DrillTec v Campbell

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50006/2002 DRILLTEC GMBH GROSSBOHR-UND-UMWELTTECHNIK v ALLAN STUART CAMPBELL JUDGMENT 1 His Honour: There are before me the hearing of three notices of motion. The first in point of time is a motion filed on 10 July 2002 by the plaintiff. That motion seeks summary judgment against the defendant and dismissal of the first cross-claim to the extent that that cross-claim is brought by the defendant against the plaintiff. The balance of the relief on the motion is not pressed. The second is by the plaintiff on 23 July 2002 which claims a series of relief in respect of the second cross-claim. In essence the claim is for a stay of that cross-claim on the basis of forum non conveniens. Only the relief in paragraph 3 is now pressed. The third motion is one brought by the defendant filed on 30 August 2002 in which the defendant seeks to amend its first cross-claim. 2 At the commencement of the second days hearing the plaintiff abandoned the hearing of the claim for summary judgement and instead it sought dismissal of various defences propounded by the defendant. The amended motion was filed on 18 November. The motions have been heard together with the evidence in one as evidence in the other. Although the defendant's motion to amend it's first cross-claim should logically be the first determined it is necessary to hear all motions together in order to see whether the matters that are raised by the amendment will give rise to a relevant defence that may be propounded at the present time. The nature of the proceedings 3 The plaintiff sues the defendant to recover the sum of Euro 766,937.82. The claim is based upon a guarantee given by the defendant dated 8 June 2001. It was given as part of a settlement of disputes between the plaintiff and a number of companies compendiously described in the pleadings as the Lucas Group. Some of those companies and the plaintiff became involved in a joint venture that carried out construction work drilling tunnels in Hong Kong. 4 The agreement of 8 June 2001 is referred to as a settlement agreement. The agreement is in German and was entered into in Germany as a result of discussions to resolve differences between the parties. The parties were both represented by their German lawyers. There are a number of provisions in the agreement. The one upon which the plaintiff sues in these proceedings is clause 7. That is in the following terms: -- "Mr Allan Campbell hereby accepts for Drilltec's above-mentioned claims against Lucas an irrevocable, absolute guarantee for a maximum amount of being DEM1,500,000 which is effective for an unlimited period of time and becomes payable at first call. Drilltec undertakes not to call Mr Campbell's guarantee before 01.10.2001, should the above-mentioned claims not have been paid by Lucas by that date." 5 Mr Campbell, the defendant, is the chairman of directors of AJ Lucas Group Ltd the public company which heads the various Lucas companies. 6 Another clause in the agreement to which reference will be made is clause 12. That is in the following terms: -- "This agreement is exclusively subject to German law. The place of jurisdiction for all disputes shall be Munich, Germany, for both parties." 7 The agreement provided for the future hire of equipment to complete projects and the hire agreement which applied also contained a jurisdiction clause in the following terms: "14. Place of fulfilment and jurisdiction 14.1 The place of fulfilment is -- at the lessors option -- 07751 Munchen. The place of fulfilment for payments shall always be Munchen, Germany. 14.2 The place of jurisdiction for all disputes, including any dispute concerning the formation and validity of the contractual relationship, and particularly claims arising from bills exchange or cheques, shall be Munchen, Germany for both parties. 14.3 German law will be solely applicable." 8 It appears that clause 12 governs jurisdiction between the companies who are parties to the settlement agreement but does not bind Mr Campbell in his personal capacity. I will return to this aspect later but it is clear that it is for this reason that the plaintiff has sued on the guarantee in New South Wales. 9 In his further amended defence filed on 5 September 2002 the defendant raises the following matters of defence:

(i) That Dr Prell who signed the settlement agreement on behalf of Mr Campbell had no authority to do so.

(ii) That the defendant was a non-merchant who was unfamiliar with the German concept of surety on first demand and that in such circumstances by operation of law only a common surety agreement was concluded.

(iii) That there were no monies due by the Lucas Group to the plaintiff.

(iv) In the event that the agreement is held to be binding as a guarantee on first demand there can be raised the German defence of abuse of process in respect of the liability of the Lucas Group to the plaintiff.

