Case: Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40 ; [1999] 1 VR 420
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. 19 I now turn to consider a number of relevant authorities. In Bachmann the appellant agreed to design, manufacture, supply and commission steel manufacturing equipment for the respondent. A clause in the Supply Contract required the supplier to provide security for the performance of its obligations, which it did by an irrevocable standby letter of credit in favour of the purchaser. The letter of credit required the purchaser to provide the bank with a statement that the supplier had failed to comply with the contract and a sight draft, which the bank undertook to honour. The relevant clause provided: "A party shall not convert into money security that does not consist of money until the party becomes entitled to exercise a right under the contract in respect of the security." 20 Brooking JA with whom Tadgell JA and Ormiston JA agreed said: 'It is also plain that it is competent to the holder of security provided by the other contracting party to promise as part of the contract under which the security is provided the underlying contract not to do some act in relation to the security except in a certain event. Such a contractual promise is efficacious, not in the sense, of when the security is constituted by the obligation of a third person, that the third person can rely by way of defence as against the security holder on a term of the underlying contract, to which he was not a party, but in the sense that relief can be afforded to the person who procured the security in an action brought against the security holder on the promise contained in the underlying contract. No principle or rule of law would deny that a promise forming part of the underlying contract is in this sense efficacious, and the cases recognise this.' [28] 22 The supplier in Bachmann did not seek to establish any case of fraud on the purchaser's part but relied only on the contractual qualification upon the purchaser's powers under the general conditions of the underlying contract to demand payment under the letter of credit. It was conceded that the clause referred to constituted a contractual qualification on the purchaser's powers in relation to the security. This is to be contrasted with earlier Australian cases where the initial question was whether the underlying contract on its proper construction qualified the security holder's powers to claim under the security. The only point in the appeal as his Honour put it was as to the content of the qualification. [30]