Plaintiff v Defendants

Supreme Court of Victoria|2013-03-15|Before: HOLLINGWORTH J

CONTRACT - Lease - Banks and banking - Bank guarantee provided to secure tenant's obligations under lease - Bank guarantee drawn down by landlord - Application by tenant for mandatory injunction seeking to compel landlord to reinstate bank guarantee until determination of dispute about existence of breaches - Tenant's case for reinstating the bank guarantee weak at best - Damages an adequate remedy - Balance of convenience against grant of injunction - Interlocutory injunction refused

1 The first defendant, Maria Wylaars, is the registered proprietor of industrial premises located at 1808 Princes Highway, Clayton. The second defendant, Stephanie Wylaars, manages the premises for her mother, Maria Wylaars.

2 The plaintiff ("Otter") is a family-owned business, which manufactures and sells fastening, fencing and bathroom products to the hardware and building industries. From 1999, Otter was the lessee of the premises, under a series of renewals and variations to what was, originally, a 10 year lease.

3 Clause 16 of the lease required Otter to provide security against breaches of the lease by depositing a specified sum, or a bank guarantee in lieu of the specified sum. On 28 June 2011, Otter provided an ANZ bank guarantee in the sum of $564,144.50, being an amount equal to one year's rental.

4 On 23 April 2012, Otter informed the Wylaars that it would not be seeking any further extension of the lease. On 31 October 2012, the lease period expired. Otter has paid no rent since that date.

5 A dispute has arisen as to whether Otter returned the premises in the condition required by the lease, and as to whether it is overholding and still liable to pay rent. The Wylaars assert that there are substantial problems with the condition in which the premises were left. They also assert that, by reason of clause 9.6 of the lease, Otter is deemed to still be in possession of the premises, and liable to pay rent, because it did not return all the keys to the premises, and has not removed all of its plant, fittings, fixtures and equipment. Otter asserts that it has complied with all its obligations, and is not liable for any rent after October 2012.

6 A mediation occurred on 24 January 2013, in an attempt to resolve the disputes between the parties. Whilst the mediation was on foot, Maria Wylaars attended at an ANZ bank branch and requested that the bank guarantee be paid in full, less $100. The bank paid out the sum of $564,044.50 on 25 January 2013.

7 Otter learned that same day that the bank guarantee had been drawn upon. On 30 January, Otter's solicitors wrote to the Wylaars, demanding that the funds be returned to the bank by no later than 5 pm on Friday, 1 February. The letter threatened to seek compensation and damages, but did not warn that an interlocutory injunction would be sought if no response was received in time.

8 When the Wylaars failed to reply by the deadline, Otter applied on the afternoon of Tuesday 5 February for an injunction restraining the Wylaars from dealing with the proceeds of the bank guarantee. Given that the bank guarantee had already been called upon, that Otter was aware that there was a serious dispute about the condition of the premises, that Otter's solicitors knew that the Wylaars had solicitors acting for them, and absent any evidence of a threat of immediate dissipation of the money without a prospect of recovery thereafter, it is not clear to me why it was thought appropriate for Otter to proceed in the absence of the Wylaars,[1] and prior to even commencing this proceeding. It is also not clear that Otter brought to the judge's attention the fact that the Wylaars had responded to the letter of demand, in a letter to Otter's solicitors dated 4 February.

9 On 5 February 2013, Williams J made interim orders, restraining the Wylaars from dealing with the proceeds of the bank guarantee until 8 February. The injunction was further extended by consent by Cavanough J on 8 February, and McMillan J on 22 February 2013, while the parties prepared further affidavits.

10 When the matter first came before me on 27 February 2013, I informed Otter that there were substantial problems with its evidence relating to the balance of convenience; I explained in some detail the nature of the problems. I was told that Cavanough J had also commented on the inadequacy of Otter's evidence. I granted Otter an adjournment, in order to give it one last chance to fix its evidence.

