Putney Group Pty Ltd v The Royal Rehabilitation Centre Sydney

LEGISLATION CITED : Foreign Acquisitions and Takeovers Act 1975 (Cth)

Clough Engineering Limited v Oil and Natural Gas Corporation Limited (2008) 249 ALR 458 CASES CITED : Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 Reed Construction Services Pty Limited v Kheng Seng (Australia) Pty Limited [1998] 15 BCL 158 Wood Hall Limited v The Pipeline Authority (1979) 141 CLR 443

Putney Group Pty Ltd (P1) Putney No 1 Pty Ltd (P2) Putney No 2 Pty Ltd (P3) PARTIES : Putney No 3 Pty Ltd (P4) Putney No 4 Pty Ltd (P5) The Royal Rehabilitation Centre Sydney (D1) Investec Bank (Australia) Limited (D2)

J Stoljar SC and J C Hewitt (Ps) COUNSEL : P R Whitford SC and M A Jones (D1) A H Kelly, Solicitor (D2)

Shaw Reynolds Bowen & Gerathy (Ps) SOLICITORS : Clayton Utz (D1) Arnold Bloch Leibler (D2)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5844/08 PUTNEY GROUP PTY LTD & ORS v THE ROYAL REHABILITATION CENTRE SYDNEY & ANOR JUDGMENT 1 HIS HONOUR: This is an application to restrain on an interlocutory basis the making of demands under a number of what are a commonly called bank guarantees. The matter has been hotly contested between Mr Stoljar, of Senior Counsel for the plaintiff, and Mr Whitford, of Senior Counsel for the first defendant. 2 The first defendant is a not for profit charitable organisation that provides specialist rehabilitation services, engages in research and delivers education. It conducts its activities upon the whole or part of very valuable land that it owns at Ryde. That land appears, on the evidence, to be worth as much as $90,000,000. It is unencumbered. The first defendant has determined to subdivide and allow development of parts of the land so as to free up moneys to allow it to improve the delivery of its core services to the community. 3 The proceedings arise out of a Project Delivery Deed ("the PDD") that the first defendant entered into with the plaintiff for the purpose of effecting the project that the first defendant had determined to carry out. The PDD allows for the plaintiff to develop parcels of land upon subdivision for residential development, another part to be left for open space and the balance to be used for facilities for the first defendant. 4 Pursuant to requirements of the PDD the plaintiff obtained a total of eight bank guarantees. The PDD provides, in cl 2.6, that the first defendant is entitled to make demand for payment under the bank guarantees if, among other things, there is failure to pay core option fees in accordance with a requirement of the PDD. Clause 2.6(b) of the PDD provides: "(b) RRCS will not demand more than the money in arrears under this deed..." 5 Clause 1.3 of the PDD deals with approval, under the provisions of the Foreign Acquisitions and Takeovers Act 1975 (Cth) ("the FATA"). That approval was conveyed in a letter from the Foreign Investment Review Board dated 27 August 2007 which stated that there were "no objections to this proposal in terms of the Government's Foreign Investment Policy" on stated conditions. One of the conditions was that the applicant should: "(b) commences continuous construction of the proposed development at an expected cost of at least 50 per cent of the purchase price of the land by 31 August 2008 and advises this office in writing of the commencement date within 30 days of commencing construction; ..." 6 The bank guarantees that were obtained under the requirements of the PDD were in a standard form to the effect that: "Investec unconditionally and irrecoverably undertakes, on demand being made by the Beneficiary in accordance with this Bank Guarantee, to pay to the Beneficiary the sum demanded up to a specified maximum amount …"

