Commonwealth Bank v White

5. Logically, the third application falls to be determined first. I heard argument upon it followed by argument on the second application. Having reserved my decision on these applications, the plaintiff's application to sever the third party proceeding was stood over to a date to be determined. I should add that Lloyd's did not appear to support or resist this application.

9. The Bank's claim against Mr White is for money due under an agreement whereby it issued three irrevocable letters of credit in favour of Lloyd's. These letters of credit were issued in December 1980, December 1984 and December 1987 respectively and were varied so that in 1992 their total sum was £168,000, provided to satisfy the requirements of Lloyd's that Mr White provide securities for his activities as an underwriting member, a Name. Mr White ceased to be a Name at the end of 1992. On 4 August 1992 he instructed the Bank to give to Lloyd's notice of termination of the letters of credit and the Bank did so on 13 November 1992.

12. In due course Lloyd's drew down on the letters of credit in the total sum of £168,000 as follows:

16. The Bank has demanded payment from Mr White under the facility and says that the amount payable by him in April 1997 was $412,119.16. This sum, together with interest accruing thereafter, remains unpaid and is the subject matter of the Bank's claim. So much appears from the amended statement of claim of the Bank filed on 11 December 1997.

19. Mr White has filed a defence and an amended defence. On 2 August 1999 his solicitors forwarded a proposed second amended defence. They foreshadowed an application to seek leave to amend in this form. The argument before me was directed to this proposed defence which I shall refer to simply as "the defence". In this document Mr White raises a number of issues in defence to the Bank's claim, some of which are not relevant for present purposes. I am concerned with the pleas made in paragraphs 34 and following.

22. In paragraphs 34 and 35 he says that he entered into agreements with Lloyd's on various dates in 1980 to 1987 under which he became a Name on terms which were substantially the same as other Names. Paragraph 36 is in these terms:

"36. It was an implied term of any agreement between the Bank and the Defendant relating to the issue by the Bank on the Defendant's behalf of letters of credit to Lloyd's, that the Bank would not pay in respect of a draw down by Lloyd's if: (a) the Defendant directed the Bank not to pay Lloyd's; and (b) the Bank knew of clear evidence of fraud or unconscionable conduct by Lloyd's which would release the Defendant from his underlying obligation to Lloyd's.

Particulars

The term is to be implied as a matter of law."

Mr White says in paragraph 37 that on or about 27 June 1994 and 6 March 1995 he instructed the Bank not to pay any draw downs in favour of Lloyd's "on the basis of fraud and bad faith by Lloyd's".

"38. Prior to each of the dates on which the Bank paid Lloyd's (as set out in paragraph 18 of the Amended Statement of Claim), the Bank knew of clear evidence of fraud or unconscionable conduct by Lloyd's which would release the Defendant from his underlying obligation to Lloyd's.

Particulars

By each of the dates on which the Bank paid Lloyd's the Bank knew that: (a) a number of Names, including at least one client of the Bank other than the Defendant, had joined a `Master Defence' against Lloyd's that alleged fraud against Lloyd's Names; (b) the allegations made by the Names in the `Master Defence' were to the effect that Lloyd's had engaged in fraud against Names and/or prospective Names by: (i) fraudulent misrpresentation or non-disclosure in relation to potential liability arising from asbestos-related and further or alternatively other claims; and/or; (ii) failing properly to regulate the Lloyd's market in relation to potential liability arising from those asbestos-related and other claims; (c) similar allegations had been made by Lloyd's Names in other proceedings in Australia, the US and Europe; (d) by the `Master Defence' and the other proceedings referred to in (c), the Names concerned sought to rescind their contractual relationship with Lloyd's and to avoid all liability whatsoever to Lloyd's; (e) the Defendant had suffered and was suffering substantial losses as an underwriting member of Lloyd's; (f) the Defendant claimed that he was able to rely on the same or similar allegations as set out in (b) and (c) and had raised such allegations with Lloyd's; (g) it was likely that the Defendant was in a position to rely on the same or similar allegations as set out in (b) and (c); (h) there was clear evidence to support the allegations described in (b) and (c) above. Further particulars of the Bank's knowledge will be provided after discovery."

