Boral Formwork v Action Makers [2003] NSWSC 713 | Case summary

The clause also states that Action Makers is to be liable to Boral for all losses suffered or incurred by Boral in connection with the warranty claim to a maximum of $2,236,713. The letter of credit 13 The letter of credit is described as an irrevocable standby documentary credit, issued on 16 July 2002 on the application of Boral as drawer, in favour of Action Makers as beneficiary, for $2,300,000, freely negotiable at any Bank. The drawee is the Bank. 14 The following text is included: "WE HEREBY ESTABLISH IN YOUR FAVOUR THIS STANDBY LETTER OF CREDIT AVAILABLE WITH ANY BANK AGAINST PRESENTATION OF YOUR DRAFTS DRAWN ON NATIONAL AUSTRALIA BANK …. THIS STANDBY LETTER OF CREDIT IS OPENED TO FACILITATE THE SALE OF SCAFFOLDING COMPONENTS BY THE BENEFICIARY TO THE APPLICANT. "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". 15 On 25 June 2003, five days before the letter of credit was due to expire, it was amended to extend the date of expiry from 30 June to 29 August 2003, and to decrease the amount covered from $2,300,000 to the Disputed Amount. The correspondence 16 As I have said, Boral wrote on 21 February 2003 to complain about defective products. The letter, written on behalf of Boral by Mr Montocchio, was addressed to Mr Oakley and Mr Thomas, the administrative receivers, and was written at a time when Boral had received seven containers of product. He set out particulars of defects in the product, and referred to the options contained in clause 24.13. He said that Boral would prefer to effect the necessary rectification work and deduct the cost of doing so from the price. Boral's proposal was to deduct $24,057.93 for the cost of inspection, transport and repair, excluding storage charges. Mr Montocchio invited the administrative receivers to indicate whether they were agreeable to Boral's proposal by 26 February, on the basis that if they were, Boral would waive any claim it had for costs and losses suffered as a result of the product being defective. 17 On 11 March 2003 Mr Montocchio sent an e-mail to the office of the administrative receivers, reporting that the rectification work on the seven container loads of scaffolding had nearly been completed, and listing additional costs that had been incurred for storage, supply of components and travel. The total repair costs were stated as $98,825.92. Mr Montocchio said that, as regards the remaining 11 containers Boral was receiving, he anticipated that there would be some rectification work of which he would notify the administrative receivers in due course. 18 On 5 June 2003, without having replied to Mr Montocchio's letter of 21 February and his e-mail of 11 March, Mr Oakley, purportedly on behalf of Action Makers, made a demand for payment of the Invoice Amount. This was the full price on 18 invoices, rendered over the period from 5 November 2002 to 30 January 2003, and listed in his letter. Mr Oakley's letter said that if full payment of the Invoice Amount was not received by return, "we" (presumably, the administrative receivers) would exercise a right to claim for the total amount under the letter of credit. The letter of demand made no reference to Mr Montocchio's correspondence. 19 On the same day Mr Oakley made a demand upon the Bank for payment under the letter of credit to the order of Action Makers, for the Invoice Amount. The demand was expressed to be made by Mr Oakley as administrative receiver of Action Makers, "acting as agent and without personal liability". He provided a beneficiary's certificate for the purposes of the letter of credit, as administrative receiver on the same basis, certifying that the amount claimed represented funds due to be paid by Boral in respect of 18 invoices, particulars of which were listed. The certificate said that a demand for payment had been made on Boral and the demand remained unsatisfied. This is presumably a reference to the demand made bearing the same date as the certificate. Neither the certificate nor the demand on the Bank referred to the dispute about defective product. 20 On 6 June 2003 solicitors acting for Boral responded to the letter of 5 June, asserting that the goods provided to Boral contained numerous defects, failing to meet the specifications set out in the supply agreement, and that Boral had incurred costs adding up to the Disputed Amount in rectifying the defects. They sought an undertaking that the administrative receivers would not exercise their rights under the letter of credit for seven days, to give the solicitors time to take full instructions from Boral. They said that if the administrative receivers were to exercise their rights pursuant to the letter of credit, Boral would hold them personally liable for any loss or damage it may thereby incur. I infer that Boral's solicitors were not aware that Mr Oakley had already made a demand on the Bank. 21 When they received no reply to their letter of 6 June, the solicitors for Boral wrote again on 10 June 2003, reiterating their request for an undertaking that the administrative receivers would not exercise rights under the standby letter of credit for seven days. They gave further particulars of Boral's claim with respect to defective product, and referred to the letter of 21 February and the e-mail of 11 March. They asserted that the containers of scaffolding components received after 21 February contained components with a higher number of defects than in the previous containers. They said that Boral would pay the Undisputed Amount, being the Invoice Amount less the cost of rectifying defects, in full and final settlement of the matter. 