Case: Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 at 400
Outcome: applied
In Olex Focas Pty Ltd v Skodaexport Co Ltd , sub-contractors provided unconditional bank guarantees to the head contractor known as mobilisation guarantees. Additionally they provided performance bonds again by way of bank guarantees to the head contractor. All the guarantees contained unconditional undertakings by the bank to pay the head contractor on demand. The contracts made between the sub-contractors and the head-contractor were variously expressed to be subject to the laws of India or Switzerland. The contracts also contained an arbitration clause requiring disputes to be arbitrated in Paris. 28 Disputes arose between the sub-contractors and the head-contractor. The sub-contractors claimed that they had performed all their obligations under the contract. The head-contractor denied this. The head-contractor then called up the full amount of the guarantees. The sub-contractors sought interlocutory injunctions requiring the head-contractor to countermand the demands made upon the bank, restraining the head-contractor from making any further demand under any of the guarantees and restraining the bank from making any payment pursuant to any of the guarantees. 29 The mobilisation and bank guarantees all contained irrevocable undertakings on the part of the bank "to pay the buyer at site forthwith on first demand and in writing without protest or demur or proof or satisfaction and without reference to the seller any and all amounts demanded from us by the buyer", subject to an aggregate limit. 35 In Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158, 164 Austin J said: 'There are three principal exceptions. The first, noted in passing by Gibbs J in the Wood Hall case (at 451) and recognised as well by Young J in Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1986) 2 BCL 366, 370, is that the Court will enjoin the party in whose favour the bond has been given from acting fraudulently. The second exception, recently recognised by the Victorian Supreme Court in Olex Focas Pty Ltd v Skodaexport Co Ltd, [1997] ATPR (Digest) [46-163], is that the Court will intervene to restrain the party for whose benefit the bond was given from acting unconscionably for the purposes of s 51AA of the Trade Practices Act 1974 (Cth). There is a third exception, which is based on contract and is the most important for present purposes. A line of cases has recognised that whilst the Court will not restrain the issuer of the bond from acting on the unqualified promise to honour it, 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.' [emphasis added] 40 As I have mentioned, Batt J was not persuaded, on the evidence before him in Olex Focas , that there was a serious issue to be tried that the head-contractor was acting unconscionably for the purposes of s 51AA of the Act in calling up the performance guarantee. His Honour came to the opposite conclusion on the evidence before him in respect to the mobilisation/procurement guarantees. This was because his Honour considered that the calling up the whole amount secured by this category of guarantees, when the greater part had already been paid, was "according to ordinary human standards, quite against conscience" and accordingly, unconscionable within the terms of the Act. 50 I have already adverted to the well-established line of authority underlining the importance of the certainty generated by letters of credit, performance bonds and the like. The Banks submit that this is an important factor on the balance of convenience and point to the case of Olex Focas Pty Ltd v Skodaexport Co Ltd where Batt J refused an injunction against either the beneficiary or the bank to prevent payment on performance bonds based on claims of unconscionable conduct contrary to s 51AA of the Act. 51 It is submitted that an injunction may well adversely affect the commercial reputation of the Banks in a way that would mean that those arranging international letters of credit and performance guarantees would prefer banks from other jurisdictions. This, it is contended, gives rise to an unquantifiable difficulty, which means that an undertaking as to damages, by Clough, may well be insufficient to protect the position of the Banks. 52 As between Clough and ONGC I have already concluded, when granting an interim interlocutory injunction against ONGC that the balance of convenience favoured the grant of an injunction because the evidence demonstrated how Clough would be irreparably affected (both financially and through an adverse impact on its reputation) if ONGC were to press its demands and secured payment under the performance guarantees. I found that damages would not be an adequate remedy for Clough on the evidence then before me. 67 In these circumstances, and in light of the serious issues to be tried as between Clough and ONGC, it is necessary, in my opinion, in order to preserve the status quo, and the efficacy of the injunctive orders made against ONGC, given the Banks' intention, otherwise, to pay under the guarantees, to restrain them from doing so: see Olex Focas at p 405. 68 Accordingly I am of the view that the motion by the Banks should be dismissed. I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour. Associate: Dated: 19 June 2007 Counsel for the Applicant: Mr G Murphy SC with Mr B Dharmananda Solicitors for the Applicant: Corrs Chambers Westgarth Counsel for the 1 st Respondent No appearance Counsel for the 2 nd -4 th Respondents: Mr J Thomson Solicitors for the 2 nd -4 th Respondents: Allens Arthur Robinson Date of Hearing: 12 June 2007 Date of Judgment: 19 June 2007 AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback URL: http://www.austlii.edu.au/au/cases/cth/FCA/2007/927.html