Tranteret Pty Ltd v St George Bank Limited [2003] VSC 46

5. Not long before the commencement of this proceeding, which was by writ filed 18 November 2002, St George informed the plaintiff that the guaranteed facility was for a 12-month period which would expire on 18 November 2002 and that it proposed to call on the guarantee to clear the facility, the amount required being some $1.86m.

8. The plaintiff commenced the proceeding in response to that intimation. By summons filed 18 November 2002 it sought an interlocutory order restraining the defendant from making any demands under the guarantee. Pursuant to an undertaking continued up to this day, the defendant has not made any such demand.

11. Last Friday I heard argument whether the plaintiff should have the interlocutory relief which it seeks. Argument proceeded on two fronts: first, whether the plaintiff had established a serious issue or issues for trial, second, where lay the balance of convenience.

14. The plaintiff alleges by its statement of claim, as amended and filed 27 February 2003, that pertinent to its giving the guarantee were three representations made by St George: first, that Pinnacle was not then in default under its current facilities. Second, that the guarantee would be used for the purpose for which it was arranged, namely to secure moneys to be advanced to Pinnacle for its purposes.[1] Third, that the guarantee would be held as security for the facility provided to Pinnacle.[2]

* The plaintiff requested Westpac to provide the guarantee relying upon or induced by the representations.

23. The relief claimed by the statement of claim is as follows: interlocutory and permanent injunctions, a declaration that the guarantee is void ab initio, and an order setting the guarantee aside.

26. In my opinion, contrary to the submissions of Mr Sifris of Senior Counsel, who with Ms Mavroudis appeared for St George, the plaintiff has demonstrated that there are serious issues for trial.

29. As to the first alleged representation, it is not in doubt that in response to specific enquiry by the plaintiff before the guarantee was given, St George stated that Pinnacle was not currently in default of facilities extended to it. Neither is it in doubt that at that time Pinnacle had exceeded its approved overdraft limit. That entitled the bank to charge what was then described as an "unauthorised excess fee" and a higher default interest rate.

32. Mr Sifris submitted that the affidavit of Mr Paul Phillips sworn 21 January 2003 showed that there was no default; and that this could be seen to be the case because at the relevant time the defendant was providing Pinnacle with a 12-month facility on which interest had been pre-paid.

35. Mr Phillips, then the Senior Manager, Corporate and Business Banking of the defendant, certainly deposes to his view "that in accordance with the terms of the bank's policy towards the Pinnacle facilities, Pinnacle was not in default of those facilities."[3] He seeks to demonstrate also that the Pinnacle overdraft limit was not so far exceeded as the plaintiff would contend. It is further the case that St George was prepared to grant Pinnacle the $2m facility.

38. But to say that the defendant has arguments why its assertion that Pinnacle was not in default was correct is not to say that the plaintiff does not have a serious issue for trial that there was default, and that the representation was false. Much would be likely to turn upon what should be understood by "default" in the context of the particular enquiry. Again, the fact that St George was prepared to provide Pinnacle with a $2m facility on which interest had been pre-paid and which was to be guaranteed by Westpac at the request of the plaintiff might be thought to say little as to whether Pinnacle was then otherwise in default - whatever "default" might mean in context.

41. It turn to the third alleged representation. In my opinion there is a serious question for trial in that connection. Exhibit PP7 to Mr Phillips' affidavit, the original of which constituted the contract between St George and Pinnacle, says this:

"At the completion of the interest capitalisation period the full debt is to be cleared by way of St George Bank calling on the bank guarantee for $2m provided by the Westpac Banking Corporation."

45. It is true that the same document permitted Pinnacle to make prior capital repayments. But that was not required and any early payment carried with it certain unfavourable consequences for Pinnacle. Clear it is that, according to the contract between Pinnacle and the defendant, the guarantee arranged by the plaintiff was to be used to clear whatever debt remained outstanding at the end of the 12-month period.

48. According to the plaintiff's case, the defendant represented that the guarantee was to serve a different function. It relies upon the defendant's letter to Mr Hallinan, Managing Director of the plaintiff, dated 22 November 2001, in particular the following:

"...the bank will be holding the bank guarantee provided by Westpac... on your behalf as security."

52. In my opinion, it is fairly arguable that this representation as to the purpose of the guarantee was at odds with its intended use as agreed between Pinnacle and the defendant. I consider that there is a serious issue for trial in that connection.

55. In concluding that there are serious issues for trial I have not ignored Mr Sifris' submission that the plaintiff's case founded on the first representation is no more than a resort to opportunism devoid of substance. It may be that this is the truth of the matter. But I could not make that judgment on the present material.

58. I turn to the balance of convenience. Under that heading, Mr Sifris submitted:

* First, that the guarantee is a banker's unconditional undertaking to pay without any recourse to the customer. The favouree in such a case is entitled to call upon the guarantee, with any fight about the merits of the matter being resolved later[4].

* Second, that the plaintiff had failed to fully disclose its financial position. It had not shown that it would suffer irreparable damage if relief was refused. In those circumstances, damages would be an adequate remedy.

* Third, that the plaintiff would have to give an undertaking as to damages as a condition of relief. The material relied upon by the plaintiff to support its claim for relief threw doubt on the worth of any undertaking it might give. At least there should be a worthwhile undertaking given by a person of substance standing behind the plaintiff. Mr Hallinan was instanced.