22 On 10 June 2003 a Manchester firm of solicitors, apparently acting for the administrative receivers and the company in administrative receivership, replied to the letters of 6 and 10 June. They said that it is an essential characteristic of a letter of credit that it is an autonomous contract, and that its performance is independent of the underlying transaction to which it relates (propositions described by Campbell J on the ex parte application as "uncontroversial": [2003] NSWSC 557 (18 June 2003), paragraph [7]). They asserted, controversially, that the existence of a "potential" claim by Boral against Action Makers did not prevent the latter from exercising its rights under the letter of credit. They rejected the assertion that Boral could hold the administrative receivers personally liable for the action they might take, as agents of the company, in respect of the letter of credit. 23 Boral's solicitors replied on 11 June. They demanded to know whether Action Makers had made a call on the letter of credit. They drew attention to the terms of the supply agreement and Boral's right to make a claim in respect of defective product under the agreement. They asserted that it is a condition of the letter of credit that the beneficiary certifies that the amount claimed represents funds due to be paid to the beneficiary by Boral, and that in light of the dispute with respect to defective product, Action Makers could not certify that the Invoice Amount was due. They asserted that the administrative receivers were not acting in good faith, because they had failed to respond to Boral's correspondence, and because they were proposing to take unnecessary action on the letter of credit, having regard to Boral's offer to pay the Undisputed Amount. 24 By another letter also dated 11 June 2003, Boral's solicitors offered to pay the Undisputed Amount immediately, and to pay the Disputed Amount into a trust account of an independent third party pending resolution of the dispute. They also said that Boral would agree to an independent third party being appointed to consider the dispute, without expressly referring to clause 24.10. 25 The Manchester solicitors replied on 11 June 2003. They rejected the payment proposal and said that their "client" (presumably, the company in administrative receivership) had exercised its rights under the letter of credit. They repeated the claim that, as their "client" (presumably, the administrative receivers) was acting as agent of the company, Boral would not be able to hold the client personally liable for action in respect of the letter of credit. They concluded: "Should your client wish to bring proceedings against the Company, it would be an unsecured creditor in any future liquidation. We understand that there will be nil dividend to unsecured creditors." 26 On 18 June 2003, after obtaining ex parte orders from this Court, Boral's solicitors wrote again to the solicitors for the administrative receivers, reiterating the offer to pay the Disputed Amount into a trust account of an independent third party and to agree to appoint an independent third party to consider the dispute. This time specific reference was made to clause 24.10. 27 On 18 June 2003 the solicitors for the administrative receivers replied, raising various questions about the ex parte relief ordered by this Court, and rejecting Boral's offer. 28 The parties arranged that the Bank would pay the Undisputed Amount to the administrative receivers, but the Disputed Amount has not been paid. Relief sought 29 By its amended summons, Boral seeks the following relief: · declaratory orders that, in calling for payment under the letter of credit in a sum greater than the Undisputed Amount, Action Makers is engaging in conduct that is in all the circumstances unconscionable, or unconscionable within the meaning of the unwritten law of New South Wales; · injunctions restraining the Bank from paying to Action Makers any amount in excess of the Undisputed Amount, and requiring Action Makers to countermand the demand it has made for payment upon the letter of credit, and restraining Action Makers from making any further demand under the letter of credit. 