(v) Various matters concerning the jurisdiction clause to suggest that the guarantee under German law is invalid. 10 The defendant admits that there has been an appropriate demand on the guarantee and that it has not made payment. 11 By his first cross-claim which was filed on 7 June 2002 the defendant sued the plaintiff and the various companies in the Lucas Group. This cross-claim in part repeats the defences, or some of them, and as against the Lucas Group seeks indemnity pursuant to a deed of indemnity dated 1 May 2002 between the defendant and the various companies in the Lucas Group. The amendment which is sought to be made to that first cross-claim refers to the second cross-claim for damages by the Lucas Group against the plaintiff and seeks to obtain declaratory relief which has the effect of bringing into the present proceedings an action for recoupment. Under German law an action on a guarantee of first demand is one in which only very few defences are allowed to be raised. The principle underlying that form of guarantee is that payment must be made once a demand is made and any defences, such as a denial of the underlying indebtedness, must be left to later proceedings commenced by the guarantor after he has made payment. The second proceedings are referred to as recoupment proceedings. 12 The second cross-claim was filed pursuant to orders made by Bergin J in a contested application for leave to file that cross-claim out of time brought by two of the companies in the Lucas Group against the plaintiff. The claim refers to the three separate commercial transactions between various parties. One is a joint venture for the purposes of providing horizontal directional drilling equipment and services to Lucas Hong Kong for what is known as the CLP Project. The second is a joint venture sub contract known as Skanska sub contract. The third transaction is what is known as the CLP hire agreements for the provision of drilling equipment and services by the plaintiff to the Lucas Group. This last claim is based upon the settlement agreement of 8 June 2001, which provided for abandonment of the joint venture and its replacement with new provisions for the hire of the relevant equipment at what were probably commercial rates. The first two claims are thus alternative claims in the event that the settlement agreement is found to be invalid. The cross-claim alleges various breaches of each of these three separate commercial arrangements and claims damages totalling HK$31,273,513.52. It is this cross-claim which is the subject of the plaintiff's stay application. 13 In addition to the Australian proceedings there are also proceedings commenced by the plaintiff on 1 October 2001 in the Munich District Court in the Commercial Chamber against the Lucas Group of companies. The defendant is not a party to these proceedings. The claim is for the recovery of various amounts plus interest pursuant to the agreement of 8 June 2001. The Lucas companies filed a challenge to the jurisdiction of the Munich District Court on 24 May 2002. On 2 July 2002 the court dismissed the interlocutory challenge and directed a defence to be filed. In its reasons the court noted that the invalidity of the jurisdiction agreement vis-a-vis Mr Campbell which was based upon the fact that he is not a merchant and did not cause the jurisdiction agreement between the parties (Drilltec and the Lucas Group) to become invalid. It is the clear that the questions of jurisdiction can still be argued at a final hearing because the conclusion was expressed to be "without anticipating a final decision". The application that was before the court was that there should be a special hearing with regard to local jurisdiction. It was this application that they dismissed. The plaintiff's claim to strike out parts of the defence 14 The plaintiff's change of position in respect of the summary judgment application was said to be as a result of the filing of further expert evidence which dealt with the authority of a Dr Prell who executed the settlement agreement on behalf of the defendant. Leaving aside the paragraphs in the defendant's contentions in the further amended defence filed on 6 September 2002 which dealt with the authority of Dr Prell it sought to strike out the balance. The actual paragraphs sought to be struck out were paragraphs 4 (f), 6, 8, 11 except to the extent that it repeats paragraph C, 4 (a) to (e), 12 (b), 13, 14, and 15. I turn to each of these matters. Paragraph 4 (f) 15 The relevant paragraph in the defence is as follows: "Even if, which is denied, there was a valid guarantee or valid agreement dated 8 June 2001, the alleged guarantee only applies to the claims set out in clause 3 of the agreement." 16 It is apparent that that this defence is a matter of the construction of the terms of the settlement agreement. In order to consider the arguments which are advanced it is necessary to set out the relevant parts of the settlement agreement. During the period of the hearing all submissions were based upon a version of the settlement agreement that is exhibit D. There are different translations of the settlement agreement in evidence. Although reference was made to this difference in the defendant's submissions on this aspect I will first deal with it as a matter of construction having regard to the settlement agreement which the parties themselves adopted in argument before me namely ex D. The parties to the agreement were the three Lucas companies described as joint and several debtors and referred to in the agreement as "Lucas", Mr Alan Campbell and the plaintiff "Drilltec". The recitals to the agreement were in the following form: "Preliminary Remarks: There have been disputes between the parties in relation to the establishing and handling of a joint venture project in Hong Kong on behalf of Skanska International Civil Engineering AB. From this project as well as from the so-called Watermains Project Drilltec has claims against Lucas. Lucas was a shareholder in Drilltec, holding 42.5%. By agreement dated 08.06.2001, Lucas sold and assigned these shares to its co-shareholder Max Streicher KG. The parties therefore make the following Agreement in order to settle the disputes between them. 17 The relevant terms of the agreement were as follows: 1. All oral and written agreements on a joint venture for the fulfilment of the order received through the agreement between Lucas and Skanska International Civil Engineering AB made on 08.09.2000, the so-called CLP Project, are hereby cancelled. There are thus no more reciprocal rights and obligations from the joint venture, with the exception of Drilltee claims against Lucas arising from the hiring of staff, drilling equipment and other equipment and services. Drilltec thus has no more claim/no more entitlement to the so-called completion fee in the amount of DEMI,000,000.00 or the partial amount of DEM550,000.00 from the re-invoicing of costs for the double shift of the 400 t rig. 2. For future hiring of staff, drilling equipment and other equipment, the parties make the following separate hire agreement:- 411 Annexure 1: General Conditions of Hire Annexure 2: Special Conditions, Drilitec 260 t rig Annexure 3: Special Conditions, Drilltec 400 t rig. Annexures 1, 2 and 3 form an integral part of this Agreement. Following expiry of the hire agreements, Lucas undertakes to issue without delay all declarations required to export the devices from Hong Kong such as customs declarations, shipping orders, etc. The services already invoiced by Drilltec shall be re-invoiced on the basis of the new charge rates in order to offset the difference to the charge rates agreed on for the joint venture. This means that the resulting difference to the amounts already invoiced will be additionally invoiced.