in the case of each bank guarantee. The total of the specified amounts is some $9,000,000. 7 I do not need to go into the history of the development project. Suffice it to say that the development consent for the subdivision proposal has now been obtained and subdivision of the land into seven lots has been effected. But construction of the proposed development did not commence by 31 October 2008 and has not since commenced. 8 The PDD contained a provision regulating the rights of the parties if the FIRB approval were refused or not obtained: cl 1.3(e). The PDD, however, is silent as to what the rights of the parties would be if the approval were obtained but subsequently lapsed. It is not contested between the parties that, in the events which have happened, the approval is not still in force. The result of this is that the continuing of steps to implement the project would now involve the committing of criminal offences under the FATA. 9 The first defendant now proposes to demand the payment of $9,000,000 from Investec under the bank guarantees. It is the making of these demands that the plaintiff seeks to restrain. 10 The plaintiff puts the case that there is no entitlement to make the demands in various ways. In the event, the only one of those that I need deal with is that it seeks to make a case that the contract has been frustrated by reason of the lapse of the FIRB approval. That being so, it says that there are no longer amounts owing under the contract and that there is no longer any entitlement under the contract for demands to be made under the bank guarantees. 11 It has been argued on the part of the first defendant that that is not correct and that there has been no frustration of the contract. Again, without going into detail, one of the principal bases on which this is argued by the first defendant is that it was as a result of action, or inaction, of the plaintiff that the FIRB approval has lapsed or has not been kept in force. One of the grounds on which this is submitted is that there is evidence that shows that the FIRB would consider extending the approval. However, it would only do so on the basis of the plaintiff's undertaking to commence work by a further specified day. This the plaintiff says it cannot, and will not, do, because, in view of the delay that has occurred, it has lost its finance to carry out the work and is unable to obtain, or certainly has not obtained, alternative finance. The first defendant's arguments have a good deal of substance. However, in my view, they do not negative that there is a serious question to be tried as alleged by the plaintiff to the effect that the PDD has been frustrated. 12 There have been extensive arguments on both sides concerning the discretionary considerations that go to the grant, or non grant, of interlocutory relief if a serious question to be tried is established. To some of these I shall need to advert in due course. One of those in the forefront, in this particular case, is to the effect that, in any event, if the plaintiff's case is correct, damages would be an adequate remedy and that that fact itself would preclude the grant of injunctive relief. 13 Before turning to an analysis of the considerations on which relief will be granted or not granted I need to consider some special principles which are relevant to the grant of injunctive relief in relation to the making of demands or draw downs under bank guarantees and similar instruments. 14 The basic principles concerning this were laid down in the High Court in Wood Hall Limited v The Pipeline Authority (1979) 141 CLR 443. There was an important exposition of the rules as they then stood in this Division by Austin J in Reed Construction Services Pty Limited v Kheng Seng (Australia) Pty Limited [1998] 15 BCL 158. Austin J's analysis was adopted with reference to some updating authority in the Full Court of the Federal Court (French, Jacobsen and Graham JJ) in Clough Engineering Limited v Oil and Natural Gas Corporation Limited (2008) 249 ALR 458. In their joint judgment their Honours adverted, at [76], to the rule that: "In general terms draw downs under bank guarantees will not be restrained because to introduce a qualification on the entitlement of the owner to call upon the performance of the guarantees would be to deprive them of the quality which gives them commercial currency",

citing Stephen J in Wood Hall at 457. 15 However, in Clough Engineering their Honours continued: "[77] Nevertheless, the authorities have recognised three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee, or bond, from performing its unconditional obligation to make payment. The exceptions were succinctly stated, with references to relevant authorities, by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 at 164-5 ( Reed ):

First - the court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently: see, for example, Wood Hall per Gibbs J (at CLR 451; ALR 391-2). As the primary judge observed at [36] Clough does not assert that ONGC has made a fraudulent claim. Accordingly, the first exception has no application in the present case.

Second - the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the TPA: Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 ( Olex Focas ). On this point, different views have been expressed about the reach of s 51AA. The High Court has not determined which of these views is correct: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153; [2003] HCA 18 at [44]-[45] ( CG Berbatis Holdings ). In any event, none of the categories of unconscionable conduct recognised in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301; 189 ALR 76; [2002] FCA 62 at [48] ( Samton Holdings ) apply in this case. Accordingly, the second exception has no application.

Third - the most important exception for present purposes, is that, while the court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay ( Reed Construction Services at 164 per Austin J): '… if the party in whose favour the bond has been given has made a contract promising 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.'

It may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the 'primary focus' will always be the proper construction of the contract: Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493; [2000] WASC 284 per Owen J at [30].

Stephen J recognised this in Wood Hall at CLR 459; ALR 398-9 by observing that the provisions of the contract may qualify the right to call on the undertaking contained in a performance guarantee.