30 Boral claims to be entitled to this relief on three grounds: (i) on the basis of an implied negative stipulation in the supply agreement; (ii) pursuant to s 51AC of the Trade Practices Act 1974 (Cth); or (iii) pursuant to s 51AA of the Trade Practices Act. 31 In these ways Boral seeks to overcome what is often referred to as the principle of autonomous operation of instruments such as letters of credit, performance bonds and bank guarantees. I shall begin by revisiting briefly the principle of autonomy and its exceptions. I shall then consider the proper construction of the letter of credit in light of that principle. Boral's first ground depends on the proper construction and application of the supply agreement, matters which I shall then consider in detail. I shall then address Boral's second and third grounds. The principle of autonomy and its exceptions 32 Broadly speaking, the principle of autonomy provides that the financier's unconditional payment obligation in commercial instruments is independent of the underlying contract between the applicant for the instrument ("the account party") and the beneficiary of the instrument; therefore, with limited exceptions, courts do not interfere with performance of the payment obligation. The principle was developed in respect of documentary letters of credit, and was applied to standby letters of credit and various kinds of demand guarantee (including performance bonds) as these instruments were developed: A Ward and G McCormack, "Subrogation and Bankers' Autonomous Undertakings", (2000) 116 LQR 121, 122ff; R Edwards, "On-demand Guarantees or Performance Bonds: Rotten at the Root", (2002) 18 Australian Banking and Finance Law Bulletin 13. 33 In its simplest form, a documentary letter of credit is an arrangement between an importer, a bank and an exporter, under which the bank irrevocably undertakes to pay the exporter upon production of stipulated documents (including, typically, a bill of lading) before the credit's expiry date, and is reimbursed by the importer. The arrangement permits the exporter to ship the exported goods with assurance of payment. 34 Whereas a documentary letter of credit requires documents which evidence the shipment of goods under a contract of sale, a standby letter of credit requires documents which evidence money owing but unpaid by the account party to the beneficiary, frequently suggesting a breach of the underlying contract. That being so, a standby letter of credit is in some ways akin to a guarantee, but it is a primary obligation of the financier, and the payment obligation is typically expressed to arise upon the receipt of documents rather than upon the account party's default under the underlying contract. The required documentation depends upon the terms of the instrument - it may be an externally produced document such as a certified judgment or arbitral award, or a certificate of some kind given by the beneficiary itself. 35 Bank guarantees and performance bonds are similar to standby letters of credit, in that the financier undertakes an obligation to pay the beneficiary on receipt of documentation, but frequently the documentation is nothing more than a demand for payment up to the stipulated amount. Typically the financier's obligation is expressed to be "unconditional" as well as irrevocable. Again, these instruments have some similarities with a guarantee, but they are primary obligations expressed to be unconditional once a demand is made in accordance with the instrument. 36 Standby letters of credit, bank guarantees and performance bonds are often considered together in the cases and by commentators, because they have the same commercial purpose. In part, the commercial purpose is simply to provide security against default by the account party in the underlying contract. Frequently, however, the payment obligation arises without proof of default, upon the making of a demand on or the provision of documents to the financier. Where that is the case, the commercial function of the arrangement is to protect the beneficiary from carrying credit risk during the course of a dispute with the account party as to money due under the underlying contract. 37 The leading statement of the principle of autonomy in Australian law is found in Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443. There the beneficiary of an unconditional bank guarantee had called upon the financier to make payment. The High Court declined to interfere to restrain the financier from acting on the call, or to require the beneficiary to countermand it. Gibbs J said (at 451): "By each of the bank guarantees, the Bank 'unconditionally' undertakes 'to pay on demand' the sum demanded up to the limit specified in the bank guarantee. To hold that the bank guarantees are conditional upon the making of a demand that conforms to the requirements of the contract between the Authority and the contractor would of course be quite inconsistent with the express statement in the bank guarantee that the undertaking of the Bank is unconditional. To hold that the Bank should not pay on receiving a demand, but should be bound to inquire into the rights of the Authority and the contractor under a contract to which the Bank was not party would be to depart from the ordinary meaning of the undertaking that the Bank is to pay on demand. It would be contrary to the settled rules governing the implication of terms in contracts to imply provisions that would contradict the ordinary meaning of the words of the bank guarantees in this way." 38 Stephen J said (at 457): "Their Honours were, with respect, entirely correct in their conclusion that none of the four guarantees is, by any process of implication or construction, to be deprived of the unqualified operation which its express words dictate the. Not only does the clear, indeed empathic [sic], language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is 'as good as cash' can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being 'as good as cash' in the eyes of those to whom it is issued is essential to its function." 