J.K. International Pty Ltd v Standard Chartered Bank Australia Limited
[2000] QDC 44
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- J.K. International Pty Ltd v Standard Chartered Bank Australia Limited[2000] QDC 44
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J.K. International Pty Ltd v Standard Chartered Bank Australia Limited[2000] QDC 44
J.K. International Pty Ltd v Standard Chartered Bank Australia Limited[2000] QDC 44
DISTRICT COURT OF QUEENSLAND
CITATION: | J.K. International Pty Ltd v. Standard Chartered Bank Australia Limited [2000] QDC 044 |
PARTIES: | J K INTERNATIONAL PTY LTD (ACN 010 127 750) (Plaintiff) v. STANDARD CHARTERED BANK AUSTRALIA LTD (ACN 008 262 897) (Defendant) |
FILE NO/S: | Plaint No. 1589 of 1996 |
DIVISION: |
|
PROCEEDING: | Trial |
ORIGINATING COURT: | District Court Brisbane |
DELIVERED ON: | 5 May 2000 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 5,6 August 1999 |
JUDGE: | McGill DCJ |
ORDER: | [Judgment on terms to be determined based on an entitlement of the plaintiff to recover $US148,840.05] |
CATCHWORDS: | CONTRACT – Intention to Create Legal Relations – relevant factors – whether agreement legally binding CONTRACT – Breach Damages – effect of later agreement between parties Jones v. Vernon’s Pools Ltd [1938] 2 All ER 626 – distinguished Rose & Frank Co v. Crompton Bros Ltd [1925] AC 445 – distinguished Banque Brussells Lambert SA v. Australian National Industries Ltd (1989) 21 NSWLR 502 l – considered Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447 - considered Grundt v. Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 - applied Walton’s Stores (Interstate) Ltd v. Maher (1988) 164 CLR 387 – applied Air Great Lakes Pty Ltd v. K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 - followed |
COUNSEL: | P.E. Hack for the plaintiff P.J. Dunning for the defendant |
SOLICITORS: | Niren Raj Lawyers for the plaintiff Thompson Eslick for the defendant |
- [1]By this action the plaintiff claims damages for breach of contract, or in the alternative equitable compensation for breach of an equitable estoppel. There is also in the plaint a claim for damages under the Trade Practices Act, but that claim was out of time and was not pursued during submissions. It must fail. The plaintiff received from the defendant a letter dated 14 December 1992, a copy of which the defendant asked the plaintiff to sign and return. The plaintiff did so. The plaintiff’s case in contract is based on the proposition that that letter was an offer to the plaintiff which the plaintiff accepted in that way, or that the plaintiff’s action by signing and returning it was an offer which the defendant subsequently accepted. The defendant’s case was that the letter of 14 December 1992 did not give rise to any binding contractual obligations between the parties, or that if it did there was no breach of those obligations or they were superseded by a subsequent agreement in different terms. The allegation of equitable estoppel is based on the proposition that the defendant represented that it would, in effect, comply with the letter of 14 December 1992, so determining the effect of that letter is central to the whole of the plaintiff’s case. It is however necessary to assess the significance of that letter by reference to what passed between the parties prior to its being sent and signed.
Background
- [2]The plaintiff has been engaged in international trade in grain since 1981: p. 6. Payment for grain sold to a foreign buyer is ordinarily by means of a letter of credit provided by a bank in the country of the purchaser by which the bank in effect guarantees payment for the shipment. As to letters of credit generally see Malleson Stephen Jaques “Australian Financial Law” (3rd edition 1994) pp 156-9. It is usually issued in advance of shipment but only takes effect in exchange for shipping documents: p. 75, 145. This reduces the risk to the vendor of default by the purchaser, but there remains the risk of default by the purchaser’s bank. The defendant bank provides a service under which it agrees, in effect, to add its guarantee to that of the purchaser’s bank in return for a fee which reflects the defendant’s assessment of that risk, and no doubt the availability of similar services from competitors and the eagerness of traders to obtain the service.
- [3]This can take one of two forms; the letter of credit may be confirmed by the bank in accordance with an international banking agreement: see Malleson Stephen Jaques at p. 157. The confirming bank has an absolute obligation to pay on the letter of credit: Hamzeh Malas & Sons v British Imex Industries Ltd [1958] 2 QB 127. Alternatively, the bank issues its own payment guarantee: p. 94-5, 168. In this case the latter occurred, because banks in Iran do not make the formal request necessary for confirmation: p. 94. It is also possible to obtain protection against default on the part of the issuing bank in another way, by insurance against such default; there is a government organisation, the Export Finance Insurance Corporation (“EFIC”) which provides such insurance: p. 101.
- [4]The purchaser’s bank may not promise to pay immediately in exchange for shipping documents, but rather at the expiration of a nominated period, and sometimes the vendor desires earlier payment. Under these circumstances the defendant (or another bank in its position) may also advance the money payable under the letter of credit before it comes due under that letter, charging an additional fee for this service. Such a transaction is similar to the factoring of a trading debt or discounting a bill of exchange: p. 169. It is also possible for matters to be arranged so that the bank provides this service but without guaranteeing the letter of credit, that is, it will advance money against the letter of credit but with the risk of default by the issuing bank remaining on the vendor. If payment has to be made to the supplier of the vendor before the letter of credit takes effect, there will also have to be a separate finance facility to fund any payment to the supplier: p. 33, 41.
- [5]The charges imposed for these various services will also vary according to whether they are to cover the full amount of the transaction or part of the risk is to remain with the vendor. Cover under the insurance offered by EFIC is limited to 90% of the value of the transaction, so some of the risk falls on the insured. With a non-recourse 100% payment guarantee the element of risk is eliminated: p. 14.
- [6]The defendant was one of two banks with which the plaintiff had been dealing for some time, the other being Banque Nationale de Paris (“BNP”): p. 6. The officer with whom the plaintiff dealt was a Mr. Webb, who is no longer with the defendant but was called as a witness; his superior in Australia was Mr. Ellis, who was based in Sydney, and was also called as a witness. As will appear however some important decisions in relation to the operations of the defendant were taken at the head office of the parent company in London.
Preliminary Negotiations
- [7]In late November 1992, the Government Trading Corporation of the Islamic Republic of Iran (“GTC”) were negotiating with a Sri Lankan firm of grain brokers, Akbar Bros, for the purchase of Australian barley: Exhibit 1, document 1. GTC was acting as agent for another entity, Range and Pasture Development Fund, which was the actual buyer, although I think the involvement of this separate entity is irrelevant: Exhibit 1, document 5. The terms offered by GTC included payment by way of a letter of credit in favour of the seller through Bank Sepah in Iran, payment to be 360 days after receipt by the bank’s agent of the shipping documents required by the buyer, which were numerous.
- [8]These brokers made contact with the plaintiff, where the principal director Mr. J. Mohan made inquiries as to possible sources of supply (p. 6) before speaking to Mr. Webb in late November. He advised that the charge for a payment guarantee would be about 10% per annum: p. 91, p. 8. This was a relatively high charge because banks in Iran were regarded as a relatively high risk (p. 90, 14), and this position was reflected in the plaintiff’s offer to the brokers on 2 December, where it was used as a justification for the price: Exhibit 1, document 4. The prospective charge was said to be 10-12%, which involved some exaggeration (p. 26) as a negotiating tactic: p. 20.
- [9]On 1 December there was a telephone enquiry by the plaintiff to Mr. Webb (p. 92) as a result of which Mr. Webb sent to Mr. Ellis a request for an indicative quote for forwarding to London: Exhibit 4 document A. Mr. Webb also sent a fax to EFIC seeking an indicative price for cover: Exhibit 5, p. 105. The price indicated by EFIC (by phone: p. 106) was 1.8% for 90% cover and this was passed on to London: Exhibit 4 document C. At this stage what was to be financed was one shipment of about 40,000 tonnes, although the plaintiff must have been already thinking in larger terms because on 2 December it raised the possibility of two shipments of 35,000 tonnes: Exhibit 1, document 4.
