FEDERAL COURT OF AUSTRALIA

Ottoway Engineering Pty Ltd v Westpac Banking Corporation (No 3) [2017] FCA 1500

ORDERS

THE COURT ORDERS THAT:

1.    The respondent bring in draft minutes of order reflecting the conclusions in the reasons for judgment.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BESANKO J:

INTRODUCTION

1    The applicant in this proceeding is Ottoway Engineering Pty Ltd and it carries on business as a mechanical fabrication and installation contractor. The respondent is Westpac Banking Corporation and it carries on business as a bank and financial services provider.

2    On or about 18 September 2014, the applicant caused its banker, National Australia Bank Limited (NAB), to provide a guarantee titled “Bank Guarantee” to the respondent as beneficiary in the amount of $1,735,000 (earlier guarantee). On or about 12 June 2015, the earlier guarantee was replaced by a guarantee in relevantly identical terms and also titled “Bank Guarantee”, save and except that the amount was $1,000,000.

3    This second guarantee is at the centre of this proceeding. I will refer to it as the Guarantee, although, as I will explain later in these reasons, it is not a contract of suretyship. It is in the nature of a performance bond or a demand guarantee.

4    On or about 29 March 2016, the respondent made a written demand under the Guarantee. The applicant sought an injunction restraining the respondent from pursuing its demand on the Guarantee. I granted an interlocutory injunction after submissions had been made by both parties (Ottoway Engineering Pty Ltd v Westpac Banking Corporation [2016] FCA 635).

5    The applicant now seeks final relief with respect to the Guarantee which would have the effect of preventing the respondent from enforcing the Guarantee and requiring it to deliver up the Guarantee.

6    The main issues raised in the proceeding are the proper construction of the Guarantee, whether there was fraud by a company called Bluenergy CMC Pty Ltd (BCMC) and, if so, whether that fraud vitiates the Guarantee and whether there was unconscionable conduct within s 20 of the Australian Consumer Law (Australian Competition and Consumer Act 2010 (Cth), Schedule 2) (ACL), or misleading or deceptive conduct within s 18 of the ACL or both, by the respondent and whether that conduct means that it should be prevented from enforcing the Guarantee.

BCMC

7    On 13 April 2016, BCMC was wound up in insolvency and the company has substantial liabilities. BCMC is not a party to this proceeding and neither party adduced any evidence from a person who had been involved in the company. BCMC was part of a group of companies under the control of a Mr Troy Millen. After the interlocutory injunction had been put in place, Mr Millen and his partner, Ms Kelly O’Brien, and a company known as Ecap Finance Pty Ltd (formerly Bluenergy Capital Pty Ltd) applied for certain orders in this proceeding. I described the application and the applicants to it in my reasons in Ottoway Engineering Pty Ltd v Westpac Banking Corporation (No 2) [2017] FCA 39 at [1]:

This is an application by a corporation and two individuals to be joined as respondents to a proceeding between Ottoway Engineering Pty Ltd (“Ottoway”) and Westpac Banking Corporation (“Westpac”). The applicants for joinder are ECAP Finance Pty Ltd (“ECAP”), Troy James Millen and Kelly Jean O’Brien. Ms O’Brien is Mr Millen’s partner. ECAP was formerly known as Bluenergy Capital Pty Ltd and Mr Millen is the sole director of the company and, according to the ASIC Current & Historical Extract put before the Court, owns all the shares in the company. Mr Millen is the sole director of, and owns all the shares in, another company called Evolve Industries Pty Ltd (“Evolve”), which was formerly known as Bluenergy Industries Pty Ltd. Ms O’Brien was the sole director of another company, Bluenergy CMC Pty Ltd (“Bluenergy CMC”), and the shares in that company were held by Evolve. Bluenergy CMC was put into liquidation upon Ottoway’s petition on 13 April 2016 and receivers and managers were appointed to the company on 14 April 2016. In addition to their application for joinder, the applicants for joinder seek an order that an injunction granted by the Court on 30 March 2016 and extended on 2 June 2016 be dissolved.