39 The history of the principle of autonomy was outlined by Young J in Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545. As his Honour pointed out (at 551), prior to the 1960s the principle developed out of commercial practice regarding documentary letters of credit, and appears to have been treated as absolute. However, an exception to the principle was suggested in cases of fraud (Young J gave as an example a case where the exporter ships rubbish or empty cartons), in a line of English cases beginning with Hamzeh Malas & Sons v British Imex Industries Ltd [1958] 2 QB 127; see also, for example, Discount Records Ltd v Barclays Bank Ltd [1975] 1 WLR 315; Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159; Themehelp Ltd v West [1995] 3 WLR 751; Solo Industries (UK) Ltd v Canara Bank [2001] 1 WLR 1800; the "fraud exception" was explored by the Batt J in Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380, 397, where reference is made to the Australian authorities; see also P Zohrab, "Standby Letters of Credit: Fortex", [1996] NZLJ 392. It has not been contended that the facts of the present case fall into the fraud exception. 40 Another exception to the principle of autonomy, invoked by Boral in the present case, was suggested in English cases such as Elias & Rabbath v Matsas & Matsas [1966] 2 Lloyd's Rep 495; see also Potton Homes v Coleman Contractors (1984) 28 BLR 19. This is the notion that the Court may, at the suit of the account party, grant an injunction to restrain breach, by the beneficiary of the instrument, of an express or implied negative stipulation in the underlying contract, namely a stipulation to the effect that the beneficiary will not call upon the financier to meet its unconditional payment obligation if there is a bona fide dispute between the beneficiary and account party. By this means, the Court does not interfere directly with the autonomy of the financier, but it prevents the beneficiary from invoking the financier's autonomous obligation. 41 More recently English courts have expressed strong reluctance to exercise the injunction jurisdiction in such cases, on the ground that, although an injunction to restrain the beneficiary from breaching the underlying contract does not directly interfere with the autonomy of the payment obligation, the effect of intervening in this way is to break down the separation between the underlying contract and the independent financing contract: Bolivinter Oil SA v Chase Manhattan Bank [1984] 1 Lloyd's Rep 251, at 256-7 per Donaldson MR; Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152, at 1161-2 per Staughton LJ. 42 However, there is now a solid line of authority in Australia for the view that an injunction is available to restrain breach of an express or implied negative in the underlying contract, where the beneficiary has not yet made a call on the instrument, or a call has been made but not acted on. In Wood Hall, Stephen J expressly left open the possibility that such an injunction might have been granted had there been an appropriate qualification on the beneficiary's power in the underlying contract: 141 CLR at 459. In Hortico, Young J made a statement the same effect at 550-551. Yeldham J granted such an injunction in Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Australian Construction LR 81, and this case has been followed in other first instance decisions in New South Wales: for example, Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451; other cases are collected in my judgment in Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158. Of course, as those cases make clear, there is no basis for intervention by injunction unless, as a matter of construction of the contract between the account party and the beneficiary, there is a relevant express or implied stipulation that is truly negative: cf R Perrignon, "Performance Bonds and Standby Letters of Credit: the Australian Experience", (1991) 2 Journal of Banking and Finance Law and Practice 157. 43 The issue was addressed by the Court of Appeal of the Supreme Court of Victoria in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812. Charles JA reviewed the Pearson Bridge line of authority without demur, but he distinguished those cases on the ground that the building contract before him did not contain any qualifications upon the owner's right to call on the security. Callaway JA referred to the observation of Staughton LJ in the Group Josi case, that the effect on the lifeblood of commerce is precisely the same whether the guarantor (typically a bank) is restrained from paying or the beneficiary is restrained from asking for payment. He continued (826): "There is nevertheless an important difference between restraining a bank from honouring a guarantee and restraining the beneficiary from calling upon it. In the former case the moving party seeks to prevent the bank from performing its contract; in the latter case the moving party seeks to prevent the beneficiary from breaching a provision of the underlying