Commercial Litigation Newsletter

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1 MAY 2012 Commercial Litigation Newsletter Cornwalls Litigation News Welcome to our May issue of the Commercial Litigation newsletter. This quarter we have included news on: bank guarantees and when they can be called upon the risks associated with using rented motor vehicles a recent decision of the Victorian Supreme Court, Knowles v Victorian Mortgage Investments, which considers aspects of the National Consumer Credit Code a recent case about offers to settle various recent decisions in the property sphere. Please don t hesitate to contact us if you would like more information on any topic, whether covered in this newsletter or not. We hope you find the newsletter informative and useful. Wayne Kelcey Partner and Head of Commercial Litigation Phone (direct) Mobile w.kelcey@cornwalls.com.au *Click on image to view Wayne s profile When can bank guarantees be called upon? The Federal Court recently considered Australia s position on bank guarantees and the circumstances in which they may be called upon in Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd 1 (Redline Contracting). This article considers bank guarantees generally, when they may be called upon and whether a party may be prevented from calling upon a bank guarantee. It goes on to examine both Redline Contracting and Clough Engineering cases and the practical implications that follow. Bank guarantees Bank guarantees are commonly used to guarantee to other entities payment to secure a contract. They are commonly found as part of construction contracts and leasing arrangements. The commercial purpose behind bank guarantees is that they are a commercial currency seen as the equivalent to cash. Once the guarantee has been presented to the issuing bank, it is payable by the bank to the proprietor and does not require the consent of the party who made the guarantee available. It is common for a bank guarantee to contain an expiry date. Conditional and unconditional bank guarantees Bank guarantees are either conditional or unconditional. A conditional bank guarantee can be where the issuing bank is only liable upon proof of a breach of the contract by the builder, and where the proprietor sustains a loss as a result of the breach. 2 In this situation, the issuing bank s liability only arises following a default by the builder under the contract. More commonly, a bank guarantee may be unconditional or on-demand. This means it is payable by the issuing bank when a demand for payment is made. Under these circumstances, it is irrelevant as to whether there is a provable breach of contract. An unconditional bank guarantee will usually state that the bank will unconditionally pay on demand, any amount demanded by the proprietor, up to the maximum amount of the bank guarantee. 1 [2011] FCA The Laws of Australia Click the arrows to navigate the document Click the circle to exit the document 1/8

2 When can a bank guarantee be called upon? When a bank guarantee may be called upon will depend on the terms of the guarantee and the arrangement giving rise to the guarantee being issued. Most contracts permit the proprietor to call on the bank guarantee in circumstances where a debt has become due and payable, and the issuing party has failed to pay the amount within the required time. Unconditional bank guarantees are most common in the construction industry. The issuing bank under an unconditional guarantee is concerned only with whether the event has happened upon which the obligation to pay has arisen that is, whether a demand has been made. 3 In this case, there need not be any evidence of a breach of contract for the guarantee to become payable and the issuing bank does not question the proprietor s entitlement to the bank guarantee under the contract. In respect of conditional guarantees, the party seeking to rely on the bank guarantee must be able to prove that a breach of contract has occurred before presenting the bank guarantee for payment. Can you stop a party from calling upon a bank guarantee? Traditionally, the approach of the courts is to allow the proprietor to call on bank guarantees. However, there are some circumstances where parties are able to obtain injunctive relief to prevent others from doing so. The relief is sought against the party seeking to present the guarantee for payment and not against the issuing bank. Recently, the decision in Redline Contracting affirmed the earlier decision of Clough Engineering Limited v Oil and Natural Gas Corporation Limited 4 (Clough Engineering). In summary, Clough Engineering established that the court will not intervene to prevent a party from calling upon a bank guarantee unless the principal: 1. is acting fraudulently or unconscionably; or 2. has made a contractual promise not to call upon the guarantee (and this is stipulated in the contract). Clough Engineering Clough entered into a contract with Oil and Natural Gas Corporation Limited (ONGC) for the development of oil and gas fields off the coast of India, as well as construction of onshore facilities. Clough provided three bank guarantees worth USD21,000, to