11 Unfortunately, Otter's further affidavit did not adequately address the problems; in fact, it raised some additional concerns. When I made that observation in court on 5 March, Otter sought leave to call oral evidence from its chief financial officer, to explain inconsistencies in the various affidavits and to fill in gaps in the evidence. I did not grant leave, given the interlocutory nature of the application, the numerous opportunities already afforded to Otter to put its case before the court, and the fact that the Wylaars would be hampered in their ability to cross-examine the witness in a meaningful way without the provision of the necessary underlying documents.

12 At the end of the hearing on 5 March 2013, I indicated that I intended to discharge the injunction. However, due to the workload in the Practice Court, I was not in a position to deliver reasons at that time. Accordingly, I said that I would not formally pronounce orders until I was ready to publish my reasons.

13 It is clear that there is a large and complex factual dispute between the parties, in relation to the condition in which the premises were left at the end of the lease, and as to whether Otter returned all of the keys to the premises. What is also clear is that the premises are in a poor condition, and there is a genuine dispute as to whose responsibility it is to pay for them to be repaired, so that they can be re-let. However, it is neither necessary nor possible to resolve those underlying disputes at this interlocutory stage; those will be issues for the trial.[2]

14 The real issue for present purposes is whether there is a serious question to be tried about Maria Wylaars' entitlement to have drawn down on the bank guarantee, pending the resolution of the underlying disputes.

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

16 The authorities have been recently summarised in Cerasola TLS AG v Thiess Pty Ltd & John Holland[3] as follows:

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

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

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

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

17 This general rule is the product of the following appellate authorities: Wood Hall Ltd v Pipeline Authority,[4] Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd,[5] Bachmann Pty Ltd v BHP Power New Zealand Ltd[6] and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd & Ors.[7] The rationale for the general rule is that by providing for security to be given, the parties implicitly agree that the party giving the security deposit shall be out of pocket pending resolution of the underlying dispute.

18 In Clough, the Full Federal Court said that "clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently."[8]

19 There is no evidence that Maria Wylaars is acting fraudulently or unconscionably, so as to fall within either of the first two exceptions identified in Clough.

20 What are the relevant terms of the lease? Is there is any contractual limit on the drawing down of the bank guarantee?

21 The bank guarantee itself is in a fairly standard form; it is unconditional and payable on demand to Maria Wylaars.

22 The bank guarantee was provided in accordance with Otter's obligations under clause 16, which relevantly provides:

16.1 When the tenant executes this Lease, the Tenant must provide security against breach of the Lease by depositing with the Landlord the sum specified in Item 10 and depositing further amounts throughout the term as directed by the Landlord ("security deposit").

16.3 If the Tenant fails to pay Rent or other money payable under this Lease or if the Landlord suffers loss or damage because of any other breach of this Lease by the Tenant, then the Landlord may use the security deposit towards paying the arrears of rent or other money or towards repairing the loss or damage.

In using the earned [sic] deposit, the Landlord does not waive the Tenant's breach and does not waive any other right or remedy arising from the breach.

16.4 If the Landlord does use the security deposit, it must notify the Tenant that it has done so. Within 14 days of the notification, the Tenant must reinstate the security deposit by paying to the Landlord the amount used.

16.5 At the end of the Lease (including any further term), if the tenant is not indebted to or otherwise liable to the Landlord for breach of this Lease, the Landlord agrees to refund to the Tenant the security deposit or the balance of the security deposit then held.

16.7 Notwithstanding anything contained in this clause, the Tenant may provide to the Landlord a Bank Guarantee for the amount stated in Item 10 of the Schedule in lieu of providing a security deposit. Where a Bank Guarantee is provided then it shall be provided on the same terms and conditions (where applicable) as that of the security deposit detailed above.