contract. A moment's reflection will show that the beneficiary, unlike the Bank, maybe restrained if there is an express provision in the underlying contract against calling upon the guarantee. In theory an implicit or implied prohibition is just as good." 44 His Honour noted, however, that the implication of a term cannot be made if it would stultify, or be inconsistent with, the purpose for which the guarantee was taken. Batt JA agreed with the reasons given by Charles and Callaway JJA. 45 A third exception to the principle of autonomy, also relied upon by Boral, arises out of the Australian statutory provisions dealing with unconscionable conduct, ss 51AC and 51AA of the Trade Practices Act. I shall consider this exception later, as its application depends upon some matters of construction and fact dealt with below. Construction of the letter of credit 46 The letter of credit is expressed to be "irrevocable" but not "unconditional". It provides that payment will be made upon receipt of a draft and the beneficiary's certificate. It prescribes the contents of the certificate, saying inter alia that the certificate is to state that the amount claimed "represents funds due to be paid to the beneficiary by Boral", and that the amount "was not paid to the beneficiary when due by Boral" in accordance with a specified unpaid invoice. The certificate must also say that a demand for payment of that amount has been made by the beneficiary on Boral and the demand has remained unsatisfied. 47 Where the instrument in question is a bank guarantee, under which the bank "unconditionally" undertakes "to pay on demand" the sum demanded up to the limit specified, the Court will adopt a construction of the instrument that reflects the unconditional nature of the payment obligation, and will not make the bank's payment obligation depend upon the claimant establishing an entitlement to be paid under its contract with the person who procured the bank guarantee. The observations of Gibbs and Stephen JJ in Wood Hall are applicable. The instrument is treated as "unconditionally convertible to cash", in the words of Stephen J. 48 A standby letter of credit provides for payment by the financier on receipt of documents, rather than simply on demand. Whether a standby letter of credit should be construed in the same fashion as a bank guarantee or performance bond depends upon the commercial purpose of the instrument. It is theoretically possible, though highly unlikely, that in a case where the purpose of a letter of credit is nothing more than to provide security for payment of valid claims, the financier's obligation to pay might depend on its being satisfied that the beneficiary has a valid claim against the account party for the amount called upon. Where, more typically, the commercial purpose of the arrangement is to shift the credit risk from the beneficiary pending resolution of a dispute between the beneficiary and the account party, the financier's payment obligation arises as soon as it receives documents complying, ex facie, with the description in the instrument. In such cases (as Gibbs J observed in Wood Hall, in the passage quoted above), the financier is not bound to inquire into the rights of the beneficiary and the account party under the underlying contract to which the financier is not party. 49 In the Fletcher Construction case, the Victorian Court of Appeal held that the commercial purpose of the arrangement under which a standby letter of credit had been issued was the shifting of credit risk pending resolution of disputes rather than the simple provision of security for payment of valid claims (at 821 per Charles JA). The letter of credit required the beneficiary to supply the financier with a statutory declaration to the effect that the amount claimed represented the amount remaining unpaid to the beneficiary under the building contract. It was argued that the statutory declaration must record facts establishing the existence of a real obligation to pay the amount claimed, and it was not sufficient that the declarant have a bona fide belief that the beneficiary was owed that sum of money. The argument was rejected. Charles JA observed (at 823) that the parties had precisely agreed that it would be sufficient for the declarant to make a statement that the amount remained unpaid. 50 Similarly, in the present case there is nothing in the supply agreement (considered under the next heading) to suggest that the commercial purpose of the arrangement for supply of the letter of credit was anything other than the shifting of credit risk from Action Makers to Boral pending resolution of disputes. The letter of credit provides, in clear and express terms, that payment will be made upon receipt of documents including a beneficiary's certificate stating that the amount claimed represents funds due to be paid by Boral. As between the Bank and the other parties, the payment obligation arises as soon as the Bank receives a draft and a beneficiary's certificate which appears on its face to be in compliance with the terms of the letter of credit. Implied negative stipulation 51 Boral submits that, properly construed, the supply agreement contains an implied negative stipulation, to the effect that