary. On 1 August 2012 and 22 August 2012, the Beneficiary issued a two further Notices of Event of Default complaining of the breach. As at the date of this First Demand the breach by the Principal has not been rectified and the Principal remains in breach." 76The next day, 7 September 2012, ALYK approached the Duty Judge in the Equity Division of this Court, Rein J. The Court granted an interim injunction that day, until further order, preventing payment under the standby LC. The matter then came before Nicholas J on 11 September, when further procedural directions were made. It was mentioned before me as Duty Judge on 26 September and then was heard on 5 October 2012. The parties were allowed time to lodge supplementary written submissions to deal with some issues that had not been anticipated before the 5 October hearing, which at relatively short notice had become a final hearing. Those submissions were received after the 5 October hearing and judgment was reserved on 19 October 2012.

The Applicable Law 77ALYK is seeking to restrain Caprock's 6 September demand for payment to the Bank under the November 2011 standby LC. Caprock says that it can make demand under the standby LC, whenever, to use the words of the standby LC, Caprock can state on a bona fide basis "the principal is in breach of its obligations under the contract conditions". Caprock says these words encompass all breaches of contract conditions. ALYK says that the Contract does not confer an unconditional or unqualified right to make demand under the standby LC but that demand would only be made in connection with cargoes, for example where ALYK has failed to pay for a shipment of iron ore. 78The relevant law in relation to payment under documentary credits such as the standby LC is well settled, and may be shortly stated: under three headings, the "Autonomy Principle", negative stipulations, and standby LC's. The course of authority shows that contests in this area mostly arise in the application of this settled law to the terms and context of particular contracts. 79The "Autonomy Principle". Documentary credits such as letters of credit and performance guarantees are considered as independent of the underlying contracts that give rise to them: Urquhart Lindsay & Co Ltd v Easter Bank Ltd [1922] 1 KB 318. This is what legal authority in this area sometimes labels as the "autonomy principle". Express statements in bank guarantees, bank undertakings and letters of credit that they are "unconditional", should not be qualified by implied conditions in those instruments that the demand on the bank must conform to the requirements of the contract between the parties; to allow otherwise would deprive these bank guarantees of their commercial currency: Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 per Gibbs J at 451 and per Stephen J at 457. 80But the question is always one of construction of the parties' agreement, which in conformity with principle requires consideration of the language used, the surrounding circumstances known to the parties and the purpose of the transaction and the objects it was intended to secure: Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165, and 179. 81Courts have recognised limited exceptions to this approach to the construction of bank guarantees and letters of credit: Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136 at [77] per French, Jacobson and Graham JJ and Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 at 164-165. 82First, the Court will recognise an exception for fraud: and may enjoin a party in whose favour a performance guarantee has been given, who threatens to act fraudulently: Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 at 459 per Stephen J. ALYK did not seek to rely upon this exception against Caprock making the 6 September demand. 83Secondly, the Court will also recognise an exception for unconscionable conduct: and may enjoin a party from unconscionably taking the benefit of the performance guarantee: Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380. Nor did ALYK seek to rely upon this exception. 84Thirdly, and the exception in issue in the present dispute, Courts will in certain circumstances enjoin the party in whose favour a performance guarantee has been given, if that party threatens breach of a promise not to call upon the performance guarantee. The breach of that contractual promise is enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts: Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd, at 164. Enforcement of the negative stipulation in these circumstances is not strictly an exception to the "autonomy principle". The negative stipulation in the contract is used to prevent the beneficiary from claiming under the documentary credit, rather than the Court interfering with a payment which would otherwise be made under the instrument. 85A Negative Stipulation. A contractual negative stipulation exists, where a condition, if not satisfied, will operate to prevent the making of a claim under the documentary credit. The unsatisfied condition is a basis for the Court to enjoin the beneficiary from proceeding with a demand against the bank. It is now well established that the Equity Court intervenes to grant an injunction to enforce a negative contractual provision in Equity's auxillary jurisdiction on the basis of the inadequacy of the legal remedy: Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited [2010] NSWCA 283, per Campbell JA at [6]. ALYK relies on a claimed negative stipulation here to enjoin the bank's payment to Caprock under the standby LC. 86Caprock does not take issue that an injunction may be issued against a beneficiary of a documentary credit enjoining it from making a demand on that documentary credit, if the making of the demand would be in breach of the contract between the applicant and the beneficiary. 87The issue here is whether the claimed negative stipulation exists and prevents Caprock from demanding payment under the standby LC. Resolution of this issue is a matter of construction of the relevant contractual provisions, especially Contract clause 6 and Addendum clause 3. These provisions must be construed in the context of the whole Contract giving proper weight to the commercial purpose of ALYK and Caprock to be inferred from the contract. 88Authority confirms that clear words are required to support a construction which inhibits a beneficiary from calling on a performance guarantee, where a breach is alleged in good faith: Clough Engineering Ltd v Oil and Natural Gas Corporation Limited at [83] per French, Jacobson and Graham JJ; and Fletcher Constructions Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 at 820-821 per Charles JA. 89Standby Letters of Credit. Caprock relies in argument upon well-accepted commercial differences between ordinary letters of credit and standby letters of credit in constructing the ALYK-Caprock Contract. 90A standby letter of credit is an undertaking by a bank to make payment to a third party, the beneficiary, provided that the beneficiary complies with the stipulations of the credit which, in international trade transactions, invariably include the tender of one or several documents. But as the learned authors of Schmitthoff's Law and Practice of International Trade, 12th Edition, 2012, Thomson Reuters, London, explain (at 11-032) there are differences between the two types of letter of credit, ordinary and standby:- "In international trade transactions the standby letter of credit, like the ordinary letter of credit, is activated by the tender of documents in accordance with the requirements of the credit. The two types of credit differ significantly however. The ordinary letter of credit is a payment instrument which normally obliges the beneficiary to tender, together with other specified documents, the transport documents. The standby credit is intended to protect the beneficiary in case of default of the other party to the (underlying) contract. In a standby credit the required documents need not include the transport documents; this type of credit may be activated by a document of any description, e.g. a demand by the beneficiary or a statement from him that the other party is in default. The standby letter of credit is thus often functionally similar in effect to a bank guarantee or performance bond." 91Caprock's argument was that the standby LC here had the typical features of a standby LC, for which transport documents were not required to complete the demand. ALYK said in reply that whether the standby LC called for the transport documents or not as a condition of payment under the standby LC, they would still be required under the Contract. In my view the resolution of the issues between the parties does not depend on this distinction.