23 The amount stated in schedule Item 10 was "The equivalent of twelve months' rent."

24 In my opinion, clause 16 does not provide any contractual limit on Maria Wylaars' capacity to draw down on the bank guarantee pending the resolution of the underlying dispute. On the contrary, the following provisions strongly support her right to do so:

(a) She was entitled to use the security deposit or bank guarantee "towards repairing the loss or damage" (clause 16.3). That suggests an entitlement to use the money now, to spend on making good the premises. If it was intended that she would have to spend her own money to repair the premises, and then seek reimbursement after trial, one would have expected a different form of words to be used;

(b) By using the deposit, she would not waive Otter's breach or any other right or remedy arising from it (clause 16.3). Once again, that suggests an immediate right to use the money, whilst preserving all her other rights for a later trial; and

(c) If she did use any of the money, she was required to tell Otter she had done so, and was entitled to call upon Otter to reinstate it to the required amount (clause 16.4). She did not have to tell Otter that she was intending to use the money, she only had to tell Otter after she had done so. She was also entitled to call upon the security on an interim and ongoing basis. Those features seem inconsistent with the idea that she could not use any of the money until after a court determined whether or not there had been relevant breaches.

25 Otter relies on the fact that clause 16.3 refers to it "failing to pay rent" or suffering loss or damage "because of any other breach". It says that those words cannot be satisfied until a court determines that there has been such a failure or breach. But similar words were used in each of the cases to which I have already referred; and in none of those cases did the court find that it was necessary for the beneficiary to establish at the interlocutory stage that the other party was in fact in breach.

26 There is also no reason to adopt a different approach where, as here, the bank guarantee or performance bond has already been drawn upon.

27 Otter relies upon two main authorities in support of its application. Both are entirely distinguishable.

28 The first case is Fluor Daniel Pty Ltd v Anaconda Operations Pty Ltd (No 2),[9] a case in which Warren J (as she then was) granted an application to restrain a party, who had called upon and received $45 million pursuant to bank guarantees, from disposing of those monies. However, in that case, the application was for an asset protection or Mareva-type injunction, based on the risk of dissipation of assets prior to trial. Here, Otter has properly conceded that this application is not being made on Mareva-type grounds.

29 The second case is Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd,[10] a case in which Byrne J concluded that the party calling upon the security could only do so pursuant to the contract if an amount was actually due and payable under the building contract. To the extent that the decision in Rejan may be inconsistent with the various appellate authorities to which I have referred earlier, it should not be followed.

30 I am satisfied that there is a bona fide claim of breach here.

31 Furthermore, the amount of Maria Wylaars' potential claim substantially exceeds the amount of security. The Wylaars have produced a detailed schedule, which lists the items which they say require attending to in order to make good the premises, as well as the actual or anticipated costs of those works at this time. Those items total almost $840,000, including rent up to and including March 2013 of approximately $260,000. If the Wylaars succeed in their overholding claim, Otter will be liable for further rent of more than $50,000 per month after March 2013. I am not in a position to say how much Maria Wylaars may ultimately be entitled to recover at trial, but, given the size of her potential claim, I am also satisfied that the drawing down of almost the entire bank guarantee (rather than some lesser sum) was done bona fide.

32 In my opinion, clause 16 of the lease gave Maria Wylaars a clear entitlement to draw down on the unconditional bank guarantee, pending resolution or determination of the underlying disputes. There is no suggestion or evidence that she acted fraudulently or unconscionably. I am satisfied that the dispute is a bona fide one. There is no contractual provision precluding her from using the proceeds of the bank guarantee prior to trial. There is no good reason for the court to depart from the general rule that an interlocutory injunction should not be granted in these circumstances.

33 Given those findings, I am not persuaded that there is a serious question to be tried as to whether Maria Wylaars was entitled to call upon, or is entitled to retain, the proceeds of the unconditional bank guarantee. That would be sufficient to dispose of the injunction application itself. However, given that it may be thought that there is always some scope for argument where contractual construction is concerned, I shall proceed to consider whether the balance of convenience would favour the grant of an injunction, even if I treated Otter as having an arguable (albeit weakly arguable) case.