- [10]On 2 December 1992 the defendant’s head office advised approval of an allocation of bank and county limits to accommodate the issuance of a payment guarantee for the plaintiff, on four specific conditions, one of which being that 90% EFIC cover was obtained, and another being a requirement as to the minimum return for the payment guarantee. The approval was to be valid for two weeks “after which it will be rescinded unless a formal extension is agreed or we are advised that the deal has materialised”.
- [11]In order to understand this document it is necessary to know that the parent company of the defendant bank maintained a system designed to limit the group’s exposure to particular banks, or banks in particular countries, by reference to what are called bank and country limits, so that in the event of a particular bank, or all the banks in a particular country, defaulting the consequences to the group will be kept within manageable proportions: p. 93. Because the banks in Iran were not regarded as good credit risks, these limits were kept low. The limits were parcelled out by head office (p. 129), and the effect of this letter was that a particular share of those limits sufficient to permit this transaction to proceed was allocated to the defendant to enable it to complete the transaction, but the allocation was temporary unless the transaction was confirmed in that time. It is important to bear in mind as well that the approval was only in respect of a guarantee for one shipment of barley. Mr. Webb would have told the plaintiff about this approval after it was received on the morning of 3 December 1992 (p. 107) and there would then have been negotiations as to price in the course of which it is likely that the plaintiff passed on the proposal that there be two shipments of 35,000 tonnes each: p. 108.
- [12]The plaintiff was at this time also negotiating with BNP; indeed that bank had been informed of the initial negotiations with Akbar Bros as early as 30 November 1992: Exhibit 1, document 2. Further, on 10 December 1992 BNP was advised of the acceptance by GTC of the plaintiff’s offer: Exhibit 1, document 14. The plaintiff had also contacted a bank in Singapore, but never received an offer of assistance from that bank: p. 36. The plaintiff had also investigated the possibility of obtaining cover with EFIC, and on 9 December received an indication of willingness to provide 90% cover at a premium of 4%: Exhibit 1, document 8 and see p. 42. For practical purposes, the plaintiff had a choice between dealing with the defendant and dealing with BNP: p. 36. What BNP was prepared to offer was different from what the defendant was offering; under the arrangement proposed by BNP, it would provide funds against the letter of credit but on a full recourse basis, with the plaintiff having to insure itself separately through EFIC. That left the plaintiff with 10% of the ultimate risk, and the risk of a delay between making a claim on EFIC and receiving payment, but on the other hand was much cheaper. In order to make it possible to put such an arrangement into place, on 10 December 1992 the plaintiff executed a proposal to EFIC at the request of BNP: Exhibit 1, document 12, and see pp. 7, 36.
- [13]On 7 December 1992 Akbar Bros advised the plaintiff of GTC’s offer to purchase two shipments of 35,000 tonnes of barley at $US118 pmt on similar terms and conditions to the offer of 28 December: Exhibit 1 document 5. This was the final price offered (p. 32) and the plaintiff must have been identified when it was accepted as a telex of confirmation of the agreement was sent on 9 December to the plaintiff: Exhibit 1 document 10. The plaintiff was able to arrange to purchase the necessary quantity of grain, 70,000 tonnes in two equal shipments, from the New South Wales Grains Board: p. 7, Exhibit 1, document 6. The fax (dated 8 December) from the Australian broker who negotiated this transaction between the plaintiff and the Grains Board does not make it clear whether the transaction was conditional in any way, although there is a reference to the plaintiff’s providing a bond which would be forfeited if the seller could not confirm that the Iranian letter of credit was established by a particular date. That suggests to me that the contract was in some way conditional at that stage. The performance bond required was arranged on 8 December 1992 through BNP: Exhibit 1, document 7, document 9.
- [14]On 9 December 1992, GTC sent to Akbar Bros the terms of the performance bond required from the plaintiff and a counter-guarantee from the plaintiff’s bank to support the plaintiff’s performance of its contract to sell the barley to GTC: Exhibit 1, document 11. These were required under the contract with GTC, but the plaintiff did not take any steps to have the bank guarantee put in place until 15 December 1992 when there was a request to the defendant to do this: Exhibit 1, document 17.
The letter of 14 December 1992
- [15]Evidently there were some difficult negotiations between the plaintiff and the defendant. The plaintiff was trying to keep the bank’s fees down, while the bank was trying to get as high a return as possible for any allocation of its Iran limit: Exhibit 4, document D. Ultimately, on 14 December 1992 Mr. Webb formulated the proposal which he sent to Mr. Ellis for approval, which was forthcoming: p. 108. Mr. Webb then drafted a letter of that date to the plaintiff which was also sent to Mr. Ellis for his approval: Exhibit 4, document E. That was also approved. Mr. Webb then delivered it and had the copy signed by Mr. Mohan on behalf of the plaintiff. Mr. Mohan’s recollection was that Mr. Webb brought the letter to his office, that it was signed and then they went out for a meal: p. 9. Mr. Webb’s recollection was that they met at a restaurant and went through the document there: p. 109. Mr. Mohan conceded that the signed copy of the letter may have been posted back the next day (p. 49), and that is supported by the fact that that document which is Exhibit 2 has a “with compliments” slip from the plaintiff stapled to it, although I suppose that could have been done if they met in the plaintiff’s office.
- [16]Mr. Mohan said that he had never seen a document like this from the defendant before, but that Mr. Webb had said he needed it for internal purposes: p. 9. Mr. Webb agreed that this document was unusual, but denied that he had said that he needed it for internal purposes. He said that he just wanted it signed: p. 134. Mr. Webb said that he went through the letter with Mr. Mohan stressing its indicative nature and stressing that it was a concessional price, and that he said that “provided our perception of bank and country risk does not change between the time that we actually commit and now that would be the price that you are going to achieve for this transaction” (p. 112). Mr. Mohan denied that Mr. Webb had said that the letter was conditional upon nothing untoward happening between the 14th and when the letter of credit was presented: p. 49. Mr. Mohan did not definitely deny that Mr. Webb had pointed out that this was an indication only or an indicative offer only. He said that Mr. Webb had said that he would ensure that everything would go smoothly as outlined in the letter: p. 50. Mr. Webb said that he would not have promised to ensure that everything went smoothly, because nothing else in relation to that transaction had gone smoothly, so it was not the sort of thing he would have said: p. 139.
- [17]Neither Mr. Mohan or Mr. Webb made any contemporaneous notes of the conversation, although Mr. Webb in a fax to London the next day (Exhibit 4, document G) described the effect of what had occurred in these terms:
“Our client has accepted our indicative offer to assist and we have been able to achieve agreement to our fee structure that will return 61.68% pa on the bank’s allocation over the exposure period however we have not committed and do not intend to commit until the L/C is to hand and EFIC cover has been obtained.”:
That suggests that there was no commitment, but agreement had been reached on the fee structure. It is clear from the notes written on faxes sent by Mr. Webb that he was keen for this transaction to proceed, and was keen to get the negotiations finalised, and it is in that context plausible that he may have expressed the hope that things would go smoothly in relation to the transaction from then on. I am wary about the reliability of the evidence by the witnesses as to what was said on this occasion, but I am prepared to accept the evidence of Mr. Webb generally and particularly that at p. 112 quoted earlier. It is likely that that was said given that it summarises what is in my opinion the effect of the letter. For reasons stated later, in respect of another conflict of evidence I prefer the evidence of Mr. Webb because it is more consistent with contemporaneous documents, and for that reason I generally prefer his evidence where there is a conflict.