CNGC. Following a series of disputes between Clough and CNGC, CNGC terminated the contract and called upon the bank guarantees on the same day. Clough applied for an injunction preventing CNGC from calling upon the bank guarantees and restraining the bank from making payment to CNGC. Clough sought the injunction on the basis that there was a genuine dispute between the parties as to whether it was in default under the contract. Clough also argued that if it were in breach of the contract, this was as a result of CNGC s failure to perform. The court initially granted Clough an interim injunction restraining payment to ONGC. However, when the matter came before the Federal Court, the court refused to continue the interim injunction. Clough applied for a stay on the payment pending appeal. On appeal, the Full Court of the Federal Court revisited established authorities in this area, including Wood Hall v The Pipeline Authority 5 (Wood Hall). In Wood Hall, the High Court said that to introduce a qualification on the entitlement of the owner to call upon guarantees would be to deprive them of the quality which gives them commercial currency. Clough Engineering established that a court would not prevent a party from calling upon a bank guarantee unless the party calling upon the bank guarantee is acting fraudulently or unconscionably or has made a contractual promise not to call upon the guarantee (and this is stipulated in the contract). The Full Court determined that ONGC was entitled to call upon the bank guarantee notwithstanding the existence of a dispute. Clough Engineering applied authorities that support a strong approach to the enforcement of bank guarantees. 3 The Laws of Australia 4 [2008] FCAFC HCA 21 2/8

3 Redline Contracting 6 Redline Contracting Pty Ltd (Redline) provided MCC Mining (Western Australia) Pty Ltd (MCC) with four unconditional bank guarantees for the installation of pipelines for a resources project in Western Australia. MCC made several complaints against Redline, including that Redline failed to pay $1,290, in fuel charges. These fuel charges caused MCC to call upon the bank guarantees. Redline argued MCC was not entitled to call upon the guarantees because: 1. there had been no determination under the contract that MCC was owed the amounts claimed, and if it were found that Redline owed MCC, the contract would allow Redline to offset this amount against amounts claimed by Redline; and 2. it alleged MCC had engaged in misleading and deceptive conduct with respect to representations made by MCC about the standard of pipelines to be used under the contract. Redline asserted that the representations caused it to enter a lower tender price for the contract than it would otherwise have done. The Federal Court rejected both Redline arguments on the basis that they had little chance of success. The court applied the principles in Clough Engineering. The court went on to discuss the importance of the construction of a contract as follows: a contract is to be construed in its commercial context ; where it provides for a performance guarantee, the parties are taken to have contracted in the knowledge of the legal principles relating to the construction of contractual terms insofar as they affect the right of the beneficiary to call upon a performance bond ; and the contract must be construed in light of the whole contract and the language of the performance bond itself. Practical implications As the decision in Clough Engineering established, there are only three circumstances in which a party may be prevented by the court from calling upon a bank guarantee. Care should be taken when obtaining bank guarantees to consider how any limiting qualifications may affect the utility of the guarantee at a later date. Qualifications will benefit the party obtaining the guarantee. The party for whose benefit the guarantee is detained should insist on an unconditional guarantee where possible. The decision in Redline Contracting, affirms that a court will not prevent a party from calling upon a bank guarantee unless there is clear wording in the contract limiting the situations in which the bank guarantee may be called upon, except in cases of fraud or unconscionable conduct. Authored by: Leneen Forde, Cornwall Stodart The pitfalls of hire cars On holidays, business trips and even when your own vehicle is getting repaired, a hire car seems like a convenient solution. An agreement is signed and the vehicle is yours for a short time but at what cost? The fine print could cost you a significant amount more than your holiday! When hiring a rental vehicle there are terms and conditions of rental that must be signed. While it is advisable to obtain the optional insurance cover, there are instances where the insurance does not apply and the hirer will be liable for all damages to the rental vehicle and/or third party vehicle in addition to associated costs. General terms A number of general terms and conditions are contained in a motor vehicle rental agreement including: a rental motor vehicle is only to be driven by the hirer or an authorised driver, within the definition of the rental; a rented motor vehicle is to be returned in the same condition as it was at the commencement of the rental period, fair wear and tear excepted; the hirer and any authorised driver must maintain all of the rented motor vehicle s engine oils and engine coolant levels to the manufacturer s specifications; the hirer and any authorised driver must keep the rented motor vehicle locked and the keys under personal control at all times; a rental motor vehicle is not to be used for any illegal purpose including races or contests; a rented motor vehicle must not be used when damaged or unsafe; and all traffic and parking infringements incurred during the rental period must be paid by the hirer or any authorised driver. 