34 Otter's evidence as to the possible financial consequences for it if the bank guarantee is not restored is less than satisfactory. The supporting affidavits of the Otter witnesses are full of sweeping assertions and comments, but largely unsubstantiated by actual evidence.

35 Otter says that as a result of the drawing down of the bank guarantee, its overdraft increased outside its current approved limit. In the first affidavit of Raymond Otter, sworn 4 February 2013, it was simply asserted that Otter would suffer "substantial interest and bank charges" as a result of the draw down. By his second affidavit, dated 7 February 2013, he said that Otter would have to pay increased financing costs in the order of $75,000 per annum.[11]

36 The Wylaars do not dispute those figures, for current purposes, so it is not necessary to inquire as to what the rather curiously-described item of "work recovery charges per month" (which represents almost half of the extra financing costs) in fact represents. But such a relatively small amount would not move the court to grant the proposed injunction, given the weakness of Otter's case, absent any other potential prejudice to Otter.

37 In an apparent attempt to add weight to its balance of convenience argument, Otter put forward evidence relating to alleged claims for loss of profit and reputational damage. In his first affidavit, Mr Otter simply said:

66. [Otter] will also suffer from the reduction of working capital available to it as a result of the amount drawn down represented by the bank guarantee now being treated by the bank as a drawn facility. This will inhibit further fund raising by [Otter] from the bank and may significantly impact on its ability to take advantage of trading opportunities as well as placing a strain on its overall finances.

38 In his second affidavit, Mr Otter repeated that the amount of overall funding available to Otter for its trading activities would be restricted by the drawing down of the bank guarantee.[12] Once again, there was no attempt to provide any detail of Otter's actual financial situation. However, he did go on to put forward some figures which were said to represent expected loss of profits:

11. ... I anticipate that as a result of the lost funding in the above draw down that [Otter] is likely to be unable to fund at least two new product lines anticipated for release within the next 12 months.

13. As a result of reduced funding, I anticipate that the potential loss arising from delayed planned launching of at least two new product lines to be as follows:

Product line 1 lost sales $435,000 per annum in the first year;

Product line 2 lost sales $720,000 per annum in the first year

14. I estimate that the loss of gross profit on the two product lines at approximately $642,710 per annum in the first year.

15. Delay in launching of two new products is also likely to damage the reputation of [Otter] as an innovative market-sensitive supplier proactively introducing new products to meets changing market needs. Such damage to reputation is difficult and time consuming to redress and would lead to [Otter] being regarded as a less favoured supplier.

39 In his third affidavit, dated 22 February 2012, Mr Otter explained that Otter was part of a group of private companies, of which the ultimate holding company was Otter Holdings Australia Pty Ltd. He said that the turnover of the entire group was about $35,000,000 per annum. He exhibited as a confidential exhibit a copy of Otter Holdings' financial statement to 30 June 2012. The financial statement showed that, notwithstanding such a substantial turnover, the entire group had only made a net after tax profit of approximately $580,000, which was down on the previous year. The financial statement also showed that Otter Holdings had a cash shortfall of more than $1.7 million as at 30 June.

40 Exhibit "RJO-E" to Mr Otter's third affidavit was a copy of a letter from ANZ dated 14 February 2012, adding an overdraft facility of $600,000 to payout the drawn down guarantee and cover fees and expenses. The letter also referred to the fact that Otter had a total bank facility limit of almost $17.5 million (although it is not clear from the letter, or from any other evidence, whether those are Otter's own facilities, or whether it has a contingent liability as guarantor of other group companies' facilities).

41 Mr Otter's third affidavit also purported to provide the following further information to support the projected loss of profits:

16. At the time of the draw down, [Otter] was planning two new product and channel launches with major customers ... The opportunity represented by the two new initiatives is unlikely to present itself again if they do not proceed ... If such occurred, it would be a major blow to [Otter's] reputation and reliability in the market place ...