Action Makers promises not to call upon the letter of credit in respect of any amount that is the subject of a bona fide dispute as to indebtedness, and promises not to certify under the letter of credit in respect of such an amount. Boral makes the further submission that, even if there is no implied negative stipulation with respect to an amount the subject of a bona fide dispute, there must be such a stipulation where it is clear that the amount in question is not owing at all. 52 This submission makes some assumptions which deserve consideration. There are, broadly speaking, three questions to consider: · whether, on the facts, Action Makers should be taken to have selected option (b) under clause 24.13 of the supply agreement; · if so, whether the supply agreement permits Action Makers to demand full payment of the Invoice Amount after the option (b) procedure has been implemented; · if not, whether there is any implied provision in the supply agreement which prevents Action Makers from claiming the full Invoice Amount after the contract price has been reduced under clause 24.13(b). 53 As to the first question, this is a case where (having regard to the concession made on behalf of Action Makers, set out above) a valid warranty claim has arisen, properly notified to Action Makers in accordance with the supply agreement. The obligation of Action Makers under clause 24.13 was, when the claim was made, to elect one of the four alternatives set out in that clause. Boral proposed option (b) in its letter dated 21 February 2003, and followed up that proposal on 11 March 2003, making it plain that repair work was being undertaken on the assumption that option (b) would apply. Action Makers never demurred to Boral's proposals, although it was aware on 11 March, if not earlier, that repair work was being undertaken pursuant to option (b). It did not take any of the steps that it would take under options (a), (c) or (d), if it were to select one of those options. 54 There is no direct evidence that a decision was made by Action Makers to select option (b). Counsel for Boral submitted that Action Makers either waived its right to elect for another remedy than option (b), or it was estopped from so doing. 55 The ambiguities in the concept of waiver, in its application to circumstances such as the present, were pointed out in some of the judgments in Commonwealth of Australia v Verwayen (1990) 170 CLR 394: see Lewis v Cook (2000) 18 ACLC 490. For example, Toohey J (at 467) recalled Roscoe Pound's observation that waiver is "a slippery word worn smooth with overuse". If the traditional formulation is used, describing waiver as an intentional act with knowledge (Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305; Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641), there has been no waiver, on the facts, because there has been no conduct by the administrative receivers that might satisfy that description, but at most acquiescence in the state of affairs assumed by Boral. If the submission is intended to invoke the doctrine of election, it is doubtful whether the evidence establishes that a binding election was made. 56 In my view, however, the facts provide evidence of an estoppel of the kind referred to in Verwayen's case, at 500 per McHugh J (dissenting, as to the application of the principle); see also Austotel Pty Ltd v Franklins Self Serve Pty Ltd (1989) 16 NSWLR 582, at 610 per Priestley JA; Wykes v Samilk [1998] Aust Contract R 90-097 at 14-15 per Sheller JA. In the passage cited, McHugh J explained (by reference to Grundt's case) that the common law does not permit "an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations". He added that equity, like the common law, will not permit an unjust departure from an assumption of fact which one person has caused another to adopt or accept for the purpose of their legal relations, but whereas the common law doctrine is concerned with rules of evidence, the equitable doctrine creates rights. 57 By failing to assert any contrary view in response to Boral's letter of 21 February and its e-mail of 11 March, the administrative receivers created on Boral's part an assumption of fact for the purpose of their legal relationship, the assumption of fact being that the administrative receivers had caused Action Makers to select option (b). The assumption of fact was created, at the latest, shortly after 11 March 2003, by virtue of the administrative receivers not replying to the e-mail of that date. Boral relied on the assumption and acted to its detriment by completing the repairs and incurring expenses in the sum of the Disputed Amount. Action Makers, and the administrative receivers as its agents, are estopped from denying that option (b) was selected. Equity, like the common law, will not permit unjust departure from such an assumption. It does not matter whether one relies on the common law or the equitable doctrine, for it is enough that the estoppel prevents Action Makers from denying, in the present proceeding, the selection of option (b). 