- [18]The letter (omitting formal parts) was in the following terms:
“We refer to our recent telephone discussions and are pleased to advise that as a special matter, Standard Chartered Bank Australia Limited, submits for your consideration our indicative offer to provide Trade Finance as follows:
Facility | : | Letter of Credit Payment Guarantee Facility |
Amount | : | USD8,260,000 (Maximum) |
Instrument | : | Irrevocable Letters of Credit to be issued by Bank Sepah Iran |
Tenor | : | 360 days after sight |
Payment Guarantee Fee | : | A fee of 7.5% pa will apply from the date of Standard Chartered Bank Australia Limited’s addition of its guarantee to the Letters of Credit to the maturity date of the drawings made under the Letters of Credit.This fee will be calculated on a monthly or part thereof basis and is payable up front. |
Discount | : | Standard Chartered Bank Australia will discount receivables under the Letters of Credit at the bank’s cost of funds plus a margin of 0.5% pa. |
Interest Recourse | : | Interest recourse is retained on JK International Pty Ltd for a period of 30 days from the maturity date of each drawing made under the Letters of Credit |
Document Handling Fee | : | USD300 per negotiation |
Other Conditions | : | Standard Chartered Bank Australia Limited is to be the nominated advising and negotiating bank for each Letter of Credit issued. Our guarantee covers 100% of drawings under the Letters of Credit. Letters of Credit are to be in a format acceptable to Standard Chartered Bank Australia Limited and are to be issued for USD4,130,000 each to cover shipments in mid-January 1993 and mid February 1993 A firm commitment to guarantee will not be issued until after each Letter of Credit is issued, and always subject to availability of suitable internal Standard Chartered Bank Australia Limited country and bank lines, at the time of Letter of Credit issue. This offer is subject to Standard Chartered Bank Australia Limited being given first opportunity to quote to provide cover for each Letter of Credit as it is issued ie. provided limits are available both Letters of Credit will be covered by Standard Chartered Bank Australia Limited. This offer is subject to the provision by JK International Pty Ltd of a term deposit to the value of AUD500,000 and appropriate assignments pledging this deposit as security for existing advances by Standard Chartered Bank Australia Limited presently in place on account of JK International Pty Ltd. |
We are pleased to be able to offer this concessional Trade Finance package to your company and should you have any queries please do not hesitate to contact the undersigned.
Please sign the duplicate of this letter to accept the terms and conditions of this officer and return it to this office by the 16 December 1993 after which date this offer expires. We stress this offer is an indication only without commitment of the Bank or writer.”
- [19]The letter was signed on behalf of the bank by Mr. Webb, and the duplicate was signed by Mr. Mohan on behalf of the plaintiff and returned. I think on the whole it is probable that that occurred the following day because the next step was the fax to London of 15 December: Exhibit 4, document G.
- [20]The evidence on behalf of the defendant was that the purpose of the letter was to prevent the plaintiff from shopping around, that is to get the plaintiff to deal only with the defendant. Both Mr. Webb (p. 108-9) and Mr. Ellis (p. 172, 179) said this. It was to get the plaintiff committed to the defendant. Consistently with this the plaintiff was asked to withdraw his approach to BNP, which involved withdrawing its application to EFIC: Mohan p. 10, Webb p. 114, Ellis p. 174. The plaintiff did this the next day: p. 45. Given that the purpose of the letter was to obtain a commitment by the plaintiff to the defendant, I think the assertions by Mr. Webb at p. 128, and Mr. Ellis at p. 171, that the plaintiff was not bound by this letter in any way were rather hollow. Mr. Ellis said on the same page that:
“The comfort we derived [from the letter] was whether the customer was actually going through with the deal at or around these figures or not.”
It seems to me somewhat inconsistent to say that the purpose of the letter was to obtain a commitment on the part of the plaintiff to the defendant, but to assert that the plaintiff was not bound by the letter. Mr. Webb at one stage put it that the purpose was to “stop the horse trading”: p. 108.
- [21]Although the defendant was the only bank willing to provide full without recourse finance of the transaction (p. 109) it was doing so at a substantial cost, and there were alternative forms of finance available under which this transaction could have proceeded: p. 181. Indeed, Mr. Webb at one point sought to justify his position with the assertion that the plaintiff would not necessarily have dealt only with the defendant after signing that letter, and that if the plaintiff could have found someone else to offer the same service at a lower price it would have dropped the defendant, and the defendant would not have thought that it could do anything about it based on Exhibit 2: p. 153. But that does not sit readily with the belief that the defendant was “the only game in town” (p. 109) and the knowledge that, by having the plaintiff withdraw its application to EFIC so that the defendant could make an application to EFIC in respect of the same shipment, the plaintiff was prevented from obtaining finance through BNP because what was proposed by that bank involved EFIC cover for the plaintiff, and EFIC was known not to deal with more than one proposal in respect to the same export shipment: p. 114. Once the defendant had lodged a proposal with EFIC, the plaintiff could lodge one only if the defendant withdrew its proposal (p. 138), so that the defendant was in a position, once it put in its proposal, to prevent the plaintiff from going back to the arrangement proposed by BNP. Mr. Webb asked the plaintiff to withdraw its proposal to EFIC because “we had now agreed to deal with one another”: p. 114.
Intention to create legal relationship
- [22]The subjective intention on the part of the defendant in relation to the letter is irrelevant to its construction but may be relevant to whether there is an intention to create legal relations: Air Great Lakes Pty Ltd v. K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 330. Such an intention is generally regarded as an essential element to a binding contract: Cheshire & Fifoot “Law of Contract” (7th Aust ed., 1997) p. 180. In commercial agreements it is presumed that the parties intend to create legal relations, a presumption which is difficult to rebut: ibid p. 188-9. A commercial agreement will not be binding in contract if it contains an express provision to the contrary: Jones v. Vernon’s Pools Ltd [1938] 2 All ER 626, Rose & Frank Co v. Crompton Bros Ltd [1925] AC 445. In each of these cases the relevant express provision was very clear.
- [23]One area where an absence of liability seems to be recognised is a “letter of comfort” which is intended to provide something which is not the equivalent of a binding guarantee in relation to the liability of a third party, but will encourage some confidence in the third party’s financial position. Letters of Comfort have been held not to be binding in Commonwealth Bank of Australia v. TLI Management Pty Ltd [1990] VR 510 and Australian European Finance Corp Ltd v. Sheahan (1993) 60 SASR 187, but the concept was strongly criticised by Rogers J in Banque Brussels Lambert SA v. Australian National Industries Ltd (1989) 21 NSWLR 502, who was very critical of the idea of commercial documents not giving rise to legal obligations: p. 523.
- [24]Sometimes there will be a preliminary recording of an agreement reflecting a stage in negotiations for a final agreement or where there is the intention that there be a subsequent formal agreement entered into and that there be no binding contract until that occurs: Barrier Wharves Ltd v. W Scott Fell and Co Ltd (1908) 5 CLR 647 at 668; Sinclair, Scott and Co Ltd v. Naughton (1929) 43 CLR 310 at 333; Masters v. Cameron (1954) 91 CLR 353 at 361. Neither of those situations is a clear analogy to the present case.
- [25]In Air Great Lakes Pty Ltd v. K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, the Court of Appeal held that reference could be made to subjective intention of the parties, as expressed to the other parties or of which the other parties ought to have been aware, as well as surrounding circumstances such as the commercial or business object of the transaction which were relevant, so far as they were known or ought to be known to both sides, for the purpose of ascertaining whether there was an intention to create legal relations. In that case the document which was ambiguous in a number of respects as to whether it constituted a presently binding contract, and which a trial judge had held was not contractually binding, was held on appeal to be an immediately binding contract, partly on the basis that that was the intention of the parties.