Two Approaches to Construction 92The parties urged upon the Court two quite different competing methodologies for the Court's construction of the Contract, the Memorandum, and the Addendum. ALYK commenced its argument by observing the lack of any express clause in the Contract specifying when Caprock could call upon the standby LC. That observation founded ALYK's argument that the operation of standby LC was solely limited to circumstances in which there had not been payment for a delivery of iron ore fines under the Contract. 93Caprock starts from the other direction. It begins with established authority that letters of credit should be construed according to their terms, which were agreed between the parties. According to Caprock, as authority suggests, the unconditional terms of letters of credit should only be cut down by clear words in the Contract itself.

Qualification on the right to make a demand? 94It is convenient to deal with ALYK's argument first. ALYK argues that Caprock approaches the whole question upon a mistaken application of the authorities. ALYK says Caprock must first establish that it has a right to make a demand on the standby LC before it can do so and before any questions of a negative stipulation can arise. ALYK's short point is that no express right arises in Caprock to make a demand on the standby LC under the Contract, let alone on the grounds Caprock cited on 6 September 2012. 95ALYK contends the Contract does not expressly specify any circumstances upon which the standby LC may be called. ALYK says that because the Contract does not expressly provide that the right to make demand on the standby LC is unconditional or unqualified, that the parties cannot have intended that the right to make such demand was unconditional or unqualified. 96ALYK is correct about the absence of a provision in the Contract, the Memorandum or the Addendum that regulates the circumstances in which the beneficiary, Caprock, might make demand under the standby LC. There was no equivalent here of the clauses debated in other authorities permitting or regulating demands: "if the contractor has not materially complied with its obligations under this contract", in clause 16.2 in Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited [2010] NSWCA 283; and "[if] the party has become entitled to exercise a right under the Contract in respect of the security retention moneys or both" in clause 5.6 in Rejan Constructions Pty Limited v Manningham Medical Centre Pty Limited [2002] VSC 579. 97ALYK also points out that there is no express term in the Contract or any of its amendments that indicates: (1) that payment should be made under the standby LC notwithstanding the pendency of a dispute (such as in Kell v Rigby at [30] per Hammerschlag J); or (2) suggesting that the commercial purpose of the standby LC was to shift the risk in the event of a dispute, and obtain prompt payment notwithstanding the dispute (see Lucas Stuart, at [40] - [42], per Macfarlan JA). 98ALYK says that on its correct construction the Contract provides for the standby LC to operate as a form of security against failure to pay, through the LC or otherwise, for a shipment of iron ore fines. ALYK argues this on the basis of a number of indicia which are best dealt with in answer to what I find is the correct construction of the Contract.