17. The combined funding cost of the two new initiatives is in the order of $450,000 ...

18. In my second affidavit, I referred to the expected gross profit on the two new initiatives as $642,701 [sic] in the first year. The gross profit so stated only covers the cost of goods sold and not overall expenses so as to indicate the net profit. The net profit before financing and tax on such turnover would be approximately 20% of the incremental sales once other relevant costs are taken into account.

19. The details of the products and the relevant customers are at this stage of development are matters of commercial confidence. I therefore have prepared a confidential exhibit providing details of the product and market channel launches.

42 The confidential exhibit was a one page document, which had obviously been prepared for the court. Like most of Otter's evidence, it made generalised assertions, without any real detail or supporting evidence. It certainly did not disclose how the projected loss of profit had been calculated.

43 When the matter first came before me, I expressed concern that, apart from the disclosure that Otter apparently had bank liabilities of almost $17.5 million, no information had been provided as to Otter's financial position, as opposed to the group's position. Nor had anything been said about Otter's ability to borrow funds from other group companies, to launch the new products. Further, no documents had been produced to substantiate the projected loss of profit of $642,710, without which the figure appeared to have been "plucked out of the air" to bolster Otter's case. I also commented that, given the size of Otter's bank debt, given the parent company's substantial cash deficiency as at 30 June, and absent any evidence as to Otter's financial position, it was not clear to me that Otter could have funded the two new products even if the bank guarantee had not been drawn upon. I informed Otter's counsel, that unless those concerns could be satisfactorily addressed, and supporting documents provided, I would give little, if any, weight to the projected loss of profit claim in assessing the balance of convenience.

44 Thereafter, Otter produced an affidavit of Philip Turner, its chief financial officer. Unfortunately, for the most part it did not address the concerns which I had specifically raised.

45 True it is that Mr Turner provided an explanation for the negative cash position of the parent company as at 30 June 2012, but that was only a small part of my concerns.

46 As far as the two new products were concerned, Mr Turner deposed that "the anticipated return over a two year time frame is projected to be $560,116." He produced as confidential exhibits a cashflow analysis, dated 21 September 2012, which had been prepared by sales and marketing staff, and some calculations he had prepared in a document dated 28 February 2013. His figures are very different to Mr Otter's gross profit figures of $642,710 (or $642,701) for the first year alone. Mr Turner did not refer to or attempt to explain where Mr Otter's figures might have come from, or why the two witnesses had put forward such very different figures. My initial concern, that Mr Otter seemed to have simply plucked the projected profit figures from the air, was confirmed rather than allayed by the Turner affidavit.

47 Mr Turner baldly asserted that Otter's budget and banking facilities for the forthcoming financial year had made allowance for the funding necessary to produce the two new products, but did not produce a single supporting document.

48 Otter has prepared four affidavits, over a period of almost one month. The last one was prepared after I had specifically identified the deficiencies in the existing evidence which needed to be remedied. Otter has had plenty of time to make proper disclosure to the court of its current business and financial position. For the purpose of the interlocutory injunction application, I proceed on the basis that the only likely financial effect to Otter if the injunction is not granted is that it will have to pay approximately $75,000 per annum in additional bank fees and charges.

49 In the circumstances, Otter's failure to make proper disclosure to the court of its financial position not only causes me to doubt whether Otter could have funded the two new products but for the draw down, it also causes serious concern as to the worth of its undertaking as to damages.

50 Whilst damage to reputation can certainly be a relevant matter in assessing where the balance of convenience lies, given the flimsy state of the evidence about the two new products, and in the absence of any substantial evidence about Otter's business performance, I would give little weight to the bald assertion that Otter would suffer reputational damage were it unable to launch the two new products.