31. In paragraph 41 he says that by reason of these matters he is not liable to indemnify the Bank in respect of any of the payments made by it to Lloyd's.

34. The Bank's strike out application is brought under R. 23.01 and/or R.23.02. It seeks to strike out paragraphs 38 to 41 on the grounds that the same do not disclose a defence and/or may prejudice, embarrass or delay the fair trial of the proceeding and/or are vexatious. The terminology of this relief suggests that this is in truth an application under R. 23.02 and this was essentially the way the application was presented. Upon such an application no evidence is admissible: R. 23.04(2). Notwithstanding this, counsel for the Bank placed before the court, without objection, copies of the following documents, most of which were referred to in the pleadings.

It was accepted by both parties that I should deal with the strike out application on the basis set out in General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 129, per Barwick CJ. Accordingly, I approach the matter on the basis that the facts alleged in the defence will be proved and that I will not strike out a paragraph in the defence unless the defence raised is clearly untenable.

41. Counsel for the Bank submitted that paragraph 38 did not raise a tenable defence in this sense. They submitted that the authorities show that when a proper demand is made, a Bank is relieved of the obligation to pay under a letter of credit only where there is a clear case of fraud of which the Bank is aware at the relevant time. See, for example, Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 at 395, per Batt J and the cases there referred to. It was submitted that the particulars provided under paragraph 38 showed no more than that the Bank had knowledge of allegations of fraud, not of fraud itself. The cases show that it is not sufficient that the Bank be aware of mere allegations: Turkiye Is Bankasi AS v Bank of China [1996] 2 Lloyd's Rep 611 at 616, per Waller J, or that there is an arguable case that the demand is not honestly made: United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd's Rep 554 at 565, per Ackner LJ. Accordingly, it was put, I should strike out this paragraph.

44. This submission in its terms cannot succeed. For present purposes, I must accept the allegations of fact are made out. The allegation of fact in paragraph 38 is that the Bank knew of clear evidence of fraud or unconscionable conduct by Lloyd's which would release Mr White from his underlying obligation to Lloyd's. It is an allegation of fact which calls up the implied term in paragraph 36(b), a plea which is not challenged. Accordingly, the defence says that the agreement between the Bank and Mr White is that the Bank would not, in these circumstances, pay in respect of the draw downs and, in paragraph 41, that he is not therefore liable to indemnify the Bank.

47. Faced with this difficulty, counsel for the Bank shifted their focus to paragraph 36(b) which I have set out above. They submitted that this paragraph should be struck out because such an implied term is untenable. Counsel for Mr White accepted that this argument might be presented notwithstanding its absence from the summons, but only on the basis that it was put under R.23.02, that is, without evidence. Argument proceeded on that basis.

50. It was therefore put that the cases, such as the Olex Focas case and the many cases to which I was referred, showed that no such term is to be implied. It is, in my view, arguable that an injunction would go against the Bank to restrain it from paying under a letter of credit where the Bank knew of clear evidence of fraud by Lloyd's which would release Mr White from his undertaking to Lloyd's. It may be that Mr White does not have to go as far as this. It is certainly not beyond argument that the Bank is entitled, and perhaps even obliged, to refuse payment faced with a conforming demand in circumstances where it has clear evidence of fraud: United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd's Rep 554 at 561, per Ackner LJ, or where the request for payment is made fraudulently in circumstances where there is no right to payment: Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 at 169, per Lord Denning MR. Likewise, where the clear evidence is of unconscionable conduct on the part of the beneficiary: Inflatable Toy Company Pty Ltd v State Bank of NSW (1994) 34 NSWLR 243 at 251, per Young J. At least in the fraud case, the customer may seek an order restraining the beneficiary from drawing on the letter of credit or restraining the Bank from paying: Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd's Rep 345 at 361, per Staughton LJ. This is not the relief which Mr White seeks against the Bank in this case, for the demands have been made and the Bank has made payment in response to them. In United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd's Rep 554 at 560, Ackner LJ contemplated the possibility that a bank, making a payment in these circumstances, would be liable to its customer in negligence. Again, this is not the allegation here made. What was put to me is that, in this country, the duty of care owed by one contracting party to another is seen, not as imposed by the law of tort, but by the implication of a term: Astley v Austrust Ltd (1999) 73 ALJR 403 at [47]. Accordingly, it was submitted that the allegation in paragraph 36(b) cannot be put aside as untenable. I agree. I will not strike it out.