The Standby LC and the Contract 99The parties reaffirmed the terms of the standby LC as part of the Contract in the terms of their amendments on a sufficient number of occasions that on the proper construction of the whole of their dealings it should be concluded that they intended the standby LC, once in place, to operate according to its terms, without qualification or restriction. There are many indications of this conclusion. 100First, in Contract, clause 6 the parties agreed to the provision of a standby LC "in a format acceptable to the seller". The "format" was agreed in its present form by 11 November 2011. The parties supplemented their Contract, in accordance with these broadly permissive words, by their mutual assent to the terms of the standby LC on 11 November 2011, which is now the subject of Caprock's demand. If the Contract as made in August 2011 lacked a clause regulating the right to call on the proposed standby LC, as it clearly did, the parties can be assumed to have been aware of that gap and to have been filling it with the terms of the standby LC itself, to which they assented. 101But ALYK draws attention to the next following words in clause 6 "in a format acceptable to the seller for the value of $20,000,000 being 1 months' shipment of 160,000 MT" [emphasis added]. ALYK argues that these words support a limitation on the purpose of a call on the standby LC. In my view these words do no more than explain how the figure of $20 million was reached. The connection between $20 million and each delivery was in any event not a strong one: 2013 and 2014 prices and quantities were still to be negotiated; through the Memorandum and the Addendum the parties had shown a willingness to re-negotiate 2011 and 2012 prices; and, the financial consequences to Caprock of a breach due to non payment for a single delivery were not necessarily limited to the anticipated total price of that delivery. 102Secondly, the parties reaffirmed the unqualified terms of the standby LC in their Memorandum, which provided that the terms and conditions of the standby LC "that have been accepted by both parties should remain unchanged". The terms and conditions contained 8 days later in the standby LC issued on 11 November were those terms and conditions which by 3 November "have been accepted by both parties". In my view the Memorandum was a re-expression of the parties' existing agreement to supplement the Contract with the form of words which is now to be found in the standby LC. The standby LC contains the only form of words in which they agreed about when and on what terms the standby LC could be called upon. The terms of the standby LC are sufficient on their own to provide for the circumstances in which a demand may be made. Now in the Memorandum, the parties agreed those terms "should remain unchanged". In this context, Memorandum, clause 6 has some importance: the Memorandum functions as "the adjustment and addition to the original Contract; and in "case of dispute this Memorandum shall prevail". All these words together emphasize that the parties were not seeking to change their consensus about the terms of the standby LC through the Memorandum. 103Thirdly, the Addendum provides for some alterations to the standby LC, but leaves unaltered the essential terms and conditions that entitle the beneficiary to make a demand under it. By the time of the Addendum in July 2012 the standby LC had been in place for eight months, and one demand had already been made on it (and withdrawn). The Addendum is a further re-expression of the parties' subsisting agreement to the apparently unqualified terms of the existing standby LC. They had done so as part of a package of mutual promise that involved substantial other changes to their positions; for example the payment of $2 million deposit to Caprock, but not to the terms of making demands on the standby LC. 104In my view, the parties agreed that the standby LC would operate according to its terms. I accept Caprock's arguments that the parties' conduct meant that those terms were incorporated by reference into the Contract. Caprock would therefore be required to make the statements required under the LC before payment would be made. It could not do so fraudulently or unconscionably. But subject to such limits it was entitled to demand payment. 105ALYK put some arguments in its final submissions that the statement of the grounds of alleged breach relied upon in the 6 September demand in fact could not amount to breaches of the Contract. But the terms of the standby LC permit payment upon the making of those statements. That the statements were not made fraudulently or unconscionably is not in issue. It seems to me that whether there has, in fact, been a breach of obligations under the Contract conditions will be a matter to be decided at the proposed arbitration. That issue does not now prevent demand on the standby LC. 106This analysis provides the answer to ALYK's point about the absence of a Contract clause regulating the circumstances in which the standby LC could be called on. The terms of the standby LC were agreed to be part of the parties' contract, and all the relevant terms regulating the making of a demand were all within the standby LC itself. 107ALYK's other arguments fall away to. The standby LC is only payable on presentation of claim related documents. This feature itself indicates that it is a means of allocating credit risk in the course of an unresolved dispute. Its operation in this way is clear here, irrespective of the absence of words commanding payment notwithstanding dispute. The five items of the beneficiary's statement in the standby LC do not require any dispute to be resolved before the Bank makes payment. The standby LC can be inferred to operate in circumstances where any existing dispute is unresolved. 108Finally, ALYK argues that the terms of the Contract make clear that the sole commercial purpose of the standby LC was not to evidence ALYK's creditworthiness but to provide security for payment for cargo. I do not find these arguments persuasive. Mr Hogan-Doran says that the standby LC should be read in this wider contractual context. These matters also found his implied negative stipulation argument. 109ALYK says: that Contract, clause 6 is entitled "Payment" and mostly deals with the subject of payment; that the obligation on ALYK to open the standby LC arises in the same paragraph as the obligation to open the LC; and that the standby LC is described as being "extra over the LC". 110But the answer to these arguments emerges from the Contract. Clause 6 is not just about payment for cargo. It deals with broader subjects including performance guarantees. That the standby LC is described as "extra over" the LC in clause 6 does not limit the standby LC to the same subject matter (payment for cargo) as the LC. Rather it infers wider purposes which may extend beyond the subject of payment for cargo. It is consistent with its use as mechanism to obtain prompt payment of amounts it claims notwithstanding disputes ALYK raises: Lucas Stewart, at [40] per Macfarlan JA.