58 Since I have concluded that Action Makers should be taken to have selected option (b), it is relevant for me to consider the second question. Once the waiver or estoppel took effect, clause 24.13 obliged Action Makers to "grant to Boral an appropriate allowance against the Contract price". It is critically important to determine whether this obligation has the effect of reducing the liquidated amount that Action Makers is entitled to claim under the supply agreement. 59 The obligation of Action Makers under clause 24.13(b) is to grant an appropriate allowance against the Contract Price. As a matter of construction this amounts to contractual agreement that the allowance is to be set off against the contract price, thereby reducing the contract price once the allowance has been granted. 60 It is unnecessary for me to decide whether the wording of the clause means that, before the allowance has been granted, the obligation to grant an appropriate allowance reduces the contract price or suspends the obligation to pay any disputed amount. It is also necessary to decide whether failure to grant an appropriate allowance in breach of the obligation would give rise to a claim for a liquidated amount or unliquidated damages (compare Spain v Union Steamship Co of NZ Ltd (1923) 32 CLR 138 with Alexander v Ajax Insurance Co Ltd [1956] VLR 436). 61 This is because, once option (b) has been selected without an allowance being stipulated in advance, the obligation to grant an appropriate allowance means that Action Makers must make allowance for all repair costs reasonably incurred. The word "appropriate" is to be construed, in its context, as imposing on Action Makers an obligation to allow what is objectively appropriate, rather than as giving Action Makers a subjective discretion available to be exercised after the repair costs have been incurred. There is evidence before me that the Disputed Amount was the cost of repairs actually incurred by Boral, and no evidence to suggest that those costs were not reasonably incurred. 62 In the circumstances, it seems to me that, at some time before 5 June 2003 when the administrative receivers sought to draw upon on the letter of credit, they had come under a contractual obligation to set off against the contract price, that is the Invoice Amount, an allowance for the Disputed Amount. This reasoning has the consequence that, prior to 5 June 2003, the amount owing (that is, the liquidated sum payable by Boral to Action Makers for the goods) ceased to be the full invoice price and became the invoice price less the appropriate allowance. 63 I turn to the third question, which relates to the contractual position between Boral and Action Makers as drawer and beneficiary of the letter of credit. Clause 7 of the supply agreement obliges Boral to provide an irrevocable standby letter of credit "to the value of each order". There are provisions about payment, principally in clause 7, but they make no further reference to the letter of credit. 64 The supply agreement does not contain the kind of provision found in the contract between the account party and the beneficiary of the irrevocable instrument in the Barclay Mowlem and Reed Construction Services case - that is, a provision stipulating when the instrument is available to be called upon by the beneficiary. In Reed Construction Services, for example, a building contract between a builder who provided a maintenance bond, and the building proprietor who was the beneficiary of that bond, stated that any security provided by the builder was to be available to the proprietor whenever the proprietor came to be entitled to the payment of money by the builder under the building contract. I held that this provision implied a contractual promise by the proprietor that the security would not be called upon unless it was entitled to the payment of money under the building contract. Although the maintenance bond was an autonomous contract, and there would be no basis for interfering with the performance of that contract by the insurance company that wrote the bond, it was appropriate for the Court to issue an injunction restraining the proprietor from calling for payment on the bond in circumstances where its conduct in doing so would breach that implied negative stipulation in the building contract. 65 In the absence of such a provision in the supply agreement, it is not plausible to contend for the kind of implied negative term asserted by Boral. If the contract between the account party and the beneficiary of an irrevocable instrument were to say, "the beneficiary shall be entitled, as against the account party, to call on the financier's irrevocable promise to pay, in X, Y and Z circumstances", it would be naturally implied, in the absence of some other provision, that these were the only circumstances in which it would be contractually permissible for the beneficiary to call upon the financier's promise to pay. Here, however, there is a requirement for the provision of a letter of credit to the value of each order but nothing is said in the supply agreement as to the circumstances in which the beneficiary of the letter of credit may demand payment under it, and the natural implication is that there is no contractual limit on such demands. The reference to the value of the order sets the maximum amount of the letter of credit, but those words do not imply any limitation as to the circumstances in which that value may be recovered from the financier. 