6 Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd [2011] FCA1337 3/8

4 Breaches of these terms result in a termination of the rental agreement. If the rental agreement is terminated, the hirer is liable for the rental charges that would have been incurred for the duration of the rental agreement in addition to any other costs resulting from the breach. Waivers and exceptions If the hirer has accepted the loss damage waiver option, and the excess shown in the rental agreement is paid in respect of the event involving damage to or loss to the vehicle which is caused by the use of the motor vehicle by the hirer, the hire company waives the hirer s liability to pay for the damage to the vehicle. However, terms and conditions exist in a motor vehicle rental agreement that can limit the cover of protection provided by the hire company in certain instances of loss and damage. While you may believe you are insured after taking out the loss damage waiver option and paying the excess as required, there are instances where you must pay for all damage and associated costs in addition to the excess. Instances include the cost of repairing/rectifying any: tyre damage not considered normal wear and tear; damage caused deliberately or recklessly by the hirer, any other driver or passenger of the vehicle; damage to the rented motor vehicle or to a third party vehicle caused by permitting the vehicle to be used in areas prohibited by the rental agreement; eg snow, hard terrain, beaches, rivers, flood water or sand; damage to the rented motor vehicle or to a third party vehicle caused by contact between the rented motor vehicle and anything overhanging the roadway; water damage to the rented motor vehicle and any resulting damage; and/or underbody damage to the rented motor vehicle and any resulting damage. The above are not covered by the loss damage waiver option. In a recent matter, the hirer rented a vehicle in Townsville for a period of 24 hours. The hirer took out the optional loss damage waiver cover that was available under the hire agreement. During the rental period, the hirer experienced heavy rainfall. When the rented motor vehicle was returned to the depot at Townsville airport the following day, no representatives from the hire car company were present. The hirer was subsequently sued for damage to the motor vehicle as a result of water damage to the rented motor vehicle during the rental period. The hire company alleged that the vehicle would not start, the air cleaner was full of water and the engine needed to be replaced as well as the exhaust and transmission. The hire company held the hirer liable because the loss damage waiver cover did not cover water damage. Despite insisting that the rented motor vehicle was operable when it was dropped off at the airport, the hirer was under an obligation to prove that the damage to the vehicle was not caused during the hire period. This could only be achieved by expert evidence showing that the water damage effects, ie hydraulic lock, would be immediate. In the absence of an inspection of the vehicle, due to it being salvaged, the hirer was unable to lead evidence and it was necessary to settle the proceedings prior to trial. What are the risks? When a hire company alleges that there has been damage to a rented motor vehicle, or a third party vehicle, it is up to the hirer to prove that the damage did not occur during the rental period. This can prove to be an expensive exercise, especially if legal proceedings are commenced. In instances where for example water damage is alleged, a hirer would need to retain an expert to prove that the damage could not have occurred during the rental period. Experts in this field can range from $1, $4, If the matter proceeds to court and the hirer is unable to prove that the damage did not occur during the rental period, the hirer will be liable for the costs of the damage, appraisal fees, administrative fees, a per day loss of use fee based on estimated downtime of the rented motor vehicle, towing, storage, legal costs and interest in addition to their own legal costs. 4/8