- [26]Turning to the actual terms of the document, there are a number of features of it which suggest that it was not intended to be a binding agreement. The third line refers to “our indicative offer” (emphasis in original), the fourth condition on page two expressly negates “a firm commitment to guarantee” arising immediately, with the commitment being “subject to availability of suitable …. country and bank lines”, the fifth condition refers to the first opportunity “to quote to provide cover” and the last sentence is expressly made as an offer without commitment. On the other hand, the letter refers to levels of fees which “will apply” and the rate at which the bank “will discount receivables”. The second last sentence refers to the offer expiring if it is not accepted in a particular way within a particular time, and the fifth condition states that “provided limits are available both Letters of Credit will be covered …”.
- [27]Some of the language is inconsistent with the document being an immediately enforceable agreement to guarantee the Letters of Credit when they issued, but it seems to me that these inconsistencies are less if one gives effect to the passage last quoted, and treats it as an agreement that the guarantee will issue provided that at the time the Letter of Credit issues the bank has available suitable country and bank limits. Interpreted in this way, most of the difficulties in the wording of the letter disappear. There is no commitment on the part of the bank, in the sense that there is not an unconditional promise to provide the guarantee; rather the position is that it will be done only if the bank is providing payment guarantees in respect of Letters of Credit issued by the Bank Sepah Iran when the Letter of Credit issues, and the bank is able to provide the guarantee in respect of those letters within its ordinary prudential limits, that is the country and bank limits will not be exceeded by doing so. Such an interpretation would be consistent with the explanation offered by Mr. Webb to Mr. Mohan, according to his evidence at p. 112. That follows because at the time when this letter was written, there were bank and country limits available in respect of the first of the proposed transactions, and the intention was to book that limit in respect of that transaction. Therefore, unless something happened to cause those limits to dry up there was not expected to be any difficulty in the transaction proceeding in accordance with the letter. The term “commitment” in the last sentence is explained in the fourth condition, as a reference to “commitment to guarantee”.
- [28]The only difficulty with this interpretation is the word “indicative”, since that word apparently is used to express a current intention as to price rather than a firm commitment as to price. If used in this way, it is inconsistent with the positive terms in which the fee is expressed, and the commercial purpose of tying the plaintiff to the defendant and ending the horse trading. This is provided for in the fifth condition on p. 2. This objective was to be achieved not by offering a firm commitment to guarantee, but rather by offering a “concessional trade finance package”, which was concessional in terms of price relative to the prices quoted earlier. If the intention had been expressly to preserve the right to change the price, it would have been easy enough to do this; an example of how that could have been done is in document 8 in Exhibit 1, the fax from EFIC to the plaintiff, which I think makes it further clear that EFIC is not bound by any of the particulars provided; that seems to have been clear to Mr. Mohan: p. 42. Had that reservation been expressed, however, the letter could hardly have had the effect of bringing the negotiations about price to an end.
- [29]One significant feature of this letter is that it makes no reference to the defendant’s obtaining cover from EFIC, either at all or at any particular price. The plaintiff knew that the defendant was intending to obtain that cover. I think that follows from the answers at p. 45. Obviously, the fee to be charged was intended to cover any fee the defendant had to pay to EFIC to obtain that cover, since it did not in terms provide for a fee based on the EFIC fee plus a margin. The effect of the omission of a condition that EFIC cover be available to the defendant may be that the defendant took the risk of such cover not being available, or it may be that the existence of such a term could be implied; the point does not arise because ultimately EFIC cover was available, although at a somewhat higher price than the defendant had expected. Indirect protection against the unavailability of EFIC cover may have been obtained because, if that cover were available, it seems that the prudential bank and country limits were only used in respect of the 10% balance, and the chance of those limits being exceeded was obviously much greater if this factor were disregarded. The real issue is whether it was subject to EFIC cover being available at a particular price. In terms it was not.
- [30]No doubt in practice Mr. Webb and Mr. Ellis in drafting Exhibit 14 did not insert some provision to protect against the possibility of an increase in the EFIC charges, or the unavailability of EFIC cover, because of their belief that the letter was not binding on the bank. But if the letter of 14 December did become a binding (albeit conditional) contract, it is clear in my opinion that its effect was that the risk of some increase in the rate charged by EFIC fell on the defendant.
- [31]Perhaps as well the defendant was reluctant to expose in that letter the circumstance that what was being proposed meant that, broadly speaking, 90% of the risk was being covered by EFIC at a fee of 1.8% and the bank was charging 5.7% to cover the remaining 10% of the risk. [This comparison is a little unfair to the defendant, as it had two additional risks (pp. 135, 179), the risk of non-payment in circumstances not within the EFIC policy, and the risk of a foreign exchange loss if the Australian dollar appreciated against the United States dollar, since EFIC paid in Australian dollars: p. 105. I do not see why the latter risk was not offset by the possibility of profit if the currencies moved the other way, but there was some substance to the former, and there would as well be a delay in payment from EFIC of 6 months. Nevertheless, this was on paper a very profitable transaction for the defendant: see Exhibit 4, document K.]
Conclusion as to letter of 14 December 1992
- [32]In my opinion, the letter of 14 December 1992 was an offer by the defendant which when signed and returned was accepted by the plaintiff. It was an agreement which was conditional upon the country and bank prudential limits not being exceeded in respect of the particular letters of credit when they were forthcoming, but subject to that the plaintiff was required to offer them both to the defendant and the defendant agreed to guarantee them at a particular rate. I arrive at this conclusion on the interpretation of the document as a whole, analysed as set out above, and in the light of that part of the subjective intention of the parties as was disclosed to the other party or ought reasonably to have been known by them, and in the light of the commercial purpose and intent of the document as known to both parties, and indeed as subsequently carried into effect.
- [33]I acknowledge that the word “indicative” is a contrary indication, but, to the extent that that means more than that there was an absence of commitment in the sense explained earlier, consistently with the statement of Mr. Webb at p. 112, I think it is outweighed by the considerations to the contrary. So far as Mr. Webb and Mr. Ellis had a subjective intention that the agreement was not binding as to price, I am not persuaded that that was shared by Mr. Mohan. The commercial purpose of the document was to get the plaintiff committed to dealing with the defendant, and to bring the negotiations as to price to a close, to end the horse trading. That would be achieved only if the price was binding.
- [34]I am also conscious of the authorities which suggest that a court should lean in favour of the existence and validity of a commercial contract. Apart from those cases dealing specifically with the question of the intention to create legal relations, the numerous authorities expressing a preference for contracts not to be held void for uncertainty may be regarded as applying by analogy: as an example see Wroon BV v. Foster’s Brewing Group Ltd [1994] 2 VR 32 at 67. I think there is something inherently distasteful in an entity such as a bank getting a document signed with a view to obtaining a commitment from the customer to deal with it in relation to the transaction, and bringing the negotiations as to price to be charged that customer for the transaction to an end, while reserving to itself the right to reopen the question of price at a later stage if it chooses, at a time when the ability of the customer to pursue alternative options is curtailed. Unless there was an actual intention at the time that that would be the price to be charged, the letter was no more than bait to lure the plaintiff away from any competitor, and this was specifically rejected by Mr. Webb: p. 153. The defendant’s evidence was that, had it not been for the change in the premium charged by EFIC, the transaction would have proceeded in accordance with the letter of 14 December: p. 160, line 20, and see the defendant’s submissions, para. 30, 58.
- [35]I am conscious that this interpretation of the matter is not quite consistent with the case the plaintiff pleaded; however it is apparent from the defendant’s submissions in writing that this was a way in which the case was litigated, and there is no unfairness to the defendant in my deciding the case on this basis.