3. From the Drilltec services provided for the joint venture project and the Watermains Project, checked by both parties and invoiced up until 30.04.2001, there are the outstanding claims against Lucas listed in Annexure 4, Joint Venture, and Annexure 5, Watermains. Annexures 4 and 5 form an integral part of this Agreement. There is further the re-invoicing claim as per No. 2, para. 3, above. 4. The loan in the amount of DEM3,650,000.00 granted by Lucas to Drilltec is to be offset against these outstanding claims. It is first to be offset against the claims from the Watermains Project and then with the claims from the CLP Project. 5. As security for the currently outstanding claims and future claims, Lucas hereby assigns to Drilltec a first-priority portion of 20% of their current and future claims against Skanska International Civil Engineering AB. Drilltec hereby accepts that assignment and undertakes to keep the assignment strictly confidential, in particular not to disclose it to Skanska International Civil Engineering AB, provided all of Lucas' payment obligations from this Agreement are met by 30.09.2001. Delayed payment of the instalments listed below shall not justify disclosure. 6. Lucas is to pay the claims/invoices still outstanding after offset as follows:- Invoices up to and including April: Immediately Invoices May: Due 30.06.2001 Invoices June: Due 31.07.2001 Invoices July: Due 31.08.2001 Invoices as in Annexure 6 as per 30.08.2001: Due 30.09.2001. In the event that Lucas defaults on the payment of one instalment, the remaining amount falls due immediately. Default interest at 6.5% shall be payable on due claims. Drilltec has opened the following separate bank account for the handling of the payments:- ……………………….. 7. Mr Allan Campbell hereby accepts for Drilltec's above-mentioned claims against Lucas an irrevocable, absolute guarantee for a maximum amount of DEM1,500,000.00, which is effective for an unlimited period of time and becomes payable at first call. Drilltec undertakes not to call Mr Campbell's guarantee before 01.10.2001, should the above-mentioned claims not have been paid by Lucas by that date. 8. Lucas undertakes that it will no longer use Drilltec and Flowtex GUT GmbHi. Ins. projects as reference projects and no longer use the name Drilltec in its advertising. 9. Lucas undertakes to assume 42.5% of all claims established by court title and raised against Drilltec by Herbert Feigl, lawyer and insolvency administrator of Flowtex GUT GmbH Gesellschaft fur Grossbolir- und UinweIttechnik, in relation to, among others, the acquisition of equipment, and to release Drilltec from such liabilities. Drilltec undertakes to notify Lucas in the short term should any claims be raised against Drilltec. Out of court settlements as well as settlements reached within the framework of legal proceedings require the written consent of Lucas. At present, the following claims are known:- Romonta GmbH, DEM1,3 14,768.29 Rampp. 10. Drilltec undertakes to submit to Lucas, against reimbursement of costs, certified annual accounts for the year 2000 as well as a balance sheet and profit and loss account for the period 01.01.2001 to 31.05.2001 prepared and checked by a tax consultant. 11. This Agreement is subject to the condition precedent that Lucas makes the payment in the amount of HKD2,593,797.73 set out in item 6 above to the Drilltec account mentioned in the same paragraph. 12. This Agreement is exclusively subject to German law. The place of jurisdiction for all disputes shall be Munich, Germany, for both parties. 18 The experts on each side agree that in the initial proceedings the court has to determine whether claims are ones to which the guarantee refers. This apparently does not need the plaintiff to establish its claim completely but merely by way of allegations. (See Dr Guntz 28 June paras 17 and 18 and Mr Dierks 25 July paras 21 to 26). 19 The defendant's submissions were to the effect that the only claims to which clause 7 was referring are those that are referred to in clause 3. As can be seen the claims in clause 3 are the matters in annexures 4 and 5 and the further re-invoicing which arise under clause 2. It is clear that the amounts in 4 and 5 have been paid. So far as the re-invoicing of earlier services are concerned it was submitted that only those for services prior to 8 June are relevant. If this construction is correct then the only amount outstanding was DEM. 388,085.54. The plaintiff for its part contends that the construction to be given to the guarantee in clause 7 is far wider and includes further amounts that become due after 8 June 2001 namely those which are referred to in clause 6. 20 On the face of the document a number of matters appear which suggest that the plaintiff's construction is correct. Clause 6 uses the expression "claims/invoices" an expression that could cover existing invoices and future claims comprised in later invoices. An alternative view might be that claims look backwards to past events and invoices forward to future amounts to become due. Clause 5 refers to the provision of security in respect of "outstanding claims and future claims". It is submitted that the terms of clause 6 which expressly provides for payment dates for future invoices including those which become due on 30 September 2001 is consistent with the undertaking in clause 7 not to call up the guarantee before 1 October 2001 "should the above-mentioned claims not have been paid by Lucas by that date." 21 Even accepting that both German Law and Australian law requires the courts to the adopt a "strictissimi juris" interpretation of guarantees, on balance one might accept the plaintiff's construction. 22 However, there are different versions of the translation in evidence. In the translation of Mr Priester, instead of the word, "claims" in clause 3, there is the word, "amounts". In clause 4 "accounts receivable" replaces "outstanding claims" while in clause 5 "outstanding claims and future claims" becomes "accounts receivable which are currently still outstanding and future claims". In clause 6 "claims/invoices" becomes "amounts and invoices" while in clause 7 there is no substantive change. 23 The matter of construction is not easy and when one adds in the doubts about translation, in my view, it is inappropriate to deal with the matter of a strike out as the Court does not have the benefit of cross examination of the experts on both translation and construction. Accordingly, I will not strike out this defence. Paragraph 6 of the defence 24 This defence is pleaded as an alternative in the event that the question of Dr Prell's authority is determined adversely to the defendant. The terms of the defence are as follows: "(a) the defendant was a non-merchant who was unfamiliar with the German law concept of a surety on first demand; (b) the plaintiff, in the circumstances of its making, could not safely assume that the defendant was familiar with the nature of such surety and its difference from a common surety; (c) the plaintiff was accordingly under an obligation to instruct and explain to the defendant the nature of such surety and its difference from a common surety; (d) the plaintiff failed to provide such instruction and explanation; (e) the defendant remained ignorant of the nature of such a surety, And in such circumstances by operation of law only a common surety agreement was concluded." 