66 Nothing in any other part of the supply agreement changes this analysis. Clause 24.13(b) requires Action Makers to grant Boral an appropriate allowance against the Contract price, once that option has been selected and implemented, and under this provision (as I have said) the grant of an appropriate allowance reduces the amount thereafter due and payable on invoices rendered. But the supply agreement does not expressly deal with the effect of such a reduction in the invoice price upon Action Makers' ability to make demands on the letter of credit. 67 Since the letter of credit is required by clause 7 to be in place throughout the term of the agreement, to the value of each order, it must cover the value of the order when it is made, necessarily at a time prior to any warranty claim that may arise after delivery of product. It would have been a simple matter for the parties to provide, in the supply agreement, that if an allowance is made, after a warranty claim under clause 24.13(b), then Action Makers shall not thereafter be entitled to claim on the letter of credit for an amount that disregards that allowance. They did not do so. It is perfectly sensible, as a commercial matter, for the parties to a supply agreement to agree that the seller is to be entitled to unrestricted access to a letter of credit notwithstanding a valid warranty claim, so as to shift the credit risk from the seller by giving it a security that it could use to put itself in funds pending settlement of the claim, subject to an obligation to account to the buyer for any net overpayment. It follows that any implied term to the contrary is not necessary to give business efficacy to the supply agreement, and is not so obvious that it "goes without saying": see BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-3. 68 This is, in effect, the analysis adopted by the Victorian Court of Appeal in the Fletcher Construction case. Charles JA held ([1998] 3 VR at 821) that the relevant clause in the building contract made provision for allocation of risk between the owner and project manager by exhibiting a contractual intention that, pending resolution of any dispute between them, the project manager and not the owner was to be out of pocket. There was no implied term in the building contract limiting the owner's calls on the security to cases where it had established the validity of its claim for damages. 69 Boral submits that, as the letter of credit must, according to clause 7, be in a form acceptable to Action Makers, the supply agreement is to be construed harmoniously with the letter of credit, which requires the beneficiary to certify the amount due. But it is not out of harmony with the letter of credit to construe the supply agreement as I have. Bearing in mind the strict judicial approach to the implication of terms in commercial contracts, explained in many cases including the BP Refinery case, there would be no justification for implying into the supply agreement a provision limiting claims on the letter of credit to moneys actually due, on the ground that the letter of credit requires a beneficiary's certificate stating the amount due. To do so would eliminate the significance that the parties have presumably intended to place on having that provision in the letter of credit rather than in the supply agreement. Again, my conclusion is consistent with the Fletcher Construction decision, because in that case the building contract required that security be given in a form, and by a financial institution, approved by the owner. 70 My conclusion is that in the present case, Boral has failed to establish that there is an implied negative stipulation in the supply agreement grounding an entitlement to an injunction to restrain Action Makers and its administrative receivers from claiming the Disputed Amount from the Bank under the letter of credit. The Trade Practices case 71 My conclusions so far mean that, when Mr Oakley provided a beneficiary's certificate to the Bank on 5 June 2003, his certification that the Invoice Amount represented funds due to be paid to Action Makers by Boral was false, and in fact the only amount due to be paid by Boral was the Undisputed Amount. He also certified that demand for payment had been made and had remained unsatisfied. It seems to me that this statement was misleading, because it suggested the expiry of some interval of time between the demand and the certificate, whereas the demand for payment was in fact made only on the same day as the certificate. The question is whether, by calling for payment of the Invoice Amount and supplying the certificate in these terms, Action Makers by the administrative receivers is engaging in unconscionable conduct for the purposes of ss 51AC or 51AA of the Trade Practices Act. 72 Section 51AA is in the following terms: "(1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories. (2) This section does not apply to conduct that is prohibited by s 51AB or 51AC."

Boral Formwork v Action Makers

At a glance

Court

Decision date

Before

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Judgment (20 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (26)

Cited By (6)