[78] Numerous authorities have accepted the third proposition. Many were referred to in Reed at 165. Others include Fletcher Construction at 826-7; Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420; [1998] VSCA 40 at [28] ( Bachmann ); Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2000] FCA 672 at [10]; Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579 at [37]." 16 If an application to restrain a beneficiary of promises under a bank guarantee from making a demand or drawing upon the guarantee falls within one of the exceptions that is outlined, then the principle that a restraint on draw downs should not be granted is avoided and the application for interlocutory relief is dealt with in accordance with the ordinary principles relating to the grant of interlocutory injunctions as enunciated in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535 - 536. 17 The plaintiffs' contention is that cl 2.6(b) of the PDD is an express negative stipulation, breach of which will be restrained. They say that it is breached because, if the contract has been frustrated or otherwise brought to an end, nothing is owing under it, so that a demand made for payment will be for more than the money in arrears under the PDD. 18 In my view this submission is correct. If the contract be non existent, then the demands are for more than the sum stipulated in cl 2.6(b). That this is correct is illustrated by the actual decision of Austin J in Reed Constructions. There was not an express negative stipulation but, because the subjacent contract provided that the security should be available to the beneficiary only in specified circumstances, it was held there should be taken to be an implied prohibition on the beneficiary calling up the security except where there was authorisation for it to do so in the relevant provision of the deed. In this case, there is an express negative stipulation. 19 I turn then to consider the application that is made on the ordinary principles applying to interlocutory injunction applications. I have already said that, despite the fact that the first defendant's submissions to the contrary have substance, it is my view that there is a serious question to be tried as to whether the contract has been brought to an end on the basis of the doctrine of frustration. I have already also said that the question of the adequacy of damages as a remedy is in the forefront of the argument in this case. 20 On the first defendant's evidence, the first defendant is at present carrying out its activities at an operating loss. It is anxious to obtain the $9,000,000 demanded to help pay for those operations. It does seem, upon the evidence, that the $9,000,000 is likely to be absorbed in those operations or in some extension of them that the first defendant is anxious to carry out, so that the $9,000,000 will not remain available as a liquid sum to be repaid if the plaintiff's case succeeds at trial. 21 The first defendant says, however, that it has unencumbered land worth something in the vicinity of $90,000,000 and that, furthermore, the proposed subdivision having been effected, that land could, if called upon, be sold not only en globo but in the subdivided lots. The difficulty is that, valuable although this land is, it is not at all clear, on the evidence, as to whether any ready market exists for it either en globo or in relation to individual lots. The contract that the first defendant entered into for its sale and development by the plaintiffs was the complex transaction embodied in the PDD. Whether there are organisations other than that of which the plaintiffs form part ready and waiting to enter into some agreement concerning this land, or other developers interested in obtaining parts of it, is simply not shown on the evidence. I cannot form the view that the $9,000,000, if required to be repaid, would be able to be raised by the first defendant readily or in any particular time line. In those circumstances, it seems to me that damages cannot be said to be an adequate remedy in the circumstances, since it is entirely unclear how and when the damages, if assessed, would be paid. 22 A number of other matters have been agitated going to the balance of convenience. It has been said that the first defendant is carrying on operations that are worthwhile and important to the public and that the advantage to those operations and the possibility of their immediate expansion if the $9,000,000 were made available should be weighed in the first defendant's favour in assessing the balance of convenience. 23 On the other hand, although the first defendant's operations have been conducted at a loss, there is no suggestion that operations on the present scale could not continue to be carried on during the comparatively short time that it will take to resolve this matter, bearing in mind the availability of expedited hearings in this Division of the Court. The proceedings can and will be sent immediately to the Expedition List, whether or not interlocutory relief is granted, and should be able to be disposed of in a comparatively small number of months, rather than any longer period of time. Equally, whilst the availability of this money may enable the first defendant to proceed earlier with its plans of expansion, it cannot be said that there is any pressing reason for that to be done in the comparatively short time frame we are talking about. 24 It is true that the plaintiffs are not carrying out any present development activity. However, no doubt it is likely that the $9,000,000 will be used for some development activity if the present project is aborted. It would be a grave inconvenience to the plaintiffs, the $9,000,000 having been paid out by Investec, if they could not recover for a protracted period the $9,000,000 that they have deposited with Investec as the counter security for the grant of the bank guarantees. 25 In all the circumstances, I have concluded not only that damages are not to be regarded as an adequate remedy but that the balance of convenience favours the grant of the injunctive relief sought. I have come to this conclusion despite the arguments that have been put to me on behalf of the first defendant by Mr Whitford in his usual incisive manner. 26 In coming to the conclusion that I have, I have not yet considered one matter that could preclude the grant of relief and that is the adequacy of the undertaking as to damages proposed to be granted in support of the relief and, during the course of argument, I drew to the plaintiffs' attention the necessity for the plaintiffs to consider whether, and in what way, they are prepared to supplement or secure the undertaking in its usual form. I shall deal on 10 December 2008 with the question of the adequacy undertaking as to damages. 27 I order: (1) Upon the plaintiffs by their counsel renewing the existing undertakings the existing interlocutory relief is extended up to and including 10 December 2008. (2) Direct that material be served by the opposing parties and delivered to my Associate as follows: (a) by the plaintiffs a firm proposal for ongoing undertakings as to damages and any evidence in support by close of business on 8 December 2008; and (b) by the defendants any material to be relied on by close of business on 9 December 2008. (3) Proceedings adjourned to 10 December at 10am before the Duty Judge. (4) Proceedings placed in Expedition List on 12 December 2008. (5) Direct that the proceedings continue on pleadings and that the plaintiffs file a further amended statement of claim on or before 12 December 2008.

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