Archive for August, 2014

NSW Court departs from general rule on drawing down of bank guarantees

There is a translation key(widget) on the mirrored blog for ease of reading for non-English speaking members of the public or professionals. The mirrored blog can be found at  http://roberthaybarrister.blogspot.com.au/

Courts have traditionally treated an interlocutory application to restrain the calling upon or use of money secured by a bank guarantee or other performance bond as being in a special category.

The authorities were summarised in Cerasola TLS AG v Thiess Pty Ltd & John Hollandd [2011] QSC 115 as follows:

On the basis of those authorities, it is sufficient for present purposes to note that the general rule is that a court will not enjoin the issuer of a performance guarantee from performing its unconditional obligation to make payment. A number of exceptions to that general rule have been identified. They are identified in Clough Engineering at [77] as:

(1)       An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting fraudulently.

(2)       An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting unconscionably in contravention of the Trade Practice Act 1974 (Cth).

(3)       While the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay if the party in whose favour the guarantee has been given has made a contractual promise 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.

See: also Otter Group Pty Ltd v Wylaars [2013] VSC 98 at [16] where the summary was referred to with approval.

This general rule is the product of appellate authorities. See: Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1983] 3 VR 812; Bachmann Pty Ltd v BHP Power New Zealand Ltd (1999] 1 VR 420 and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd & Ors (2000) 249 ALR 458.

The rationale for the general rule is that by providing for security to be given, the parties implicitly agree that the party giving the security deposit shall be out of pocket pending resolution of the underlying dispute.

In Clough, the Full Federal Court said at [83] that “clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently.”

The Supreme Court of New South Wales in Universal Publishers Pty Ltd v Australian Executor Trustees [2013] NSWSC 2012 appears to have departed from the general rule in circumstances where there were no clear words preventing the landlord calling on the bank guarantee and there was no issue that the landlord was acting in good faith. The lease did not contain any negative stipulations on the landlord’s right to call on the guarantee. The tenant disputed that there was any breach. The landlord submitted that the authorities referred to above made it clear that the existence of a dispute as to whether there was an actual breach was not an answer to an invocation of the guarantee. See: para [21].

In Universal the tenant obtained an ex parte injunction restraining the landlord from drawing on the bank guarantee. The proceeding then concerned whether the injunction should be discharged.

Clause 19.1 of the lease required the tenant to provide an “unconditional” bank guarantee to “secure the Lessee’s obligations under this Lease”.

Clause 19.4 provided that:

19.4. In the event that the lessee:

19.4.1.1 defaults in the payment of Rent or in the performance or compliance of any other obligations under this Lease; or

19.4.1.2 breaches any other obligation, term, condition or covenant under this Lease,

the Lessor is hereby authorised to demand that the guaranteeing bank pay to the Lessor such amount that (in the reasonable opinion of the Lessor) may be due to the Lessor as a result of such default, breach or non-observance by the Lessee or termination of the Lease pursuant to it.

The Court determined that there had to be an actual breach before the landlord could form an opinion as to the amount that might be due. See: para [25]. As to whether there was an actual breach did not depend on a judicial determination but on whether the tenant could establish that there was a serious question to be tried about whether there was a breach. See: paras [27] and [71].

The Court held that clause 19.1 did not provide for an allocation of the risk as to who should be out of pocket while a dispute as to the lessee’s asserted breach was determined. See: para [60].

The lesson from Universal is that the parties to a lease should ensure that the provisions concerning the drawing down of the guarantee specifically define the circumstances when the landlord can draw down on the guarantee. In particular, solicitors acting for landlords should, rather than relying on the general rule referred to above, ensure that the lease refers to the landlord’s entitlement to draw down on a guarantee where the landlord believes in good faith that the tenant has breached the lease.

My clerk can be contacted via this link for bookings http://www.greenslist.com.au/

From 31 July 2014, liability limited by a scheme approved under Professional Standards Legislation

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Franchisor’s internet trading breaches restraint clause

There is a translation key(widget) on the mirrored blog for ease of reading for non-English speaking members of the public or professionals. The mirrored blog can be found at http://roberthaybarrister.blogspot.com.au/

 

Franchise agreements often restrict the franchisor from selling the franchised product in the territory in which the franchisee operates. Franchisors that engage in internet selling might be acting in breach of such clauses. This issue was highlighted in a recent appeal in New South Wales from the decision of a Magistrate to award damages against a franchisor. See: Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143.

 

In Video Ezy the franchisee operated a franchise business renting and selling DVDs.

A company related to the franchisor operated a website from which customers could order DVDs. The franchise agreement precluded the franchisor from carrying on a “trade or business involving the rental and/or sale of video products or any other business of a similar nature within the territory of the franchise” (restraint clause).

The franchisor contended that the online business did not breach the restraint clause because it did not refer to the rental and sale of DVDs “into” the territory of the franchisor: a business could undertake transactions in a place without it being correct to say that the business is “within” that place.

The court rejected the franchisor’s contention on the basis that it was “artificial” and did not give the phrase “within the territory” its natural and ordinary meaning.

The court dismissed the franchisor’s appeal. The franchisor and the related company operating the website were treated as one entity and found liable for breaching the restraint clause and an implied duty to act in good faith and for unconscionable conduct under the Australian Consumer Law.