- [36]I should say something about the question of Mr. Webb’s authority. There was some evidence as to the absence of his authority to enter into a transaction of this size on behalf of the defendant; but the letter of 14 December 1992 was signed and sent by him with the express approval of Mr. Ellis, and there was no issue as to Mr. Ellis’ authority. Approval from London was required to make a commitment, that is to provide a specific guarantee or otherwise call on bank and country limits, but what was being done in the letter of 14 December which did not involve any call on bank and country limits, and in any case the appropriate limits sufficient to enable the first letter of credit to be guaranteed had already been reserved, so the bank would be able to provide that cover unless the limits were adjusted before the letter of credit issued. Mr. Ellis said and I accept that he did not require approval from London to quote the fee of 7.5% in the letter of 14 December: p. 159. I think therefore that the contract was not invalid for want of authority.
Subsequent Events
- [37]On 15 December Mr. Webb sought an extension of the limit allocation in respect to the first shipment and the increase of it to $US413,000 and sought the “earmarking” of a further similar amount to “enable us to quote for the second L/C”: Exhibit 4, document G. That was supported by a fax to London from Mr. Ellis on the same day: Exhibit 4, document H. That latter fax also sought cover in respect of a similar transaction by the Australian Barley Board, and foreshadowed the possibility of still further transactions. The fax on p. 2 suggests that the bank was in a “no profit no loss” position in the event of the Iranian Bank defaulting, a proposition which I do not think was correct: p. 151. In any case it did not persuade London, who advised that the limit for Bank Sepah was fully utilised so that it would not be possible to guarantee the second letter of credit, and sought more details in relation to the other proposed transactions: Exhibit 4, document J. Somewhat surprisingly, the plaintiff was not advised of this (p. 132), possibly because Mr. Ellis thought that he could get the decision reversed, with the assistance of the director in Singapore: p. 161.
- [38]It seems that the plaintiff’s performance bond in favour of GTC was put in place on 15 December 1992. On 15 December 1992, the plaintiff signed a letter to the defendant requesting the issue of its guarantee of this bond with its agreement to indemnify the bank in the event of that being called up (Exhibit 1, document 17) and the Brisbane office of the defendant in response asked the Sydney office to issue the guarantee to the Iranian Bank: Exhibit 1, document 19. A fax from Mr. Ellis to EFIC on 16 December refers to the performance bond having issued yesterday: Exhibit 4, document I. In that fax he described the plaintiff as “now committed” and that was Mr. Webb’s view: p. 117. On 17 December the plaintiff applied to EFIC for unfair calling of bond insurance: Exhibit 1, document 20.
- [39]Although on the face of the telexes there seems to have been a contract between the plaintiff and GTC prior to this, that contract was expressly subject to Iranian law and the jurisdiction of Iranian courts: see e.g. Exhibit 1, document 10. Mr. Mohan spoke of his experience of international trade in somewhat informal terms (p. 16) and it may be that the plaintiff was only really committed to the deal with GTC once this performance bond was put in place, which significantly occurred only after the agreement with the defendant. From then on it would have cost the plaintiff a significant sum ($US206,500) to walk away from the transaction.
- [40]There was a further fax from Mr. Ellis to London on 17 December, again pushing the transactions for the plaintiff and for the Australian Barley Board. By a fax sent on 23 December 1992 to Mr. Ellis, London advised approval for both the plaintiff’s transactions and the transaction for the Australian Barley Board on condition that 90% EFIC cover be secured, the fees were to be “received in advance within 14 days of your commitment” and dealt with in the particular way for the purposes of the bank’s accounting (p. 161); the approval was to be valid for one month unless formal extensions were agreed. This fax would have reached Mr. Webb the following day (p. 115) but apparently Mr. Ellis was aware of it on 22 December because on that day he advised approval to EFIC and asked them to process the applications: Exhibit 4, document L. On 24 December EFIC advised Mr. Ellis by phone (p. 162) that cover was approved but at a premium which had increased to 3%: p. 162. In addition, the fees paid were to be non-refundable, which was unusual for EFIC. That was confirmed in a letter of the same date (received on 29 December 1992) which however expressed the fee in a sum in Australian dollars rather than a percentage: Exhibit 4, document N. The offer from EFIC was to be accepted by 4 January 1993.
- [41]Mr. Ellis drafted a letter of guarantee to the plaintiff and faxed it to Mr. Webb: p. 162; Exhibit 4, document O. There was some disagreement between Mr. Ellis and Mr. Webb about the correct approach in response to the increase in fees: p. 117, 162. Interestingly, when the fee increase from EFIC first became known, the first proposal from Mr. Ellis (Exhibit 4, document O) involved an increase in fees which was more than the amount required to cover the extra fee being charged by EFIC: p. 175. Mr. Ellis’ explanation for this was that he took the opportunity to go back to the 10% fee which London had originally sought, in the expectation that there would be further negotiations with the plaintiff about the fee and that that this would give them room to reduce the price again: p. 175, line 40-50, p. 176. That seems to me to be a strange way to do things, but I suppose that is just a reflection of my lack of commercial experience.
Further Negotiations
- [42]On 24 December 1992, Mr. J. Mohan went overseas: p. 10. His brother, Mr. S. Mohan, who held the position of general manager of the plaintiff (p. 79) was left in charge in Australia, but ordinarily any matter of importance would be referred to Mr. J. Mohan: p. 17. It was common ground that before Mr. J. Mohan left there was a conversation between him and Mr. Webb. Mr. S. Mohan was involved in a conference call, as Mr. J. Mohan was already at the airport. According to Mr. J. Mohan (p. 52) and Mr. S. Mohan (p. 83-4), all that they were told was that the transaction was proceeding and they were not told about any problems because EFIC had raised the price. Mr. Webb on the other hand said that he spoke to Mr. J. Mohan at the airport by telephone and told him of the price increase and said he would see what he could do about it and get back to him: p. 118. Under cross-examination Mr. Webb said that he said the fees were significantly increased from what had been discussed: p. 136.
- [43]The plaintiff’s position essentially was that nothing was said on 24 December about any increase and they knew nothing about an increase until 31 December 1992 when there was a letter from the defendant to the plaintiff offering a payment guarantee to cover the letters of credit when received, but on terms which were different from those set out in the letter of 14 December. Mr. Webb on the other hand said that after 27 December he was involved in negotiations with both Mr. Ellis and Mr. S. Mohan with a view to arriving at some compromise agreement: p. 119. A fax from Mr. Webb to Mr. Ellis on 29 December 1992 (Exhibit 4, document P) refers to “discussions with company principals” and suggests a price structure which “would be accepted”. Mr. Ellis approved this. Mr. Webb said that he obtained approval from Mr. S. Mohan for this price structure, and on 30 December Mr. Ellis sent a fax to London (Exhibit 4, document Q) in which he advised that they had “managed to renegotiate the position with both exporters”. This set out details of an adjusted fee structure. There is no reason why the defendant would not have been concerned to negotiate with the plaintiff during this period to see if the deal could be saved. On the whole I think it unlikely that these faxes would have been sent in these terms if there had not been negotiations, and indeed some measure of agreement, with at least Mr. S. Mohan during this period, although both Mr. S. Mohan (p. 84) and Mr. J. Mohan (p. 52) denied that there was any negotiation about a new fee prior to 31 December. In respect of these matters, I accept the evidence of Mr. Webb and reject that of Mr. J. Mohan and Mr. S. Mohan. This, I think, must cast some doubt on the reliability generally of those witnesses.
- [44]By a fax dated 30 December 1992 (Exhibit 4, document R), London essentially approved the proposals set out in the fax from Mr. Ellis the same day: Exhibit 4, document Q. Mr. Webb drafted a letter to the plaintiff for Mr. Ellis’ approval (p. 169), it was approved with one minor change: Exhibit 4, document S. I think it is clear from this letter, and what had been said by Mr. Webb to the plaintiff on 24 December and subsequently, that the defendant was indicating that it was not prepared to provide guarantees on the terms set out in the letter of 14 December.
