Case: Ideas Plus Investments Ltd v National Australia Bank Ltd (2006) 32 WAR 467
Outcome: considered
The Banks submit that there is no serious question to be tried. At a general level what is said on behalf of the Banks as to the well established independence or autonomy of irrevocable letters of credit, is uncontroversial. A standby letter of credit is a letter of credit which performs the function of providing security against the danger that a party to a contract will fail to perform it: Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40 ; [1999] 1 VR 420 at 428 [26] . The purpose of a standby letter of credit is "to provide the beneficiary with an unfettered, immediate remedy upon the triggering event on the letter of credit, pending resolution of any dispute on the underlying contract": Ideas Plus Investments Ltd v NAB Ltd (2006) 32 WAR 467 at 478 [34]. A standby letter of credit is not simply a mere method of payment but creates a direct liability upon the banker independent of the underlying contract; Ideas Plus at 477, 497, [33], [99], Bachmann at 429-430 [28]-[29]. The contractual promise between the banker and the beneficiary is unaffected by the terms of any underlying contract between the beneficiary and the applicant for the letter of credit. However the applicant for the letter of credit might be able to apply to prevent the beneficiary from claiming against the banker due to the terms of an underlying contract: Bachmann at 429-430 [28]-[29]. These principles apply equally to the performance guarantees the subject of this application. 17 The Banks submit that the only traditional exception where a banker may be enjoined, is where the beneficiary is fraudulently attempting to draw down the letter of credit. That is because of the Court's special jurisdiction to prevent fraud, which is wider than the jurisdiction to prevent the beneficiary breaching the underlying contract with the applicant for a letter of credit: Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd's Rep 251 at 254, Deutsche Ruckversicherung AG v Wallbrook Insurance Co Ltd [1995] 1 WLR 1017 at 1029-1030, Ideas Plus at 496 [93]. There is no allegation of fraud here and so, the Banks submit, no injunction should be granted against them. The Banks nonetheless rightly, in my opinion, accept that another basis upon which the Banks might be enjoined is by reason of it being allegedly unconscionable, contrary to s 51AA of the Act, for ONGC to exercise its contractual rights in the underlying construction contract and draw upon the performance guarantees although any such restraint would be ancillary to Clough's claim against ONGC. 26 In Ideas Plus Steytler P with whom McLure and Buss JJA agreed concluded that the National Australia Bank (NAB) was empowered to claim under a letter of credit granted by HSBC Bank of Australia Ltd (HSBC) so long as it had a bona fide belief that the conditions were satisfied. The certificate by the NAB issued to HSBC certifying in effect that the conditions of the letter of credit had been met was only a representation of such a bona fide belief and perhaps that there were reasonable grounds for such a belief. [55]-[57], [105] See also Fletcher Construction Australia Limited v Varnsdorf Pty Ltd [1998] 3 VR 812. Steytler P with whom McLure JA agreed held that the basis for the payment made by HSBC pursuant to its independent obligation by it to NAB under the letter of credit was the provision by NAB of a certificate in the required terms. It was, his Honour found, the presentation of that certificate, not the truth of the facts certified, which conditioned HSBC's obligation to pay.