25 It should be noted that the plaintiff's claim is based solely on the guarantee being a guarantee on first demand. It does not claim on an alternative basis that the guarantee is a common surety that would have the effect of allowing the defendant to challenge the underlying indebtedness. This defence, which arises as a matter of substantive German law, is one in respect of which the defendants have not filed expert evidence. Instead they seek to base it on the terms of a particular decision namely a decision of the Federal Supreme Court 9th Civil Division given on 2 April 1998. 26 The factual matters that are alleged in paragraph 6 have been established on the evidence before me at least to a level that would lead to the defence remaining with the only question being whether the facts supported the legal result. There were some facts such as Mr Campbell's signature of another guarantee on first demand at some other time and his experience in construction contracts, which might need investigation on a final hearing. For the purposes of this application I am satisfied that the facts are established. In the circumstances the question of law is whether or not a common surety agreement was concluded. 27 It seems fairly clear from the decision to which I was referred and also from the plaintiff's expert, Dr Guntz, that where a creditor is aware prior to entering into the agreement that the guarantor is not sufficiently aware of its obligations it is incumbent upon the creditor to inform the guarantor thereof and in default of such explanation the guarantor is liable only based on a common surety. 28 What the defendant's pleading does not address is the question of whose knowledge was appropriate. The pleading relies solely on the knowledge of the defendant rather than the knowledge of Dr Prell who was present, negotiated and signed the agreement on his behalf. As was pointed out by Dr Guntz pursuant s166(1) of the Civil Code it is the knowledge of the representative not that of the person represented which is crucial. The terms of section 166 are as follows: "166 (1) Insofar as the legal effectiveness of the declaration of intention is vitiated by lack of intention, or by knowledge or by attributable knowledge of certain circumstances, the person not of the principal, but of the agent is taken into consideration." 29 As I have said, the defendant called no expert evidence to deal with this aspect of the matter. The plaintiff also raised the fact that the case relied upon was really a standard form contract case. However, I think this is irrelevant to the general principle which seems to be clear from the case. 30 This particular defence is predicated upon the defendant being bound by the guarantee as a result of the failure of its arguments as to the authority of Dr Prell to enter into the settlement agreement. As a finding that authority existed brings into play the knowledge of Dr Prell rather than the defendant it would seem that this defence is bound to fail and should be struck out. The defence of abuse of process 31 This is the substantive defence, which is sought to be raised in paragraph 8, 11, 12 (3), 13 and 14 of the defence. The expression "guarantee on first demand" is not an expression that is found in Australian law. It apparently is somewhat analagous to an unconditional performance guarantee and is perhaps an example of what were described as "autonomous obligations" by Austin J in Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd [2000] NSWSC 1178 para 24-25. It is necessary for me to consider the matter on the basis of the substantive German law and I have had the benefit of evidence from experts on both sides. 32 There is no doubt as far as the experts are concerned that clause 7 contains a guarantee on first demand and there is general agreement about the general principles in respect of such guarantees. The principles were usefully collected in the plaintiff's submissions in the following terms: "1. The guarantee on first demand, whilst not expressly provided for in the Civil Code, is unquestionably recognised in German legal practice because of repeated and uniform judgments of the highest courts; 2. The legal consequence of a guarantee on first demand is that the guarantor must, in principle, pay immediately (BGH NJW 2002,1493); 3. The defences and objections of the guarantor as against the principal debtor cannot be made in the context of the first claim, but are postponed to a claim for reimbursement in proceedings brought by the guarantor against the creditor (BGH NJW 2002, 1493);" 33 The relevant judgments to which I have been referred are those of the Federal Supreme Court - including those of 5 March 2002 (reported, inter alia, in NJW 2002, 1493), 8 March 2001 (BGHZ 147,99 = NJW 2001, 1857), 10 February 2000 (BGHZ 143,381 = NJW 2000, 1563), 24 January 2002 (NJW 2002, 1198), 17 October 1996 (NJW 1997, 225) and 23 February 1997 (NJW 1997, 1435). Relevant excerpts illustrating the general principles are as follows: "The guarantor, who undertakes to pay on first demand, must normally pay immediately and can invoke defences or objections from the main claim only in a claim for repayment" (BGH NJW 1997, 1435/1437); and "According to the content of the guarantee, the claims of the plaintiff are secured by the obligation undertaken by the guarantor. Consequently, the guarantor must, in principle, pay immediately upon demand. All issues in dispute are deferred to the claim for repayment" (BGH NJW 2001, 1857). "... it is to be examined in the initial proceedings whether the plaintiff claims against the defendant the debt to which the guarantee refers. If that is the case, the plaintiff does not need to establish its claim conclusively. It suffices that it submits that the claim is in respect of a debt covered by the guarantee" (NJW 2002, 1198); "the party liable under a guarantee upon first demand may, to oppose its liability under the guarantee, raise objections, which result the relationship of the creditor with the principal debtor, only if the creditor obviously abuses his/her formal legal position. This is the case only if and when it is self evident or at least readily provable, that the material case covered by the guarantee has not occurred. All contentious issues which cannot be resolve ipso jure cannot be clarified in the current proceedings, but in the proceedings for reimbursement" (NJW 2002, 1493); "… the guarantor's objections to the claim are, however, relevant already within the framework of the first court instance if and when the justification thereof results ipso jure from the undisputed facts and circumstances or from the contents of the contractual instruments" (NJW 2001, 1857); "This is the case only if and when it is self-evident or at least readily provable, that the material case covered by the guarantee has not occurred" (NJW 2002, 1493). " 34 It is the last three quotes that have given rise to the difference between experts on either side in respect of the concept of "liquidly establishable" or "readily provable". In particular a question arises whether or not one can call oral evidence to establish such matters. The defendant's expert who suggested that one might call oral evidence, limited it to cases where the Court expects the issue in dispute will be answered at once and without doubt by hearing those witnesses. This obviously would not extend to where there is a dispute between witnesses. 