The Agreement of 31 December 1992
- [45]On 31 December this letter was sent from the defendant to the plaintiff commencing:
“Please accept this as our payment guarantee to cover the captioned letter of credit (“the credit”) when received.”
It went on to require the letter of credit to be advised through and restricted for negotiation to the defendant, that it to be in a format acceptable to the defendant, to require all shipments to be effected by 28 February 1993, and that all documents presented for negotiation be in strict compliance with the terms of the credit. It was to be subject to the issuing bank’s advising that the document presented complied with the terms and conditions of the credit within 30 days from the date of presentation of documents at the defendant’s office. This was to prevent the issuing bank from dragging out the date for payment by not advising that it was satisfied with documentation, since the 360 days after which payment would be made would not begin to run until the bank was satisfied. There was also a requirement for interest recourse for 30 days after the date of maturity of the drawings under the credit, and the requirement for the provision of additional security by the plaintiff in respect of existing advances from the defendant within 7 days after negotiation of documents for the second shipment, this being a matter referred to by Mr. Webb in document D of Exhibit 4 as one of the advantages to the defendant of the concessional proposal offered to the plaintiff on 14 December.
- [46]Despite the introductory wording of the letter as if it were an immediate payment guarantee, clause 4 made it clear that it was an offer:
“This offer should be accepted on or before 31 December 1992 and is subject to our receiving our commitment fee of $US68,833.33 together with your written acceptance. The balance of our fee is $US722,750 is payable in full on or before 31 January 1993.”
The letter went on to note that the balance fee would be immediately payable if the first negotiation occurred before 31 January 1993, and fees were not refundable if shipments did not materialise. The letter also gave the plaintiff the option, once the Iranian Bank had advised the documents presented did comply, of receiving immediate payment at a discount rate of 0.5% per annum over the cost of funds; this aspect appears to have been consistent with the earlier arrangement.
- [47]This letter was received by Mr. S. Mohan (p. 80) who was unable to contact Mr. J. Mohan by phone that day: p. 81. He said that Mr. Webb telephoned two or three times pressuring him to sign, and threatened not to release $1.3 million required to pay for the barley until the letter was accepted. Mr. Webb, on the other hand, said that he did say that the letter had to be accepted that day, but that was because of the time limit imposed by EFIC for acceptance of its offer to the defendant: p. 121. Mr. Webb had no recollection of imposing or seeking to impose any linkage with the payment for the barley (p. 142) and the evidence of Mr. Ellis was that the two transactions were independent: p. 164. I accept this evidence, and am not prepared to find that there was any threat not to make funds available to pay for the barley unless this offer was accepted. However, no doubt Mr. S. Mohan would have been concerned about the need to make a substantial payment for the barley that day, and when being pressed by the defendant to accept the letter of 31 December may have actually thought at the time that such funds could have been at risk if he did not co-operate. Various payments were made from time to time to the New South Wales Grains Board for the barley that was being delivered: Exhibit 1, document 27.
- [48]Mr. S. Mohan did, on 31 December 1992, sign an application to the defendant for a telegraphic transfer for $US1.35 million to the New South Wales Grains Board: Exhibit 1, document 27. He also on 31 December signed a letter to the defendant accepting the terms and conditions of the defendant’s letter of that date, and authorising the defendant to draw on the plaintiff’s US Dollar account for the first payment of the fees: Exhibit 1, document 25. I am not prepared to find that he did so with the specific approval of Mr. J. Mohan, but on the view that I take that does not matter. If necessary, Mr. S. Mohan could have made a decision himself: p. 18. The practical explanation for the making of this first payment was that EFIC required the first instalment of the premium on the policies it was to issue by 4 January 1993: p. 154, 170 and see Exhibit 4, document M. No doubt it also served to reduce the risk of the plaintiff’s making alternative arrangements for finance even at that late stage. The fee was debited from the plaintiff’s account the same day: p. 63.
Events of 1993
- [49]After Mr. J. Mohan returned from overseas on 5 January (p. 11) he met Mr. Webb on 7 January and had discussions about a number of matters including the first shipment of barley for Iran, when he said that the first letter of credit was expected to issue imminently: Exhibit 4, document U. Mr. Webb’s diary note of this meeting does not record any complaint about the increase in the fees, which he said would have been recorded had there been one: p. 122. Mr. J. Mohan did not recall the meeting, but said that had there been one at this time he would have complained about the increase in fee: p. 55.
- [50]There was some delay in arranging the actual shipment of the barley but the necessary loading for the first shipment must have commenced in late January 1993 because it was fully loaded by 2 February: Exhibit 1, document 30. Although the letter of credit did not become operative until documents were produced which would only be available once the vessel was fully loaded, it ought to have been provided some time in advance (p. 145, 75), and indeed there were some telexes between the plaintiff and GTC in December arranging for the establishment of the letter of credit for the first shipment: Exhibit 1, documents 22, 23. The letter of credit was in fact received by the defendant from the bank in Iran on 27 January 1993, although the defendant then suggested a number of amendments: Exhibit 1, document 28. Some of these seem trivial, but apparently in the field of international finance trivial matters sometimes form an excuse for argument: see p. 42, and p. 77.
- [51]On 2 February 1993, the plaintiff issued its invoice to GTC for the first shipment, 36,750 metric tonnes for $US4,336,500 loaded on the MV Iran Abazar at Port Kembla. Attached were the various documents required to activate the letter of credit: Exhibit 1, document 30. Presumably these were accepted by the bank in Iran fairly promptly (in spite of the misgivings of the defendant, or its parent company in London) since the due date for payment on the letter of credit became 5 February 1994, and it was negotiated by the defendant on 10 February 1993: Exhibit 1, document 30, and see p. 62. Fourteen months interest of $US234,893.75 was deducted: p. 63. The balance fee payable under the letter of 31 December was in fact debited on 12 February 1993: Exhibit 1, document 31. It was treated as a loan until it was “repaid” on 26 May 1993. Payment of the full amount of the fee to EFIC was made in respect of the plaintiff’s transaction, the balance being paid on 26 February 1993: Exhibit 4, document Y.
- [52]Arrangements for the second shipment however dragged on, and GTC sought to provide for payment on a different basis: Exhibit 4, document BB. It seems that at the time there was some confusion as to just what the situation was with GTC, but on 17 March it advised the plaintiff that it could not obtain a letter of credit in accordance with the agreement for the second shipment: Exhibit 4, document CC. Ultimately there was a second shipment which was financed in another way (p. 60), but there was no second letter of credit dealt with under the arrangements in the letter of 31 December, and in late March 1993 the plaintiff sought from Mr. Webb a refund of the fees in respect of the second shipment which request Mr. Webb passed on to Mr. Ellis on 22 March: Exhibit 4, document DD. The defendant sought a partial refund from EFIC on the basis that the second shipment was not going to occur, and the partial refund was forthcoming on 6 April 1993: Exhibit 4, documents EE, FF. On 7 April Mr. S. Mohan advised that a refund of US$302,437 was accepted subject to the matter being finalised on Mr. J. Mohan’s return from overseas: Exhibit 1, document 33. On 13 April 1993 a refund of $US307,108.78 was made by the defendant to the plaintiff: Document 1, Exhibit 32.
- [53]The plaintiff however sought a further refund of $US73,465: Exhibit 1, document 34. The defendant had made only a partial refund in respect of the fee for the second shipment, on the basis that the defendant was exposed to the risk of having to guarantee the letter of credit for a period of some three months, and so during this period was not able to use that part of its prudential bank and country limits for other transactions, this being a period when the plaintiff could have taken advantage of the letter of 31 December provided that the shipment took place and the various conditions in that letter were satisfied: Exhibit 4, document DD. There was also a “penalty fee” charged of $20,000. In a sense however, argument about the refund was academic; the terms of the letter of 31 December are clear, there was no total failure of consideration, and there was no legal entitlement to any refund arising just from that letter and the failure to take up the offer of the guarantee in respect of the second shipment. The exchange of correspondence which appears in the later documents in Exhibit 1 shows that the claim for the further refund was pursued but without result, although the delay between the end of 1993 and the issue of the plaint on 16 May 1996 was not explained.