64. In my opinion, contrary to Mr Sifris' submissions, the balance of convenience lies in favour of the plaintiff. Concerning counsel's first submission, it seems to me that Mr Dreyfus of Queen's Counsel, who with Mr Klotz appeared for the plaintiff, drew a distinction of substance between the Fletcher Construction type of case and the present case. The other type of case may be said to involve a contract pursuant to which one of the contracting parties obtains a performance bond in favour of the other party, exercisable in the event of the first party being arguably in breach of contract. Where the terms of contract show an intended allocation of the risk of a party being out of pocket pending resolution of a dispute, the risk being against the first party, the second party will be entitled to call upon the performance bond leaving the merits of the alleged breach for later resolution.

67. In the present case, by contrast, the underlying contract was between Pinnacle and the defendant. The plaintiff, via Westpac, should be regarded as a third party surety. Its claim against St George depends upon its dealings with that bank, not on the merits of any dispute between Pinnacle and the defendant. In the particular circumstances, I do not consider that the fact that the guarantee was a banker's unconditional undertaking to pay on demand without recourse to the plaintiff is decisive in favour of the defendant's submission.

70. I think that Counsel's second submission ought not be accepted. It is true that the plaintiff has not by its material disclosed its entire financial position. I consider that on an interlocutory application it would be too much to require a plaintiff to do so; or at least that is so in this case. There is evidence of what Westpac has said it will do if a call is made on the guarantee. At the least, the plaintiff will be charged interest on the amount paid by Westpac. Interest at the current rates will be some $17,825 per month. The plaintiff's business is not presently generating income. It will be unable to meet such an obligation. It can be predicted that it will have to renegotiate its facilities with Westpac. The fate of any such negotiations is necessarily unknown.

73. In all, the evidence satisfies me that the consequences for the plaintiff of the guarantee being called upon are likely to go well beyond a debit to the account of an affluent company, which the company is well able to meet without its business being disrupted and possibly put in peril. I do not consider that recovery of damages at trial by the plaintiff - assuming the success of the proceeding - would be adequate when the potential consequences of interlocutory relief being denied are considered. Relevant also, would be the difficulties in adequately assessing damages which are often present if a business fails.

76. I turn to Mr Sifris' third submission concerning the balance of convenience. It was not in debate that an undertaking as to damages should be given by the plaintiff. The court should be satisfied that there is no substantial doubt that a defendant will be adequately protected by the undertaking. In the present case, it is clear that, if the guarantee were now called upon, the plaintiff's financial position would at the least be rendered very difficult. But it does not follow that an undertaking by the plaintiff as to damages should be considered to inadequately protect the defendant.

79. What right to damages will the undertaking protect in this case? The defendant seeks to call upon the guarantee given by Westpac. There can be no doubt that, if the plaintiff fails, the guarantee will be honoured.

82. Mr Sifris argued, however, that the undertaking would protect interest on the Pinnacle facility accruing to trial, and costs. As to the first of those matters, Mr Dreyfus noted that the amount of the facility was about $1.86m when the defendant sought to call upon the guarantee. He submitted that there was a substantial buffer in the amount of the guarantee against accruing interest. I think that the point was well made.

85. As to costs, Mr Dreyfus submitted that ordinarily an undertaking as to damages does not address costs, but that in any event the defendant could always seek an order for security for costs. I consider that the answer to this aspect of Mr Sifris' third submission is a simpler one: assuming that an undertaking to damages extends to protecting a defendant's costs, I do not conclude on the present state of the material that the plaintiff's undertaking would be worthless. That conclusion, I make clear, does not foreclose an application by the defendant made on different material for an order for security for costs.

88. Thus far, as to the balance of convenience, I have considered and rejected submissions made for the defendant. Rejection of the second of them provides a positive reason why relief should be granted to the plaintiff. That is not the only consideration tending in that direction. The defendant, which is apparently owed about $6M by Pinnacle in all, has taken possession of mortgaged land at Bulla and is taking steps to sell it. The land has been valued at around $5.5M (it is, however, otherwise encumbered). That land apart, the defendant has substantial security otherwise in respect of the Pinnacle facilities. Accepting, as Mr Sifris submitted, that ordinarily a holder of securities is not constrained to resort to them in any particular order, I do not consider that the existence of other substantial securities, and the fact that the defendant is already exercising its rights with respect to one of them, are matters irrelevant to the balance of convenience.

91. I should finally refer to two other matters raised by written submissions for the defendant but not addressed orally. First, it was submitted that the court should refuse the plaintiff the relief sought because it amounted to final relief. In my opinion, that submission could not be accepted. The interlocutory relief sought leaves open for decision the critical questions framed by paragraphs 2 and 3 of the prayer for relief.

94. Second, the submissions addressed a notice to produce dated 18 November 2002 served by the plaintiff on the defendant. That notice to produce, I was informed by plaintiff's counsel, was not to be called on, relevant documents having been produced.

97. In the event the plaintiff should have the interlocutory relief which it seeks. The costs of the application, including any reserved costs, should be costs in the cause.

[1] This representation is alleged to have been made good by the defendant's failure to advise the plaintiff of matters which it knew or ought to have known.

[2] And not as a means of clearing the facility at the end of 12 months.

[3] See paragraph 19 of his affidavit; see also paragraphs 22 and 23.

[4] Counsel cited Wood Hall Ltd v. The Pipeline Authority & Anor [1979] HCA 21; (1979) 141 CLR 443, Olex Focas Pty Ltd & Anor v Skadaexport Ltd & Anor [1998] 3 VR 380, and Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 particularly at 826 and 827.