51 I also accept that, in principle, reputational damage may also be caused by a call on a performance bond or guarantee, as that may call into question a person's ability to perform their obligations under a contract, as well as their financial viability.[13] However, apart from the ANZ bank (which presumably is already aware of Otter's financial position), the Wylaars, and the parties' lawyers, there is no suggestion that anybody else is aware of the fact that the guarantee has been called upon. I would also give this factor little weight here, given the state of the evidence about Otter's financial viability.

53 Between 25 January and 5 February, Maria Wylaars spent approximately $210,000 of the bank guarantee proceeds paying tradespeople and businesses to repair and reinstate the premises. She wishes to use some of the remaining proceeds to continue to restore the premises, so they may be tenanted again. She also wants to use some of the money to pay the Deputy Commissioner of Taxation. Stephanie Wylaars says that not being able to use the bank guarantee proceeds until after the proceeding is finally determined would cause significant inconvenience and disruption to her mother, who is 81 years old.

54 There is no evidence to support Otter's bald assertion that the Wylaars may "waste the funds through personal expenditure." Nor is there anything apparently wrong in using some of the funds to pay tax; I would assume that tax is payable on rental income earned from the premises.

55 Further, there is no dispute that Maria Wylaars owns the premises on an unencumbered basis. Whilst there is no evidence before the court as to the market value of the premises, it is a very substantial industrial property, which had been attracting an annual rental of more than $500,000 and must therefore be worth some millions of dollars. Maria Wylaars has informed her daughter that she has, and will continue to have for the foreseeable future, the capacity to repay all of the bank guarantee proceeds, if required to do so. Otter did not challenge that evidence.

(a) Otter has not persuaded me that damages would not be an adequate remedy, if it were found at trial that the bank guarantee should not have been drawn upon; and

(b) I am satisfied that the balance of convenience is against the grant of an injunction.

57 Otter has not established that there is a serious question to be tried as to Maria Wylaars' entitlement to call upon, or to retain, the proceeds of the unconditional bank guarantee.

58 However, even if I proceeded on the basis that Otter did have an arguable case in that regard, Otter has not persuaded me that damages would be an inadequate remedy, or that the balance of convenience otherwise favoured the grant of an interlocutory injunction.

59 Maria Wylaars' potential claim against Otter substantially exceeds the amount of the bank guarantee. If, at trial, Maria Wylaars does not succeed in establishing all of the breaches and rental entitlement upon which she relies, then she would have to make any necessary repayment to Otter. There is no evidence that she would be unable to do so. However, the parties agreed that, as a matter of contractual risk allocation, she would be entitled to call upon and utilise the security, pending the determination or resolution of the underlying disputes. The least risk of injustice lies in refusing the injunction.

60 Had the case been more finely balanced, it might have been necessary for me to consider whether Otter's conduct in approaching the court and obtaining urgent injunctive relief without proper notice (and possibly without proper disclosure of all facts) would have otherwise been a discretionary consideration against the continuation of the interim injunction. However, Otter's case for injunctive relief is so weak, that I will say nothing further in relation to the matter.

61 The interim injunction will expire at 4.15pm today. Otter's application for an interlocutory injunction until trial will be dismissed.

[1] Although an email had been sent to Stephanie Wylaars on the morning of 5 February, she did not see it until after the hearing had taken place that afternoon. Otter's solicitors made no attempt to give notice of the injunction application to the Wylaars' solicitors, even though they had been acting for the Wylaars in the negotiations with Otter, and had attended the mediation the previous week.

[2] But I do reject Otter's assertion that I should find on the current evidence that some of the Wylaars' complaints are "fanciful or dubious."

[11] According to Mr Otter, the annual fee for the undrawn down bank guarantee was $9,026, whereas the cost of a "drawn facility in place of a bank guarantee" was said to total $84,845.

[13] Barclay Mowlem Construction Ltd v Simon Engineering (Aust) Pty Ltd (1991) 23 NSWLR 451 at 461-2; Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [46].

Trade Practice Act 1974(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (97 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (3)