- [54]Ultimately, Bank Sepah in Iran did not pay the letter of credit on time, although it did pay about 8 months later, after the defendant had made a claim on the insurance with EFIC: p. 127. The defendant therefore did ultimately lose some months interest on this transaction, although the first month’s interest was the subject of the interest recourse condition in both agreements. Hence the defendant’s premature deduction of this amount from the proceeds of the negotiation of the letter of credit came to be justified by events, although it was not suggested that there was any entitlement, other than “common practice”, justifying that deduction at that time.
Further Arguments for the Defendant
- [55]It was submitted on behalf of the defendant that any rights in the agreement of 14 December merged in the subsequent agreement made on 31 December or that that agreement varied or superseded any earlier agreement. I do not think this is the correct analysis of the situation. In substance, the defendant did not offer the agreement of 31 December as a variation of the agreement of 14 December (see p. 126, line 55); it refused to act in accordance with the agreement of 14 December, but offered to provide guarantees on new terms as set out in the letter of 31 December. If a repudiatry breach of contract is followed by an offer of a contract on different terms, acceptance of the latter offer does not destroy the other party’s entitlement to damages for the breach involved in the repudiation, although it would involve acceptance of the repudiation as putting an end to the earlier contract.
- [56]It was further submitted that the transaction contemplated in the letter of 14 December did not eventuate because there was no letter of credit in existence at that date. But there is nothing in the letter of 14 December which confines its operation to a letter of credit then in existence; indeed, it is expressed to relate to letters of credit “to be issued” suggesting that a letter already in existence would be excluded. There is nothing to exclude the transaction which did ultimately occur from the terms of Exhibit 2.
- [57]It was then submitted that there were no “suitable” country and bank lines available within the defendant at the rate of charge set out in the 14 December letter, so that letter did not apply, because the express condition to which it was subject did not operate. But the country and bank lines were prudential limits designed to regulate by reference to amount the exposure to particular countries and particular banks, and therefore ought to have been independent of the fees payable. It may be that there was some flexibility so that there was some responsiveness either to the prospect of a high return or some other commercial consideration, since it seems that the agreement of 31 December was authorised in spite of the fact that there was not room available within the prudential limits to cover the second letter of credit for the plaintiff: Exhibit 4, document J.
- [58]The essential nature of these limits, as explained in the evidence, requires that they operate by reference to the amount of the exposure of loss in the event of the failure, either of a particular bank or a particular country. In effect, the defendant was saying that, if at the relevant time the defendant’s group was already in a position where if the bank in Iran fails its loss will exceed a particular amount, then it will not enter into the transaction which would have the effect of increasing the loss as a result of that failure, but if its limit would not be exceeded by that transaction it will do so. The effect of the letter of 14 December which is apparent from its terms is that, if that can be done, the defendant will do it at a particular price. To say that the defendant is only contractually bound if it remains willing to provide the guarantee at that price is tantamount to construing the contract as providing an obligation on the defendant only in circumstances where one is not needed. It would be an optional obligation, not a contract at all: MacRobertson Miller Airline Services v. Commissioner of State Taxation (WA) (1975) 133 CLR 125 at 133. I reject that interpretation of the contract of 14 December.
- [59]For the first letter of credit, plainly “suitable … bank and country lines” were available, since they had earlier been reserved, and the guarantee was provided. The contrary was not suggested in the evidence of Mr. Webb or Mr. Ellis. There was, in my opinion, nothing to prevent the letter of 14 December operating in respect of the first letter of credit, other than the defendant’s refusal to be bound by it, although it does appear that the defendant would have been entitled to refuse to commit in respect of the second letter of credit if the unavailability of limits continued.
- [60]Some emphasis was placed by the defendant on the failure on the part of the plaintiff to complain of the increase in the charges. No such complaint is recorded in the contemporaneous documents, and I accept the defendant’s evidence that there was no such complaint. This could be relevant if it were necessary to determine whether any payment made by the plaintiff were made “under protest”; clearly that was not the case, but on the view that I take of the matter that issue does not arise. This is not a case where there is an attempt to recover money paid under protest, where the plaintiff was forced to make the payment in order to secure from the defendant something the plaintiff was entitled to receive from the defendant anyway: see Goff & Jones “The Law of Restitution” (4th ed 1993) p. 268.
- [61]The other possible significance of the failure to complain is that it could amount to an implied admission on the part of the plaintiff of the existence of a common intention that the agreement of 14 December did not give rise to a legal relationship. That is a possible explanation for a failure to complain, but I think that more than that is required before a failure to complain can be treated as an implied admission. There is no evidence that the plaintiff took any legal advice about the position until after the complaints about the refund which appear in Exhibit 1 had all been made, and the plaintiff may have been simply unaware that it had any legal basis for complaint. The plaintiff may also have felt that it would have been a waste of time complaining, and that complaints may have jeopardised the prospect of getting a guarantee for the second letter of credit, which was still expected to materialise until well into 1993. There were other matters on foot between the parties (p. 122) so the plaintiff may have had other reasons not to rock the boat. I think there are all sorts of possible explanations for the failure to complain apart from an implied admission as to the status of the letter of 14 December, and in any case I think it appropriate to be wary about treating a mere failure to complain as some sort of implied admission of anything. In all the circumstances, I am not prepared to treat that failure to complain as evidence of a common intention that the letter of 14 December not be legally binding.
- [62]In my opinion, once the position is understood it becomes unnecessary to consider any question of setting aside the agreement of 31 December, on the basis of economic duress or unconscionability or breach of estoppel, or on any other basis. That agreement was entered into and partly performed, and its true relevance is to the quantification of the damages for breach of the earlier agreement. The position is in substance no different from what it would have been if the earlier agreement had been repudiated by the defendant and the plaintiff had then gone to another bank and made the agreement of 31 December, that being the best it could then obtain. To the extent that it was worse off than it would have been under the earlier agreement which had been wrongfully repudiated, the plaintiff is entitled to recover the difference by way of damages for breach of that earlier agreement. Nothing further is required to do justice to the plaintiff than to assess those damages in that way. In principle therefore, the damages are simply the amount that would have been paid in respect of the first letter of credit under the agreement of 14 December, less the amount that was paid under the agreement of 31 December, but giving credit for the refund that was subsequently made.
- [63]The agreement of 31 December was not a voluntary submission to a bona fide claim, nor did it purport to extinguish any liability for breach of the earlier agreement, or to vary it. But because of the earlier agreement, the plaintiff had no real choice but to accept the defendant’s terms. It had broken off its negotiations with BNP, and that arrangement required an application to EFIC by the plaintiff, which the plaintiff could not make while the defendant’s proposal to EFIC was in place. The plaintiff had to accept on 31 December or risk losing its performance bond to GTC, and once it had accepted it risked losing $68,833.33 (if not more) if it then made other arrangements during January. In view of this the assertion that such a course was open to the plaintiff (p. 180) was quite unrealistic. On 31 December the plaintiff had no real choice but to accept the plaintiff’s offer. If I thought it necessary to do so, I would have been prepared to find that the contract of 31 December was procured by economic duress.