5 What you can do When hiring and returning a rented motor vehicle, it is essential to note the odometer reading. This ensures that if any damage is caused to the vehicle, a timeline can be established in order to attribute blame. It is important to take note of any problems that you may experience with a rented motor vehicle. If the rented motor vehicle is making unusual sounds or appears to be experiencing mechanical issues, no matter how minor they seem to be, cease driving the vehicle immediately and contact the hire company. If you continue to drive the vehicle you may be liable for using it when damaged or unsafe and causing deliberate or reckless damage, thereby inadvertently surrendering indemnity under the loss damage waiver option. When returning a rented motor vehicle, it should be returned directly to a representative of the hire company and the time should be noted. Again this ensures that if any damage is caused to the vehicle, a timeline can be established in order to attribute blame. Authored by: Jacinta Atkinson, Cornwall Stodart For further information, please contact Joe Naccarata, Partner and Head of Insurance and Risk. Case Note: Knowles v Victorian Mortgage Investments Limited & Anor [2011] On 20 December 2011, his Honour Justice Croft of the Supreme Court of Victoria handed down a decision in Knowles v Victorian Mortgage Investments Limited & Anor [2011] VSC 611. The decision confirmed that: If a credit provider does not obtain from a borrower a signed declaration as to the loan s purpose, then a presumption will arise (in favour of the borrower) that the National Consumer Credit Code (NCCC) applies. Compliance with the prescribed form of declaration is fundamental. The inclusion of a consumer warning in the format outlined by the Consumer Credit Regulations is essential. This should make clear to the borrower the potential loss of rights under the NCCC in declaring a commercial purpose. Any such declaration will nonetheless be ineffective if the credit provider knew or had reason to believe that funds were in reality to be used predominantly for personal, domestic or household purposes. Facts Knowles and Mortgage Investments Victoria (Mortgage Investments) had been in advanced negotiations for the advance of a loan to Knowles, to be put to a variety of uses. The general understanding, as reflected in the letter of offer, was that the loan was wholly or predominantly for business and commercial purposes. Knowles however did not proceed with the loan and no moneys were ever advanced. Mortgage Investments then sought payment for the loan application fee and costs totalling $31, This was made up of legal costs and costs associated with the lodgement and withdrawal of a caveat by Mortgage Investments over the property of Knowles in order to secure the debt arising out of the proposed loan offer. It was argued on behalf of Knowles that she was illiterate and did not have the benefit of independent legal advice, and further that the Loan Agreement was unjust and should be reopened under the provisions in the NCCC. Claim Knowles alleged that Mortgage Investments failure to obtain the declaration of intention in the prescribed form brought the negotiations within the scope of the NCCC. Further it was alleged that the loan agreement arising out of the letter of offer was unjust in the terms provided for by the NCCC, given the unequal bargaining power between the parties. Findings The court found that the NCCC did in fact apply. In re-iterating the consumer protection rationale and adopting a liberal interpretation of the beneficial nature of the legislation, the court noted that given the unequal bargaining power of the parties (highlighted by the fact that the Knowles was illiterate), Knowles was not in a position to properly understand the standard form contract and hence the transaction as a whole was unjust. In directing substantial attention to the obligations of credit providers, the court noted that: In determining the purpose of loan monies in relation to the NCCC, the relevant intention is that of the borrower. In not conforming with the prescribed NCCC purpose declaration, the credit provider invites the difficulty of proving the loan was not intended to be used wholly or predominantly for personal, domestic or household purposes 5/8

6 and will thus not be protected from the presumptions favouring the consumer in the NCCC. 1 In circumstances where purpose is in dispute and the credit provider has not availed themselves of the protection afforded by the prescribed form of agreement, the onus rests on the credit provider to prove that a proposed loan is wholly or predominantly intended to be used for business purposes. The NCCC places the onus on the credit provider to familiarise themselves with their potential borrower, ensuring that the loan contract is understood. In this respect, reliance upon finance brokers to read and explain the contract to borrowers will not suffice. The court will look to the substance of the transaction in determining purpose and whether, in the circumstances, loan agreements are unjust. In determining purpose in line with the NCCC, whether funds are actually advanced is an irrelevant consideration given that the NCCC not only applies to the provision of credit but also to the proposed provision of credit. Result Following the finding, the court held that the transaction was unjust and reopened the agreement, ordering that the claim for the establishment fee, application fee and legal costs associated with