35 The first question is whether there might in fact be any abuse of process in bringing the proceedings in breach of the principles of good faith in s 242 of the Civil Code. The abuse was not particularised in the defence nor indeed before the matter commenced. There was eventually read an affidavit of Mr Campbell of 18 November 2002 that annexed schedules based upon information and belief from discussions with his employee Mr Shields. That was a summary supported by correspondence concerning a series of invoices, which were included, both in the demand of 17 October 2001 and in the proceedings brought by the plaintiff's against the Lucas Group in Germany. It was suggested in submissions that these invoices were clearly not payable and thus the necessary bad faith and hence abuse of process was demonstrated. It was submitted that the tendering of evidence to support these matters would fall within the exception in respect of readily provable evidence. 36 Many of the individual items, when the documents and the terms of the objection to the invoices were considered, are typical of matters which would give rise to a dispute and normally would be dealt with by evidence of witnesses and their cross-examination. In respect to only one of these claims was it conceded that there was readily provable evidence and that related to a claim for a credit note of 8 June 2001 in the sum of US $129,262.72. A consideration of the correspondence however clearly indicates that the parties were not in agreement about that matter until after the demand was issued. 37 Even if it be incorrect and the inclusion of this amount in the demand was an error it was suggested that this would not vitiate the demand as the demand covered substantially more than the sum of DEM 1,500,000. The two relevant amounts claimed were expressed in different currencies. The two amounts were US $1,333,055.64 and the other was DEM 794,210.36. The total of this on current exchange rates is approximately EUR 1,735,804.50 which converts to DEM 3,394,938.50 38 It was finally submitted therefore that there should be a strike out of these paragraphs as none of the evidence was within the exception allowed on the first hearing. In opposition to this ground the defendant suggested that the mandate in section 63 of the Supreme Court Act which requires the court to determine all matters in controversy and avoid a multiplicity of legal proceedings required the court to deal with the whole dispute not just the guarantee on first demand. The terms of section 63 are as follows: "63. Final determination The Court shall grant, either absolutely or on terms, all such remedies as any party may appear to be entitled to in respect of any legal or equitable claim brought forward in the proceedings so that, as far as possible, all matters in controversy between the parties may be completely and finally determined, and all multiplicity of legal proceedings concerning any of those matters avoided." 39 Is important to note that the section relates to the claims brought forward in the proceedings. I have already referred to the fact that the plaintiff only brings its claim on the basis that the guarantee is a guarantee upon first demand. The defendant's suggestion that the recoupment proceedings should also be dealt with in these present proceedings completely destroys the effect of the substantive German law which gives rise to the nature of the claim that the plaintiff brings. In those circumstances I do not think that the section assists the defendant. The relevant paragraphs should be struck out to the extent that they seek to raise an abuse of process. Paragraph 15 of the defence 40 The defence raised in paragraph 15 is based upon the contention that clause 12 of the agreement is invalid as against the defendant as the defendant is a non merchant under Part 38 of the German Civil Code. It is said that as a result of Part 139 of the German Civil Code that an invalid part of an agreement renders the entire agreement void unless the parties would still have entered into the agreement notwithstanding the absence of that clause. 41 The experts' evidence agreed that the provisions of section 38 (2) of the code of civil procedure meant because Mr Campbell was a non merchant that the provisions of clause 12 in the agreement, in so far as it effects the relationship between the plaintiff and defendant, is invalid under German law. They were sharply in issue as to whether this also led to the invalidity of the agreement as a whole or alternatively the guarantee clause 12. Section 139 of the Code provides as follows: "If part of a legal transaction is void the whole legal transaction is void, unless it may be assumed that it would have been entered into even if the void part had been omitted." 42 What this leads to is a consideration of the parties' intention as to whether they would have agreed on Munich jurisdiction as between the remaining parties to the agreement. It is possible to include a severability clause in the contract, which does exclude the somewhat draconian provisions of section 139 in the present case. As a matter of interest it was done in the share sale agreement executed the same day but does not appear in the settlement amount. The defendants suggest that this matter cannot be a dealt with in the present application. Arguments about the parties' intentions, whether it be derived from the process of documentation or the oral evidence, is not an appropriate consideration in a strike out application of this nature. 43 To avoid this result the plaintiff referred to the interlocutory decision in this case of the Munich court but as it is interlocutory it is not of assistance. Of more importance is a Federal Supreme Court decision of 5 March 2002. The question in this case was whether a particular article in a building contract constituted a standard business term and if so was invalid or whether the contractual clause had been negotiated in detail by the parties to the building contract and its validity therefore was not in doubt. The court held that such a determination could only be clarified during the process of taking evidence which might be quite extensive and this was only appropriate for recoupment proceedings and did not found a claim of abuse of process in the initial proceedings. The court said that: "In the case at issue, the objection of abuse of rights is not applicable for the mere reason that it is neither obvious nor readily provable that article 14 (6) of the building contract constitutes a standard business term; this means that the respective assertion of the defendant and his/her inference of an obvious invalidity of the contract clause [reference to precedents] and the ensuing obvious abuse of the warranty guarantee upon first demand by the plaintiff, obtained without legal ground, lacks any the basis. As stated correctly by the Court of Appeal, the contentious question whether article 14 (6) of the building contract has been individually negotiated within the meaning of section 1 II AGBG and is thus not covered by the AGBG can be clarified only by taking further evidence [reference to precedents]. This process may be extensive and cannot take place during the current proceedings but during reimbursement proceedings, if any are to be instigated." 