Negative Stipulation 111Caprock contends, correctly in my view, there is no express provision limiting the circumstances in which the standby LC might be called upon. ALYK says in the alternative, that it is an implied term of the Contract that the standby LC would not be called on except for particular contractual breaches. Specifically, ALYK says it was an implied term that Caprock would only make a demand under the standby LC where ALYK had failed to pay for a shipment of iron ore fines, as distinct from the standby LC operating as a general performance guarantee: Contract clause 6 and Schedule 1(7). 112In the absence of an express negative stipulation, an implied negative stipulation may qualify Caprock's making of a demand under the standby LC. The usual requirements govern the implication of such a term into a contract: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the Contract so that no term will be implied if the Contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express terms of the contract: BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283. To give business efficacy to an agreement, clear necessity is required to imply a term, such that it is not enough that it is reasonable to imply a term; it must be necessary: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 346 per Mason J. 113ALYK says that in order to give the Contract business efficacy, it is necessary to imply that Caprock could only make demand against the standby LC when ALYK failed to pay for a shipment of iron ore fines, and the LC mechanism miscarries for some reason. In support of this contention ALYK deploys the arguments referred to above. These have already been dealt with in these reasons: see [108] to [110]. 114Caprock contends that no term should be implied into the Contract enjoining it from making a demand under the standby LC. I find Caprock's contentions persuasive for three main reasons. 115First, there is no necessity to imply such a term. The Contract works without it but with the standby LC operating according to its terms as a risk allocation mechanism, for Caprock to obtain prompt payment notwithstanding disputes about alleged breaches of the Contract. Secondly, it would contradict an express term of the contract: the parties incorporated by agreement into their Contract all the terms of the standby LC, which are inconsistent with the claimed implied term. Thirdly, it is not capable of clear expression: which cargo payment issues would be caught by the term and which not be so caught would be difficult to define, one problem being what would happen when the same facts founded a claim for non-payment for cargo and a breach of other terms of the contract.

Mediation 116The Court's conclusion in these reasons means that there will be more litigation. ALYK has foreshadowed that supplementary proceedings may be brought if the present decision is against ALYK. That may or may not result in a stay of the current orders beyond a few days. ALYK may choose to appeal from these reasons. The parties anticipate arbitration proceedings. More litigation is on the horizon for both ALYK and Caprock. 117The Court is in an unusual position in this case. It has had to closely read the parties' correspondence and studied the course of events, without deciding all the issues of breach, with which the parties will soon be grappling. Events as revealed by this correspondence show the parties have attempted over many months to deal, mostly very courteously and co-operatively with the dynamic market conditions they faced. This gives considerable support for the inference that these proceedings may yet be able to be settled under the guidance of an experienced mediator. I may consider ordering a mediation under Civil Procedure Act 2005, s 26 as part of the stay orders in these proceedings. I shall invite submissions on this.

Conclusions and Orders 118In the result I have found that ALYK is unable to stay Caprock's call on the standby LC and it fails in these proceedings. The Court will therefore dismiss the Summons and order that the plaintiff pay the defendant's costs. But the Court will hear submissions in relation to any special costs orders. But the plaintiff should have a stay of these orders until 5.00pm next Wednesday, 19 December 2012 to consider its rights of appeal.

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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 December 2012

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