the lodgement and withdrawal of the caveat be relieved against. Comment Credit providers, particularly those dealing in standard form contracts via finance brokers, should be acutely aware of their obligations under the NCCC. They should also ensure that they incorporate the purpose declaration in the correct form without variation. It has become prudent lending practice for credit providers to ensure borrowers are afforded with an opportunity to obtain independent legal advice, and ensure a signed solicitor s certificate is obtained. Authored by: Joseph Carneli and Gino Potenza, Cornwall Stodart For further information, please contact Gino Potenza, Partner, Commercial Litigation. Case Note: Kassem and Secatore v Commissioner of Taxation (No 2) [2012] FCA 293 The recent case of Kassem and Secatore v Commissioner of Taxation (No 2) [2012] FCA 293 (Kassem) is a timely reminder of the important role that offers of compromise can play in litigation, and the different considerations arising when a Calderbank offer is made. This matter involved two unfair preference claims brought by Kassem and Secatore as liquidators of ACN (in liq.) against the Commissioner of Taxation (Commissioner) and Workers Compensation Nominal Insurer by its scheme agent Allianz Australia (Allianz). Both of those claims were successful for $70,000 plus interest and costs against the Commissioner, and $56,000 plus interest and costs against Allianz. In the claim against the Commissioner, the liquidators served an offer of compromise in accordance with what was then order 23 (rule 3) of the Federal Court Rules 1979 (now rule 25 of the Federal Court Rules 2011), for $59,500 plus costs. As they subsequently obtained a more favourable result, a rebuttable presumption in favour of indemnity costs was created. The Commissioner argued that he should be treated differently to other litigants as a result of his obligation to ensure the proper use of Commonwealth resources; however the court was not persuaded by that argument and ordered that costs of the liquidators be paid on an indemnity basis from 11:00am on the day after the offer of compromise expired. While the liquidators were similarly successful against Allianz, no formal offer of compromise was served in accordance with the Rules. Instead, a Calderbank offer for the sum of $57,350 (all inclusive) was sent to the solicitors for Allianz. As opposed to the rebuttable presumption created by an unaccepted offer of compromise, the onus falls upon the offeror to show that the rejection of a Calderbank offer was unreasonable or imprudent (Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC). His Honour Justice Nicholas held that since Allianz had not received affidavit 1 Knowles v Victorian Mortgage Investments Limited & Anor [2011] VSC 611 per Croft J at 47 6/8

7 evidence from the liquidators prior to the expiry of the Calderbank offer, it was not unreasonable or imprudent to reject the offer, and there was no basis for an award of indemnity costs. Kassem highlights the advantages of an offer of compromise served in accordance with the Rules. If a Calderbank offer is deemed to be the better strategy given the circumstances of a case, then the offer should fully particularise the reasons the offer should be accepted (and why it would be unreasonable not to accept it), which can be relied upon to argue for indemnity costs at a later date. Authored by: Alex Nicol, Cornwall Stodart For further information, please contact Leneen Forde, Partner, Commercial Litigation. Case law update Property New legislation: property and legal industry groups have come together to push for a national uniform property law. Lawyers and property industry members have taken the lead by releasing their own draft Uniform Torrens Title Act for public comment. Peter Verwer, CEO of the Property Council of Australia, said national consistency has the potential to reduce costs for individuals and businesses involved in cross-border transactions. The draft Uniform Torrens Title Act was prepared by Professor Peter Butt of Sydney University and drew on each jurisdiction s existing system. (See Lawyers call for national property laws, 23 March 2012, The New Lawyer.) Complete Pets Pty Ltd v Coles Group Property Developments Pty Ltd [2012] VCAT 361 Issue: costs and how they are to be awarded where claims fall under both the Fair Trading Act 1999 (FTA) and the Retail Leases Act 2003 (RLA). Impact: for disputes regarding both the RLA and FTA, costs will be awarded under section 92 of the RLA. Summary: Complete Pets Pty Ltd (Complete Pets) subleased premises from Coles Group Property Developments Pty Ltd (Coles). Complete Pets, the guarantor of its obligations and an investor each alleged misleading or deceptive conduct contrary to the FTA. Complete Pets and the guarantor sought orders that the sublease was void ab initio (from the start). The investor sought damages. Coles counterclaimed against the guarantor for unpaid rent and outgoings. This was the only claim to succeed. Coles sought costs under section 109 of the VCAT Act Coles contended that there were four claims in total but conceded that one claim was covered by the