53. I return, then, to paragraph 38. In its terms it alleges a breach of the implied term alleged in paragraph 36(b). It cannot, therefore, be struck out under R. 23.02 so long as paragraph 36(b) stands. Counsel for the Bank then submitted that paragraph 38 should be struck out on the basis that the particulars given do not support the allegations, alternatively, that the particulars are insufficient. I was reminded that an allegation of fraud must be fully particularised. I accept that the particulars as they stand are insufficient for trial purposes. Paragraphs (a), (b), (c), (e), (f) and (g) amount to no more than a claim that the Bank was aware that serious allegations had been made against Lloyd's. These allegations, if proved, would not establish the fraud exception.

56. Paragraph (h), however, baldly asserts that the Bank knew that there was clear evidence to support the allegations of fraud by Names other than Mr White. This, too, is probably insufficient, for there must be some factual or logical nexus between the allegations in paragraphs (b) and (c) and those made by Mr White.

59. Accepting that the particulars given under paragraph 38 are insufficient, this is not, in this pleading, sufficient to warrant the striking out of the paragraph. The proper order would be to direct the delivery of further particulars. I am mindful of the fact that further particulars of the Bank's knowledge are to be given after discovery and that the information sought is peculiarly within the control of the Bank. See Wickstead v Browne (1992) 30 NSWLR 1 at 11, per Handley and Cripps JJA.

64. It is convenient to deal with these paragraphs together. They are in the following terms:

"39. Further, in his letters dated 27 June 1994 and 6 March 1995, referred to in paragraph 37, the Defendant notified the Bank that allegations of fraud had been made against Lloyd's which would release him from his underlying obligation to Lloyd's.

PARTICULARS

The Defendant refers to the particulars sub-joined to paragraph 37 hereof. 40. Further, by an Internal Memorandum of the Bank dated 3 November 1994 (Exhibit PEW9 to the affidavit of the Defendant sworn 1 June 1988 and filed herein) the Bank noted that one of the Bank's customers (not the Defendant) was joining a `Master Defence' against Lloyd's that alleged fraud against the Lloyd's Names and that the defence, among other things, claimed false misrepresentation and breach of fiduciary duty.

Each is introduced by the word "Further", which invites me to ask "further to what?" Each is a plea which, coupled with paragraph 41, leads to the conclusion that Mr White is not liable to indemnify the Bank because it was not obliged to pay under the letters of credit in response to the demands by Lloyd's. It does not appear that either paragraph is dependent upon the contractual terms alleged in paragraph 36. Counsel for Mr White accepted that each paragraph was a self-contained basis for denying Mr White's liability to indemnify the Bank and they conceded further that the paragraphs do not fall within any of the categories established in the decided cases. They submitted, nonetheless, that I should permit these paragraphs to stand because the law in this area is still in a state of development and because they do not enlarge the issues of fact already raised: Wickstead v Browne (1992) 30 NSWLR 1 at 6, per Kirby P.

69. Against this, I was reminded of the caution with which the fraud exception has been expressed in the decided cases. I was invited to look at the letters of 27 June 1994 and 6 March 1995, referred to in paragraph 39 of the defence and at the internal bank memorandum of 3 November 1994 referred to in paragraph 40 to determine the substance of the plea. Having examined these documents, it was submitted that, in the light of the cases, even assuming some further development, it was inconceivable that either paragraph 39 or paragraph 40 in their present form could possibly raise a defence. No good purposes, it was put, could be served by permitting them to remain. I agree. I will strike them out.

