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Wing Lee Motors Ltd v Khan [1995] FJHC 86; HBE0155j.1994s (5 May 1995)

IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION

CIVIL ACTION HBE 0155 OF 1994/S

Between

WING LEE MOTORS LIMITED
Plaintiff

And

SHAMEEMA KHAN
(father's name
Mohammed Hafiz) trading
as G. Kay Construction
Defendant

Counsel: Miss Narayan for Plaintiff
Mr. Gates for Defendant

Hearing: 16th March 1995
Decision: 5th May 1995

JUDGMENT OF PAIN J. ON
APPLICATION TO REVOKE INTERIM INJUNCTION

In this action the Plaintiff claims the sum of $125,260.53 alleged to be owing under a sub-contract with the Defendant for construction work on the Housing Authority Project in Nadawa. The Defendant denies owing this sum to the Plaintiff and counterclaims for the sum of $39,290 comprising the cost of completing the Plaintiff's work and liquidated damages for delay.

Immediately before the proceedings were issued the Plaintiff applied for, and was granted, an ex parte interlocutory interim injunction restraining Australia and New Zealand Banking Group until further order from paying to the defendant the sum of $20,000 deposited with the bank by the Plaintiff as a performance bond under the sub contract. The Defendant has applied for revocation of this interim injunction. The application was heard on the 16th March 1995 and counsel for the Plaintiff sought leave to file written submissions. These have been filed and the Defendant has filed a reply.

The evidence in support of the application for the interim injunction was contained in two affidavits of Humphrey Chang, the general manager of the Plaintiff company, dated 29th and 30th March 1994. Annexed to the second affidavit was a copy of a letter dated 17th November 1993 from the Defendant to the Plaintiff confirming the terms of their agreement. In particular it states, "Your company will have to provide a $20,000 performance bond for this portion of the project". Mr. Chang deposed that "the Plaintiff then deposited the sum of $20,000 as a Performance Bond into the Australian and New Zealand Banking Group in December 1993". The affidavits also gave details of work done by the Plaintiff under the subcontract and claims for payment made upon the Defendant which had not been met. It was acknowledged that the work had not been completed by the Plaintiff on time but reasons were given for that delay. In relation to the Performance Bond, it was deposed that the Defendant was "seeking to withdraw the said sum of $20,000 Performance Bond from the Australia and New Zealand Banking Group". The Plaintiff had not been given any reason for this and assumed "that the Defendant is seeking to withdraw the bond as a penalty for late completion of the work by the Plaintiff". In doing this the Defendant was "purporting to impose a penalty where an extension of time should have been granted" and was "ordering forfeiture of the Performance Bond when such forfeiture is unjustified".

A copy of the Performance Bond was not placed before the Court on the hearing of the ex parte application for an interim injunction. A copy has now been annexed to the affidavit of Kailash Nadan dated 22nd February 1995, filed in support of the Defendants application for revocation of the interim injunction. It is headed "Bank Guarantee" and has been given to the Defendant (the Principal) by Australia and New Zealand Banking Group Limited (the Bank) for the Plaintiff (the Customer). The significant provisions state:

"The Bank undertakes unconditionally to pay the Principal on written demand from time to time any sum or sums to an aggregate amount not exceeding $20,000. The Bank will pay this amount or any parts of it to the Principal on demand without reference to the Customer and even if the Customer has given the Bank notice not to pay the money and without regard to the performance or non-performance of the Customer or Principal under the terms of the contract or agreement. Any alterations to the terms of the contract or agreement or any extensions of time or any other forbearance by the Principal or Customer will not impair or discharge the Banks liability under the undertaking".

Counsel for the Defendant submits that an injunction should not have been made to restrain the performance required of a bank under such an irrevocable guarantee or letter of credit. Passages from Commercial Law by R.M. Goode pages 675 to 678 and 697 to 701 were cited in support of this submission. Counsel also relied upon the authorities in the list submitted and particularly quoted from the judgments in R.D. Hardbottle (Mercantile) Ltd. v National Westminster Bank Ltd. and ors. (l978) 1 QB 146 and Hortico (Australia) Pty Ltd. v Energy Equipment Co. (Australia) Pty Ltd. (l985) 1 NSWLR 545. In reliance on these authorities it was submitted that the Court should not interfere with the irrevocable obligation assumed by a bank under the bond. It is independent of the contract between the Plaintiff and the Defendant and is a separate guarantee given by the bank to the plaintiff. The only exception that would justify an injunction is a clear case of fraud and there is no such evidence in this case.

In written submissions, counsel for the Plaintiff concedes that "in the case of an on-demand performance bond or guarantee, the only way that an injunction can be granted is if there is compelling evidence of fraud". However the injunction should not be dissolved "because there is evidence that the Plaintiff was misled into agreeing to the performance guarantee which is tantamount to a fraud". It is submitted that the bond was given by the Plaintiff on the condition that it would be forfeited if the Plaintiff defaulted in its obligations. The Plaintiff never agreed to or executed an unconditional guarantee and was unaware of the terms of the guarantee given by the bank to the defendant. The defendant "is only calling up the guarantee by virtue of the fact that the contract has been breached by the Plaintiff". This is not a question for the Defendant to decide but is a major issue to be tried in the action. The Defendant cannot withdraw the money from the performance bond without good reason. She has fraudulently misrepresented to the bank that the Plaintiff has defaulted under the contract. This is unconscionable conduct amounting to fraud.

In reply, counsel for the Defendant submits that there is no evidence of fraud. The bond is an unconditional or irrevocable letter of credit and the Defendant is entitled to call up the bond for what she considers a breach of contract.