Quantum
- [64]Unfortunately, there is a dispute between the parties even as to the calculation of the damages. The difficulty arises because of a disagreement as to the operation of the cause for calculating the “payment guarantee fee” in Exhibit 2, quoted earlier. The maturity date of the drawings made by the letter of credit was 5 February 1994; there seems to be no dispute about that date which appears on the defendant’s form in Exhibit 1, document 30. The letter, Exhibit 2, contemplated that something further would be done by way of adding the defendant’s guarantee to the letters of credit (and see p. 143) and expressly provided that that would not occur until after the letter of credit was issued. Part of the difficulty in applying Exhibit 2 is that under the subsequent letter of 31 December, the guarantee purported to be issued at once, that is on 31 December, even though the letter of credit did not issue until late in January, and did not become operative (and the defendant did not become bound under the guarantee) until some time in February. It seems that letter of credit and the guarantee became operative when the bank in Iran accepted that the plaintiff’s shipping documents were in order. The difficulty is in knowing what would have happened if the original agreement had been followed.
- [65]Certainly the guarantee from the defendant would not have been added until the letter of credit had issued, and I think it reasonable to conclude that the guarantee would not have been added until the defendant was satisfied with the terms of the letter of credit. But once the defendant was satisfied with its terms, I think it would have added its guarantee, although conditional on the letter of credit taking effect by presentation of the appropriate shipping documents, which occurred on 2 February. I am not persuaded that the guarantee would have been added on the later date, and it follows that, under the formula given in the letter of 14 December, a charge is to be made on a monthly basis from about 27 January 1993 to 5 February 1994, which is 13 months, since it was to be calculated “on a monthly or part thereof basis”. The fee was therefore 8.125% of the maximum value of the first letter of credit, US$4,130,000, or $335,562.50. This, as it happens, is half the figure given for the “previous” fee payable by the plaintiff on the first page of the facsimile from Mr. Ellis of 30 December 1992, document Q in Exhibit 4. He was calculating the fee on the assumption that the letters of credit for both shipments would be dealt with in this way. That supports the logic of this approach.
- [66]The fee in fact paid was US$791,583.33, the sum of the two amounts in clause 4 of the letter of 31 December, less the refund of $307,108.78 (Exhibit 1, document 32), a balance of $484,402.55: Exhibit 3. The difference between that amount and the amount which I have calculated would have been payable in accordance with the letter of 14 December is US$148,840.05. This is less than the amount claimed in the plaint, which is calculated in the assumption that the fee of 7.5% was payable only for one year.
Equitable Estoppel
- [67]In these circumstances it is unnecessary to deal with the alternative claims for equitable compensation on the basis of equitable estoppel or unconscionability. However, I should say a few things briefly about these matters in case a different view is taken elsewhere about the effect of the letter of 14 December. It seems to me that if there was no binding contract between the parties created by that letter then there was no unconscionability in the sense discussed by the High Court in Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447, since the plaintiff was in no particular position of disadvantage which was exploited by the defendant. Mr. J. Mohan is an experienced and skilful trader: p. 13, 16. The plaintiff had certain commercial needs, and the defendant was in a position ultimately of a monopoly supplier of what the plaintiff wanted, but I do not think that exploiting the commercial advantage of being a monopoly supplier has been regarded as unconcsionability in the relevant sense: Equiticorp Finance Ltd v. Bank of New Zealand (1993) 32 NSWLR 50 at 105-9, 149-51. Mere commercial pressure is not enough, it has to be unlawful or unconscionable conduct. If the defendant was not already contractually bound to the plaintiff, and if there was no estoppel, the commercial pressure it applied was not in itself unlawful or unconscionable.
- [68]With regard to equitable estoppel, if there was no contract I think there can be seen to have been a representation, although a somewhat qualified one, as to what the defendant would charge for providing its payment guarantee; that is to say, that the charge would be as set out in the letter of 14 December provided the bank could undertake the obligation in accordance with its prudential limits, and provided its assessment of the bank and country risks did not change in the meantime. Mr. Webb’s evidence was that his assessment of the bank and country risk had not changed between the time when that letter was sent and the end of December (p. 117), and the fact that what prompted the desire to increase the fees was the increased charges imposed by EFIC, and that ultimately some of the increase was absorbed by the defendant, also suggest that there was no change in the assessment of the risk by the defendant, or the defendant’s head office. I so find. The evidence of Mr. Ellis relied on for the contrary proposition is not, I think, sufficiently to the point; if it is directed to the period 14 to 31 December I reject it and prefer the evidence referred to earlier.
- [69]The plaintiff did act on this representation, by withdrawing its application from EFIC and discontinuing its negotiations with BNP. Although the plaintiff was apparently not able to obtain from any other source a non-recourse payment guarantee under which the full proceeds (after appropriate deduction for bank charges) could be made available promptly, there were other means of obtaining protection against the risk of the bank in Iran not paying on the letter of credit. The arrangement proposed by BNP was different and cannot be compared directly; it had the disadvantage that it did not offer as much protection to the plaintiff, but had the advantage that it was cheaper. In the events that have happened, where the payment was ultimately made but made late, the plaintiff may not have been worse off in bearing itself 10% of the risk for non-payment and it may be that with hindsight the plaintiff would have been better off with the arrangement it could have made with BNP. But that is not the relevant issue; the matter had to be looked at from the point of view of the plaintiff at the time, and on 14 December it really had to make a choice; the fact that only one application could be made to EFIC, and that the plaintiff’s application would prevent one by the defendant, and one by the defendant would prevent one being made by the plaintiff (p. 138), meant that once the plaintiff chose one path it was necessarily going to be difficult (although perhaps not impossible) to go back and choose the other. It would certainly have placed the plaintiff in a weaker negotiating position with BNP if the plaintiff had had to go back to that bank in late December or early January to try to revive the arrangement, assuming the defendant would co-operate by withdrawing its proposal to EFIC. I think that this is the relevant detriment, and sufficient detriment to support an equitable estoppel.
- [70]The reason for enforcing an estoppel in these circumstances is that the potential for this detriment makes it inappropriate for the defendant to resile from the representation: Grundt v. Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 674-5. It is not, I think, a qualification on an equitable estoppel that the representor not have a good reason for wanting to change its position. I think therefore that the fact the defendant was responding to the increase in the EFIC fee is not an answer to the claim of equitable estoppel.
- [71]It was also submitted that the equitable estoppel would not assist the plaintiff because compensation for breach of the estoppel would be nil, on the basis that compensation ought to be assessed on a tort basis rather than a contract basis, and there was no evidence that the plaintiff would have been better off if the representation had not been made. The difficulty is that it is not known what would have happened instead; whether the defendant might have made some other more guarded statement, and the plaintiff dealt with the defendant anyway, or whether the plaintiff might have dealt with BNP (or possibly even found someone else) under which circumstances the transaction could have proceeded on a completely different basis, which may or may not have left the plaintiff better off at the end of the day. There was certainly no attempt to prove that the plaintiff would have been better off ultimately if the transaction with BNP had proceeded. It does appear that BNP was agreeable to providing the different trade finance it had available: Exhibit 1, document 21. I do not think there is any rigid rule about how compensation is to be assessed in a situation such as this, and I suspect that in this case the appropriate course would have been to assess compensation on a basis analogous to damages for breach of contract. The passages relied on from Walton’s Stores (Interstate) Ltd v. Maher (1988) 164 CLR 387 do not support the strict application of the tort approach; one statement at least by Brennan J at p. 425 supports the contractual basis if that is “what is necessary to prevent detriment from arising from unconscionable conduct”. That is not an approach which leads to no compensation. However, if this matter goes further that issue can be resolved elsewhere.
Conclusion
- [72]The result is that I find that the defendant is liable to pay the plaintiff an amount of damages assessed in United States Dollars, $US148,840.05. The issue of how this is to be reflected in a final judgment was touched on during the trial, and I have some recollection that there was agreement between the parties as to what should be done if that situation arose. In any case, I propose to publish these reasons and invite either advice of an agreement or further submissions on that matter. There should also, I think, be some submissions in relation to the questions of interest and costs; it does seem to me at the moment that there was a substantial unexplained delay in pursuing this action, and that is relevant to the assessment of what interest should be allowed.