73. Mr White seeks orders pursuant to R. 29.08 that the Bank make specific discovery of the following classes of discovery:

"(a) correspondence or other communications sent or received between 1 January 1990 and 6 November 1996 between the Bank and customers of the Bank on behalf of whom security (by way of bank guarantee, letter of credit or otherwise) had been provided by the Bank to the Society of Lloyd's (`relevant customers') containing or referring to allegations that Lloyd's had engaged in fraud against Names and/or prospective Names by: (i) fraudulent misrepresentation or non-disclosure in relation to potential liability arising from asbestos-related or other claims; and/or (ii) failing to properly regulate the Lloyd's market in relation to potential liability arising from asbestos-related or other claims (`the said allegations'); (b) court documents or copies of Court documents served on or provided to the Bank by relevant customer between 1 January 1990 and 6 November 1996 containing or referring to any of the said allegations; (c) correspondence or other communications between the Bank and the Society of Lloyd's sent or received between 1 January 1990 and 6 November 1996 arising out of or in response to any document falling within (a) or (b) hereof; and (d) reports, memoranda and advices prepared by or on behalf of the Bank between 1 January 1990 and 6 November 1996 arising out of or in response to any document falling in (a), (b) or (c) hereof."

In essence these documents are sought in aid of the fraud plea raised in paragraph 38 of the defence to which I have referred.

78. The Bank resisted discovery on the basis that it is fishing. In the sense that Mr White is seeking to elicit documents which will fix the Bank with sufficient knowledge of Lloyd's fraud or unconscionable conduct at the relevant time to sustain his defence, this is doubtless correct. It is, however, not a reason to refuse discovery.

81. Next, it was put that the documents were irrelevant in the sense that this expression is used for discovery purposes. This argument cannot stand so long as paragraph 38 of the defence remains. I have refused to strike this paragraph out.

84. Finally, it was said that the discovery would impose an unreasonable burden on the Bank. I have read again the affidavit of Cullen Ross Thomson on this topic sworn on 21 August 1998. I find in it no sufficient reason to deny the defendant access to the documents which are or may be relevant to its defence in this litigation.

Under the plaintiff's summons of 6 September 1999

1. Paragraphs 39 and 40 of the defendant's proposed amended defence be struck out.

2. The defendant provide further and complete particulars under paragraph 38.

Under the defendant's summons of 12 August 1999

1. Pursuant to Order 29.08 the Bank, by its appropriate officer, make and serve an Affidavit within 21 days stating whether any document or copy of any document falling within any of the following classes is or has been in its possession and, if such a document or copy has been but is no longer in its possession, when it parted with the document or copy and the belief of the deponent as to what has become of it:

(a) correspondence or other communications sent or received between 1 January 1990 and 6 November 1996 between the Bank and customers of the Bank on behalf of whom security (by way of bank guarantee, letter of credit or otherwise) had been provided by the Bank to the Society of Lloyd's (`relevant customers') containing or referring to allegations that Lloyd's had engaged in fraud against Names and/or prospective Names by: (i) fraudulent misrepresentation or non-disclosure in relation to potential liability arising from asbestos-related or other claims; and/or (ii) failing to properly regulate the Lloyd's market in relation to potential liability arising from asbestos-related or other claims (`the said allegations'); (b) court documents or copies of Court documents served on or provided to the Bank by relevant customers between 1 January 1990 and 6 November 1996 containing or referring to any of the said allegations; (c) correspondence or other communications between the Bank and the Society of Lloyd's sent or received between 1 January 1990 and 6 November 1996 arising out of or in response to any document falling within (a) or (b) hereof; and (d) reports, memoranda and advices prepared by or on behalf of the Bank between 1 January 1990 and 6 November 1996 arising out of or in response to any document falling in (a), (b) or (c) hereof.

97. I will adjourn that part of the plaintiff's summons of 24 February 1999 which seeks a separate trial of the third party claim to a date to be fixed. I will hear counsel further as to the precise terms of the orders to be made, including the time for the provision of the further particulars under paragraph 38, and as to costs.