44 The reference to the doubt as to whether the proceedings might be instigated is equally apposite to the present case. There is nothing to stop the defendant calling on the Lucas companies to indemnify him, which in fact he has done by his cross claim. It is apparent from the nature of the matters that may need to be considered on the severability issue in this case that the evidence could by no stretch of the imagination fit the description of readily available proof. The court also went on to arrive at the same result having regard to the allocation of the burden of proof. It said: "It is true that the onus and burden of proof regarding the preconditions of the exemption to Section 1 II AGBG rests with the user of the standard business terms [reference to precedents]. However this is not decisive in the case in issue. As has been held by the Court of Appeal with binding effect on this appeal court on points of law (section 561 I old version ZPO) the plaintiff asserted that article 14 (6) of the building contract has been negotiated individually between the parties to the building contract. The plaintiff thereby discharged his/her burden of presentation regarding the preconditions of section 1 II AGBG. The question of whether these preconditions were actually fulfilled is contentious and cannot be immediately proved with the assistance of readily available evidence. Alone for this reason, no obvious abuse of rights by the plaintiff is involved. The fact that the burden of proof regarding the preconditions of section 1 II AGBG rests with the plaintiff is irrelevant. The purpose and the meaning of the guarantee upon first demand is to procure liquid funds to the creditor within a very short time [reference to precedents]. It would conflict therewith if the fast enforcement of the guaranteed claim could be avoided by the objection of an abuse of rights in all cases in which a fact to be proved by the creditor cannot be clarified immediately." 45 The question of the further invalidity of the agreement as a result of the partial invalidity of clause 12 is one which must await any recoupment proceedings. It is telling that the German court in dealing with these proceedings between the present parties has in effect refused to allocate a special hearing for this question to be considered. Paragraph 15 should be struck out. The application to amend the first cross-claim 46 This application seeks to add a claim for a declaration that the first cross defendant is liable to reimburse the cross-claimant an amount of DEM 1.5 million in the event of the cross-claimant paying that amount to the cross defendant. In effect it is a declaration sought as to the result of recoupment proceedings. Reference was made to the cases in respect of hypothetical claims for declarations in contrast to claims for declarations in anticipation of uncertain future events. There is no doubt that there is such a distinction but to allow such a matter requires the recoupment proceedings to be run at the same time and this is not appropriate in the present proceedings. Accordingly, I refuse the amendment and dismiss the motion. The application to dismiss the first cross-claim 47 To the extent that the cross-claim seeks as against the first cross defendant orders which depend upon matters which I have disallowed as a defence to the main claim this cross-claim should be dismissed. It will remain on foot in respect of the other claims. The parties may wish to consider the effect of the amendments to be made to the pleadings as a result of the decisions made by me in the matter. The application to stay the second cross-claim 48 It is necessary to consider the nature of the second cross-claim and also the proceedings in the Munich court. The second cross-claim is brought by the Lucas Group against Drilltec and the principal claim is one for damages for negligence in respect of hire of the equipment pursuant to the settlement agreement. The amount of damages claimed is A$31,273,513.52. There are also alternative claims which have been made in paragraphs 19-22 and 23-25 in respect of the original joint venture and joint venture sub-contract. These claims are in the alternative and are no doubt inserted in case the settlement agreement is set aside. The second cross-claim was filed on 17 June 2002. 49 The Munich proceedings were commenced in October 2001 but they were not served until 15 May 2002. The Lucas companies immediately filed a challenge to the jurisdiction in the Munich court and I have already referred to the result of the application. The defence to the proceedings, which was filed by the Lucas Group, took issue with the claims that were made by the plaintiff. Those claims were to recover amounts said to be due under the hire agreements. The defence did make reference to the fact that the Lucas Group had counterclaims but in fact did not raise them as matters of defence or by way of formal counterclaim. 50 The hearing of these motions commenced on 9 September 2002 the day that had been allocated for the hearing. They were not completed and the next available dates suitable to the parties and the court were 18 and 19 November. A preliminary hearing was scheduled for the Munich proceedings on 21 November and in order to avoid being shut out in both proceedings from raising matters in the second cross-claim the Lucas Group made a decision to instruct its German attorneys to file a cross-claim raising the claims for negligence in the second cross-claim in the Munich proceedings. Thus at the present time I can proceed on the basis that the same issues are raised in both proceedings although there are some important matters to consider in respect of the timing and relevant principles to be applied. 51 The parties are not at issue on the general principles to be applied in respect of the plaintiff's stay application. The principles have been upheld in a number of cases recently in the High Court. In Regie National Des Usines Renault SA and Renault Automobiles SA v Zhang (2002) 187 ALR 1 the court referred with approval to the comments made by the majority in Henry v Henry (1996) 185 CLR 571, in the following terms: In [Voth], this court adopted for Australia the test propounded by Deane J in [Oceanic Sun], namely, that a stay should be granted if the local court is a clearly inappropriate forum, which will be the case if continuation of the proceedings in the court would be oppressive, in the sense of 'seriously and unfairly burdensome, prejudicial or damaging', or vexatious, in the sense of 'productive of serious and unjustified trouble and harassment'…Relevant 'connecting factors' and a legitimate personal or juridical advantage' [provide] valuable assistance…The legitimate personal or juridical advantage is a relevant but not decisive consideration, the fundamental question is 'where the case may be tried suitably for the interests of all parties and for the ends of justice'". 52 There are three main questions which have been addressed on the application for a stay and they are:

1. That the second cross-claim involves essentially the same issues, same parties and same evidence as the Munich proceedings.

2. That the second cross-claim is brought in breach of the exclusive jurisdiction clause agreed by the parties in the settlement and hire agreements.

3. That by bringing these proceedings against Mr Campbell, Drilltec has submitted itself to the jurisdiction of the court in respect of every matter of counterclaim that would operate as a defence to its action, or that would be a set-off or cross-claim arising out of the same subject matter. 53 Apart from these matters there are also other matters of procedure and convenience to be considered in the exercise of the Court's discretion. The coincidence of issues 54 The commencement of a second set of proceedings when there is already existing proceedings in another country is a matter of importance. In Henry v Henry, Dawson, Gaudron, McHugh and Gummow JJ regarded the question of whether proceedings had been previously commenced in another jurisdiction (Monaco) as "highly relevant" to the question of whether the local court was a clearly inappropriate forum (at 591). They said: "It is prima facie vexatious and oppressive, in the strict sense of those terms, to commence a second or subsequent action in the courts of this country if an action is already pending with respect to the matter in issue. And although there are cases in which it has been held that it is not prima facie vexatious, in the strict sense of that word, to bring proceedings in different countries, the problems which arise if the identical issue or the same controversy is to be litigated in different countries which have jurisdiction with respect to the matter are such, in our view, that, prima facie, the continuation of one or the other should be seen as vexatious or oppressive within the Voth sense of those words. It does not follow that, because one or other of the proceedings is prima facie vexatious or oppressive within the Voth sense of those words, the local proceedings should be stayed. However, it does follow that the fact that there are or, even, that there may be simultaneous proceedings in different countries with respect to the same controversy is highly relevant to the question whether the local proceedings are oppressive in the sense of "seriously and unfairly burdensome, prejudicial or damaging", or, vexatious, in the sense of "productive of serious and unjustified trouble and harassment". And it also follows that courts should strive, to the extent that Voth permits, to avoid that situation." 55 Although it is clear that now there is an identity of issues in both proceedings the situation was not the same when the second cross-claim was first filed in these proceedings. At that time the Munich proceedings were at an interlocutory stage and the Lucas Group had not raised the claims of negligence in those proceedings in any substantive way. This being noted, however, the matter in issue in the German proceedings were the amounts outstanding for the hire of equipment pursuant to the settlement agreement. It seems to me that this is a matter in issue which is closely connected with the claims for negligence in respect of the supply and operation of the equipment pursuant to such hiring. Breach of the exclusive jurisdiction clause 56 The plaintiffs placed substantial reliance on clause 12 of the settlement agreement and clause 14 of the hire agreements which contained a submission to jurisdiction. In FAI General Insurance Company Ltd v Ocean Marine Mutual Protection & Indemnity Association Ltd (1997) 41 NSWLR 559 at 569 Mr Justice Giles Chief Judge of the Commercial Division said: "The criterion familiar in relation to a stay of proceedings on forum non conveniens grounds, whether this Court is a clearly inappropriate forum (see Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538), is displaced or modified when there is a submission to the exclusive jurisdiction of the courts of another country. In such circumstances the starting point is that the parties should be held to their bargain, and while this Court retains its jurisdiction and may decline to grant a stay of proceedings substantial grounds for doing so are required: see Huddart Parker Ltd v The Ship "Mill Hill" (1950) 81 CLR 502 508-509; Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197 at 230-231, 259; Akai Pty Ltd v Peoples Insurance Co Ltd (1995) 8 ANZ Ins Cas 61-254 at 75,855; (1996) 71 ALJR 156 at 160-161 (dissenting in the result but unimpaired on this point), 170; 141 ALR 374 at 380-381; 393. The principles identified in The Eleftheria Owners of Cargo Lately Laden on Board the Ship or Vessel Eleftheria v The Eleftheria (Owners) [1970] P 94 at 99 are established in England (see, eg, Aratra Potato Co Ltd v Egyptian Navigation Co (The El Amria) [1981] 2 Lloyd's Rep 119, The Sennar (No 2) [1985] 1 Lloyd's Rep 521 and Citi-March Ltd v Neptune Orient Lines Ltd [1996] 1 WLR 1367; [1996] 2 All ER 545). They have been adopted in the Court of Appeal and the High Court, and in my opinion I should apply them. They are: "(1) Where plaintiffs sue in England in breach of an agreement to refer disputes to a foreign court, and the defendants apply for a stay, the English court, assuming the claim to be otherwise within its jurisdiction, is not bound to grant a stay but has a discretion whether to do so or not. (2) The discretion should be exercised by granting a stay unless strong cause for not doing so is shown. (3) The burden of proving such a strong cause is on the plaintiffs (4) In exercising its discretion the court should take into account all the circumstances of the particular case." 57 The submissions of the Lucas Group fastened upon the effect of invalidity of clause 12 of the settlement agreement. As I have mentioned it is common ground between the experts that clause 12 is invalid in relation to Mr Campbell and the further argument advanced by Mr Campbell's expert is that this would render the whole agreement, or at least clause 12, invalid. They point out that if the whole of the settlement agreement is invalid the hire agreements form part of the settlement agreement and thus there is no independent operation of clause 14 in the hire agreements. 58 It is submitted that because of these doubts the Court should disregard the contractual submission to jurisdiction for the purposes of exercising its discretion whether or not to stay the application. It points out in support of the submission that the alternative claims in the cross-claim which relate to the joint venture and the joint venture sub-contract did not contain a submission to arbitration. 59 The arguments about invalidity are all founded upon the invalidity of the submission to arbitration. It may well be that it is only that submission that is invalid and that the part of clause 12 which provides that the law of the agreement shall be German would survive. If this is the case and there is a reasonable prospect of this happening in terms it would be preferable for a German court to consider the matters arising under the agreement. There is of course no reason why this Court cannot, properly informed by evidence on the German law, deal with the matter but it is one further factor to be taken into account. 60 Given the doubts about the extent of the invalidity, I will not approach the matter on the basis that the starting point is that the parties should be held to their agreement. Submission to jurisdiction by commencement of proceedings 61 The Lucas Group submitted that Drilltec commenced these proceedings against Mr Campbell and thus exposed itself to the consequences of having submitted to the jurisdiction of this Court. In National Commercial Bank v Wimborne (1979) 11 NSWLR 156 the Court said at 174: "In my opinion, on the authorities I have cited and for the reasons I have given, the correct view of the law is that a foreign plaintiff, not otherwise subject to the jurisdiction of the Court, who brings an action in the Court submits himself by necessary implication to every matter of counter-claim that would operate as a defence to his action or that would as a set-off or cross-claim arising out of the same subject matter reduce or extinguish the plaintiffs' claim; and also, at least if he is not a foreign Sovereign, to a counter-claim founded on or directly arising out of the same subject matter as the plaintiffs' claim that would require to be tried in order to do justice between the parties in relation to that subject matter even if it might result in a judgment against the plaintiff on the counter-claim." 62 The Lucas Group submissions fastened upon the submission to jurisdiction to which His Honour was referring. It submitted that:

1. The plaintiff clearly would have foreseen the developments in the action which it has chosen to bring in New South Wales namely a defence by Mr Campbell seeking an indemnity from the Lucas Group and a challenge to the underlying debts;

2. The plaintiff does not in fact challenge the jurisdiction of the court but merely moves for a stay:

3. In so far as the settlement agreement contains an agreement as to jurisdiction the plaintiff has now of its own volition accepted the jurisdiction of this Court and the principles referred to in the FAI case are, therefore, not applicable. I have already addressed this aspect. 63 The submissions proceed on the basis that the matter should be dealt with on a neutral basis so far as the submission to jurisdiction. It is suggested that:

The Munich proceedings have only been expanded because of unavoidable delays;

The defendant Mr Campbell seeks to agitate the counterclaim and he not being a party to the Munich proceedings must do it in New South Wales;

Section 78 of the Supreme Court Act gives a right to cross-claim and the court can fashion its procedure to deal with such claim as justice requires. This allows the court flexibility in dealing with the alternative claims expressed in the cross claim;

It is the case that the action on the guarantee will have to be heard here in New South Wales. There is thus a need for witnesses from Germany to attend.

It was suggested that as a result the cross-claim should be allowed to proceed and should be put into an early directions list with a snappy timetable to deal with it as quickly and as expeditiously as possible. 64 The problem with the submissions are that they ignore the true nature of the claim that has been brought by the plaintiff in these proceedings. As I have pointed out several times before it is a claim for summary relief pursuant to a guarantee on first demand which should be dealt with quickly and promptly according to the substantive law. It is interesting to note in Justice Holland's summation of the principles on submission to jurisdiction the plaintiff opens himself to every cross-claim necessary "in order to do justice between the parties in relation to that subject matter". The subject matter of the plaintiff's claim has clearly been limited to a short and concise point. In this regard I note that Holland J in National Commercial Bank v Wimborne at 174-175 went on to say:- "It is not necessary in the present case to decide whether, having regard to the problems of executing a judgment against the property of a foreign Sovereign, the last-mentioned type of counter-claim would lie against a foreign Sovereign; but see Duff Development Co Ltd v Government of Kelantan [1924] AC 797 at 810, 817, 819, 821, 829, 833. As I have earlier indicated, I think that the basis of a correct view of the matter lies in the question: To what has the plaintiff submitted? The answer to that lies, I think, in a consideration of what the plaintiff has brought to the Court for adjudication. He could not, in my opinion, properly be said to have submitted to claims outside of and independent of the subject matter of his own action.

In an endeavour to illustrate the limits upon the kind of counter-claim that would be open to a defendant, counsel for the plaintiff referred to a number of decisions applying statutory provisions or rules entitling defendants to apply in the plaintiff's action for all such relief against the plaintiff or third parties "as related to or was connected with the subject of the cause or matter": eg, Judicature Act 1873 (UK) , s 24(3). These showed that a mere connection with the facts of the action or a party to it was insufficient to satisfy the test if the cause of action was distinct and independent. I will mention the cases but I do not think it necessary to deal with them: S F Edge Ltd v Weigel (1907) 97 LT 447; Barber v Blaiberg (1882) 19 Ch D 473; Harris v Gamble (1877) 6 Ch D 748 and Padwick v Scott (1876) 2 Ch D 736."

65 Accordingly, it seems to me, that given the limited submission in this regard, the plaintiff should not be deprived of the consideration by the Court of the discretionary factors in deciding whether or not to stay the proceedings. Other discretionary reasons 66 The other discretionary reasons did not play a great part in the submissions or evidence before me. The subject matter of the construction contract was construction work in Hong Kong. One party to the dispute and it's relevant officers are in Germany and the other party and it's relevant officers are mainly in Hong Kong and Australia. There is no suggestion that in Germany there would be any different delay in dealing with the matter. Importantly the cross claimant has identified no personal or judicial advantage which it would lose if it was forced to litigate in Germany. Conclusions. 67 Although there is doubt about the jurisdiction submission at this stage the German court has on an interlocutory basis refused to divest itself of jurisdiction. The Court in Munich is, also like this Court, seized of the whole dispute between the parties. When one has regard to the subject matter of the dispute, namely, a construction contract performed in Hong Kong, there is no particular connection which makes it imperative to deal with it in a particular place. The proceedings in Munich were commenced first and are equally advanced as this Court in terms of completion of the proceedings. The hearing of the cross claim will no doubt be long and complex. In this State the cross claim would most likely be referred out to a Referee to deal with a substantial part of the hearing. By virtue of the nature of the issues the length of the hearing would be considerable in contrast to the hearing of the plaintiff's claim which can be brought on promptly. In these circumstances it seems to me that the proceedings should proceed in Germany and, accordingly, the second cross-claim should be stayed. Orders of the court 68 Because of the way in which the pleadings have progressed it may be of assistance to the parties to bring in short minutes to provide for the carrying into effect of this judgment. The parties may wish to have at the same time amended pleadings to reflect the current status of the matter. I will be happy to give directions for the further preparation of the matter for hearing and hear arguments on costs.

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