RLA. Consequently, each party would have to bear its own costs in relation to this claim. However, Coles argued that the three other claims fell under the FTA and would not be covered by the RLA. VCAT held that it was irrelevant whether relief was being sought under the FTA and the critical question was whether the parties were, pursuant to section 90 of the RLA, parties to a proceeding before the Tribunal. The Tribunal held that the parties were parties to the proceeding within the meaning of section 90 of the RLA. As such, section 92(1) of the RLA applied and the parties had to bear their own costs. Harrison v Harrison [2011] VSC 459 Issue: proprietary estoppel. Impact: the court applied principles of proprietary estoppel to an estate dispute and awarded the plaintiffs a share in their father s estate. The defendant had been left the whole estate but had made promises to the plaintiffs that he would provide for them from the estate. Summary: this case involved an estate dispute where a father had left farming land and water rights, valued at about $3.25m, to his son. The son made promises and undertakings that he would provide for each of his sisters from the father s estate. He later revoked those promises and undertakings. Reliance on those promises and undertakings induced the plaintiffs to refrain from obtaining legal advice as to their rights, and from making application for provision from the father s estate under Part IV of the Administration and Probate Act The court found that had the plaintiffs not relied on representations made by their brother, they would have been successful in a claim for provision under the estate pursuant to Part IV of the Administration and Probate Act In applying the principles of proprietary estoppel, the court held that the plaintiffs should each be granted relief, entitling each to a percentage interest as tenants in common with the defendant, of the interest held by the defendant in the property and the associated water rights. Propell National Valuers (WA) Pty Ltd v Australian Executor Trustees Limited [2012] FCAFC 31 (20 March 2012) Issue: whether courts are able to take into consideration expert evidence regarding comparable sales conducted after the valuation in question. Impact: reinforces the principle that in assessing allegations against a valuer of negligent advice and misleading and deceptive 7/8

8 conduct, evidence of expert valuers in making an assessment of the valuer s advice, will be inadmissible to the extent that the expert considers comparable sales after the date of the valuation in question. Summary: a valuer was engaged to perform a valuation of a property in Perth. The property was being held as security in a refinancing arrangement. The property was valued at $1.6 million and a loan was advanced for $1.2 million. When the borrower defaulted, the property was sold for $980, The financier sued the valuer s principal and the valuer in his personal capacity for providing negligent advice and engaging in misleading and deceptive conduct under the Trade Practices Act 1974 (now the Competition and Consumer Act 2010). The majority of the Full Court of the Federal Court must consider the conduct of the valuer at the time the valuer conducted the valuation. In doing so, the expert valuer may not consider evidence relating to events post valuation date, namely evidence of comparable sales post valuation. The court held that valuers owe a duty of care to third parties relying on a valuation (such as financers) in order to prepare valuations with due care and skill. Valuers in their personal capacity, as employees of a principal, owe the same duty of care to third parties. Authored by: Lauren Bartlett, Cornwall Stodart For further information, please contact Gino Potenza, Partner, Commercial Litigation. Cornwalls Litigation Team Member Profile Joe Naccarata, Partner and Head of Insurance & Risk Joe has 30 years legal experience. The breadth and depth of Joe s expertise in the insurance industry means he is adept at analysing insurance claims and devising strategies to place his clients in superior bargaining positions. He advises and assists clients in dealing with claims against them, and is skilled at delivering the best possible legal and commercial results. Joe s experience also enables him to provide clients with monetary projections of potential claims at an early stage. He is therefore able to give accurate advice before litigation commences, affording his clients an early opportunity to make adequate provision for potential losses. Joe Naccarata Partner and Head of Insurance & Risk Phone (direct) Mobile j.naccarata@cornwalls.com.au *Click on image to view Joe s profile Want to republish any of this newsletter? If you would like to republish any part of this newsletter in your staff newsletter or elsewhere please contact our Marketing team on Disclaimer This newsletter is intended to provide general information on legal issues and should not be relied upon as a substitute for specific legal or other professional advice. Cornwalls Lawyers Pty Ltd Level 10, 114 William Street, Melbourne VIC 3000, Australia Phone Fax enquiry@cornwalls.com.au 8/8