 

My clerk can be contacted via this link for bookings  http://www.greenslist.com.au/

 

From 31 July 2014, liability limited by a scheme approved under Professional Standards Legislation

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Beware lodging caveat ‘without reasonable cause’

There is a translation key(widget) on the mirrored blog for ease of reading for non English speaking members of the public or professionals. The mirrored blog can be found at http://roberthaybarrister.blogspot.com.au/

 

Section 118 of the Transfer of Land Act 1958 and s.74P of the Real Property Act 1900 (NSW)  provide for payment of compensation to a party who has suffered “damage” (TLA) or “pecuniary loss” (RPA) where a person lodges a caveat “without reasonable cause”. In New South Wales s.74P also extends to a caveator who, without reasonable cause, refuses or fails to withdraw a caveat after being requested to do so. See: s.74P(1)(c).

As to the meaning of “reasonable cause” in Bedford Properties Pty Ltd v Surgo [1981] 1 NSWLR 106 Wootton J said at 109:

The drastic nature of the power is relevant in considering what is “reasonable cause” for its use, just as the dangerous character of a thing is relevant to deciding what is reasonable care in handling it. Before exercising such a power, a person can reasonably be expected to get proper advice, and be reasonably sure of his ground. If he does not, he may find that he has acted at his peril. This is all the more so when he knows, as Mr Richards knew, and indeed intended, that his action will prevent an important transaction involving a large sum of money.

In the recent case of  Arkbay Investments Pty Ltd v Tripod Funds Management Pty Ltd [2014] NSWSC 1003  Robb J said that it was “salutary to record” Wootton J’s observations in deciding that a caveat had been lodged without reasonable cause and had caused pecuniary loss.

In Arkbay there was no evidence that when the caveator lodged the caveat it had an honest belief on reasonable grounds that it had an interest in the relevant property. His Honour held that the lodging of the caveat had caused loss by reason of a delay in the settlement date for sale of the property.

At [17] Robb J said:

“The onus is on the plaintiffs to show that the caveator acted without reasonable cause. For there to be reasonable cause it is not necessary that the caveator actually have a caveatable interest, but it is necessary that the caveator have an honest belief based upon reasonable grounds that the caveator has such an interest. Wootton J in Bedford Properties noted at 108  that an honest belief on the part of the caveator based on reasonable grounds may not be sufficient to provide a reasonable cause for lodging or maintaining a caveat, if the caveat is lodged “not for the protection of his interest but for an ulterior motive and without regard to its effect on transactions to which the caveator had agreed.”

My  clerk can be contacted via this link http://www.greenslist.com.au/

From 31 July 2014, liability limited by a scheme approved under Professional Standards Legislation 

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Implied term that vendor must act in a reasonable manner when selling land pursuant to liquidated damages clause

There is a translation key(widget) on the mirrored blog for ease of reading for non-English speaking members of the public or professionals. The mirrored blog can be found at http://roberthaybarrister.blogspot.com.au/

 

What duties does a vendor have in selling land pursuant to a liquidated damages clause in the sale contract following a default by the purchaser?

There are three possibilities:

  • if a vendor acts unreasonably in failing to minimise loss arising from a purchaser’s breach, any damages will be reduced to the extent that the vendor’s loss would have been reduced had the vendor acted reasonably;
  • the duty imposed on a vendor is similar to that imposed on a mortgagee exercising a power of sale granted under a security, the duty being to act in good faith;
  • there is an implied term in the contract for the sale of duty that a vendor will exercise the power of resale in a reasonable manner.

In Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 Garde J rejected the first two possibilities and held that there was an implied term in the contract that the vendor would act reasonably in the exercise of its power of resale and that this implied term extended to all aspects of the resale. The contractual provision considered by the court was general condition 28.4 of the general conditions which provides:

“If the contract ends by a default notice given by the vendor:

(a)        the deposit up to 10% of the price is forfeited to the vendor as the vendor’s absolute property, whether the deposit has been paid or not; and

(b)       the vendor is entitled to possession of the property; and

(c)        in addition to any other remedy, the vendor may within one year of the contract ending either:

(i)        retain the property and sue for damages for breach of contract; or

(ii)       resell the property in any manner and recover any deficiency in the price on the resale and any resulting expenses by way of liquidated damages; and

(d)       the vendor may retain any part of the price paid until the vendor’s damages have been determined and may apply that money towards those damages; and

(e)        any determination of the vendor’s damages must take into account the amount forfeited to the vendor.”

His Honour held that the implied duty to act in a reasonable manner in exercising the power of resale did not mean that a vendor had to put the interests of the defaulting purchaser ahead of his own. At [175] His Honour said:

“Where the interests of a vendor and the purchaser in breach are in conflict, for example as to the urgency or method of the resale, the vendor is entitled to prefer his own interests to those of the purchaser in breach, provided that in so doing the vendor acts in a reasonable manner. The obligation on the vendor to act in a reasonable manner has been held to apply to price, time of resale and conduct in the form or method of resale. It would also extend to the terms of resale to be offered by the vendor.”

 

My clerk can be contacted via this link for bookings  http://www.greenslist.com.au/

 

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Media Presentation By Robert Hay

Re-entry and Relief from Forfeiture in Commercial Leases 

Robert Hay  – Greens List

 

My  clerk can be contacted via this link http://www.greenslist.com.au/

 

 

 

https://www.youtube.com/channel/UCnZ52SbIPsHnEz74tK8ikRg

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