In my view the arguments of the Defendant must prevail. It is conceded by the Plaintiff and explicit in the authorities that a performance bond or guarantee imposes an absolute obligation on the bank to pay in accordance with its terms. The nature of such guarantees is explained in Commercial Law by R.M. Goode at page 699 in these terms:

"Performance guarantees may also be classified according to the events which trigger the liability of the guarantor. Thus, whilst the traditional guarantee calls for the beneficiary to establish default, those beneficiaries who are in a strong bargaining position have been able to exact on-demand guarantees (Form 35), which oblige the guarantor to pay on written demand from the beneficiary, irrespective of whether there has been default by the principal, and indeed without obligation even for the demand to contain a declaration of default. Such 'guarantees' (which in law are plainly primary undertakings, not guarantees in the legal sense) will be enforced by the court according to their terms. The court takes the view that if the guarantor and the principal place themselves at the mercy of the beneficiary in this way, they must accept the consequences".

The learned author cites the Court of Appeal decision in Edward Owen Engineering Limited v Barclays Bank International Ltd. and anor. (1978) 1 QB 159 as a vivid illustration of this. In that case a party to a contract, although prima facie in default, nevertheless made a claim under a performance bond given by a bank on behalf of the other party. The Court of Appeal upheld the decision discharging an interim injunction restraining the bank from paying under the guarantee. Lord Denning said at page 171:

"All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not; The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice".

The form of the bond in this case is an on-demand performance guarantee. Although provided as a term of a commercial contract entered into between the Plaintiff and the Defendant, it is nevertheless separate from and independent of that commercial contract. It is an unconditional promise by the bank to pay upon demand from the Defendant. The bank is required to make payment without reference to the Plaintiff or to the contract between the Plaintiff and the Defendant and without regard to the performance or non performance of the Plaintiff or the Defendant under the terms of that contract.

The Court will only interfere with this obligation in cases of fraud. In Edward Owen Engineering Ltd. v Barclays Bank International Limited and anor. (supra) Browne L J, after agreeing with Lord Denning's exposition of the banks obligation to make payment under this type of guarantee, said at pages 172-173:

"I agree also that it is established that there is at any rate one exception to this rule ............ That exception is that where the documents under the credit are presented by the beneficiary himself, and the bank knows when the documents are presented that they are forged or fraudulent, the bank is entitled to refuse payment. But it is certainly not enough to allege fraud; it must be "established" ".

Accordingly, in this case, the bank is obliged to pay the amount of the bond upon demand by the Defendant. The Court should only interfere by way of injunction if fraud on the part of the Defendant is established.

In my view the matters raised by the Plaintiff do not establish fraud entitling the Court to intervene. Any misunderstanding the Plaintiff may have had regarding the nature of the guarantee given by its bank cannot connote fraud on the part of the Defendant. Further, the resolution of the disputed issue of whether or not the Plaintiff defaulted under its contract with the Defendant, does not arise on this application. Under the terms of the bank guarantee an absolute obligation to pay arises from a demand for payment by the Defendant. There are no prior conditions to be fulfilled. The bank undertook to pay "without reference to the Customer and even if the customer has given the bank notice not to pay the money and without regard to the performance or non performance of the Customer or Principal under the terms of the contract or agreement".

These matters were adverted to in R.D. Harbottle (Mercantile) Ltd. v National Westminister Bank Ltd. and Others [1978] 1 QB 146 (a decision approved by the Court of Appeal in Edward Owen Engineering Ltd. v Barclays Bank International Ltd. and another (supra) ). The remarks of Kerr J. at page 155 are pertinent to the Plaintiffs submissions in this case. He said:

"The Plaintiffs then still face what seems to me an insuperable difficulty. They are seeking to prevent the bank from paying and debiting their accounts. It must then follow that if the bank pays and debits the Plaintiff's account, it is either entitled to do so or not entitled to do so. To do so would either be in accordance with the bank's contract with the Plaintiffs or a breach of it. If it is in accordance with the contract, then the Plaintiffs have no cause of action against the bank and, as it seems to me, no possible basis for an injunction against it. Alternatively, if the threatened payment is in breach of contract.................then the Plaintiffs would have good claims for damages against the bank. In that event the injunctions would be inappropriate because..................the Plaintiffs would then have an adequate remedy in damages.

...........(Counsel for the Plaintiffs) submitted that on the evidence the buyers were clearly not entitled to payment under the guarantees, and indeed that their demands for payment were fraudulent. He therefore submitted that the Court should at all costs prevent the buyers from obtaining the money................ I cannot accept any of these submissions. First, this is not a case of established fraud at all. The Plaintiffs may well be right in contending that the buyers have no contractual right to payment of any part, let alone the whole, of the guarantee ................ But all these issues turn on contractual disputes. They are a long way from fraud, let alone established fraud. Secondly the authorities are strongly against the Plaintiffs contentions. It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks ..................... Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation........"

It follows, that an interim injunction cannot be sustained against the bank in this case. The interim injunction was made on an ex parte application, as a matter of urgency, because the bank was about to make payment to the Defendant. If a copy of the guarantee had been filed and the present arguments made, an injunction would not have been granted. It should therefore now be discharged.

It is not necessary to consider the issue raised by me as to whether an injunction could, in any event, be made against a person who is not a party to the proceedings. Likewise the submissions of counsel for the defendant relating to non-disclosure by the Plaintiff at the original hearing and the balance of convenience in this particular case do not require determination.

Accordingly, I make the following orders:

1. The interim injunction made by this Court on the 30th March 1994 restraining Australia and New Zealand Banking Group from paying out to the Defendant the sum of $20,000 deposited with it by the Plaintiff as a performance bond is revoked.
   
2. The Plaintiff is to pay the Defendants costs on this application, to be taxed if not agreed.
   

JUSTICE D.B. PAIN

HBE0155J.94S