8    I dismissed the application for joinder on the basis that the claimed financial interests of the applicants were not sufficient to justify joinder. I recorded the fact that none of the applicants suggested that they should be joined because of possible reputational damage in view of the plea of fraud against BCMC. At the conclusion of my reasons, I said the following (at [24]):

I should refer to one matter which was raised by counsel for Westpac at the conclusion of the submissions. He referred to the fact that Ottoway’s Amended Statement of Claim contains a plea that Bluenergy has engaged in a fraud on Ottoway (paragraph 37.3). Whether that circumstance would give Bluenergy CMC or some other person the right to be joined to the proceeding or to intervene in some way is not before me. That would be a different basis from that advanced on the present application.

9    An application for leave to appeal from my decision was refused (Ecap Finance Pty Ltd v Ottoway Engineering Pty Ltd (No 2) [2017] FCA 237).

10    No further application for joinder or intervention was made by BCMC or any other party related to it.

WITNESSES

11    In accordance with the practice of the Court, each party filed affidavits containing the evidence-in-chief of the witnesses they proposed to call at the trial. In the case of the applicant, affidavits of Mr Stephen Young, Mr Mark Vartuli and Mr Ra’ed Alaraj respectively were filed. Mr Young and Mr Vartuli are directors of the applicant and Mr Alaraj is the chief financial officer of the company. Mr Young was the main witness for the applicant and he was cross-examined at length. Mr Vartuli and Mr Alaraj were not required for cross-examination. In the case of the respondent, affidavits of Mr Paul Chapman, Mr Chullanath Ekanayake and Mr Ryan Hoare respectively were filed. Those persons are bank officers employed by the respondent and Mr Chapman is the senior bank officer. He was the main witness for the respondent and he was cross-examined at length. Mr Ekanayake was cross-examined briefly. Mr Hoare was not required for cross-examination.

12    I accept the substance of Mr Young’s evidence. Nevertheless, there are some aspects of his evidence which call for comment.

13    First, on occasions Mr Young gave evidence that he considered met the issue rather than answering, or confining himself to answering, the question. At various points in his evidence he described his behaviour as “entirely consistent” or “consistent” with what he claimed his state of mind to be and that his conduct “had been held against a prism which was never what my state of mind was”. This evidence was argumentative and, in my opinion, unhelpful.

14    Secondly, Mr Young was strongly challenged on a statement in his affidavit about the time at which the applicant first became aware of a proposal or suggestion that the applicant share with BCMC the costs associated with the provision of the Bill Facility. The Bill Facility is described below (at [45] and following). His evidence about this topic was incorrect and, as he himself said, his evidence should have made it clear that it was when he, rather than the applicant, first became aware of the proposal or suggestion. I do not think that this was a deliberate attempt to mislead the Court. The relevant documents were, in any event, exhibited to Mr Alaraj’s affidavit. Nevertheless, it was an unnecessary distraction and exhibited a lack of care. At the very least, as the applicant itself was prepared to concede in its closing written submissions, it indicated that on some matters Mr Young’s approach was one of overview leaving the finer details to others. In this case, those “others” are Mr Alaraj and Mr Vartuli.

15    Thirdly, Mr Young was challenged on evidence he gave that in 2014 it was industry practice for parties to have discussions before the party considering whether to call on a performance guarantee actually did so. The evidence seemed to move from an industry practice of awaiting the outcome of the underlying dispute before enforcing a performance guarantee to a practice of having discussions before enforcing the guarantee. I find the former difficult to accept because it seems inconsistent with the essential purpose of a performance guarantee, but it is not a factual issue that needs to be resolved in this case. I am not prepared to find that the latter was not Mr Young’s understanding of industry practice in 2014.

16    Finally, the respondent submitted that none of the applicant’s witnesses, including Mr Young, addressed an important aspect of the applicant’s case. As will be seen in the recitation of the facts, the applicant sought certain conditions in the Guarantee which were rejected by the respondent and ultimately not included in the Guarantee. Mr Young said that the decision to go ahead without the conditions was made by either Mr Alaraj or Mr Vartuli. He said it was probably Mr Vartuli. The respondent pointed to the fact that neither Mr Alaraj nor Mr Vartuli gave evidence on this matter and that, although they gave evidence on other matters, their respective failures to address this matter could and should lead to the drawing of an adverse inference (Jones v Dunkel and Another (1959) 101 CLR 298, Heydon JD, Cross on Evidence (11th ed, LexisNexis Butterworths, 2017) p 44 [1215]). The respondent’s argument is that it is an essential element of the applicant’s unconscionable conduct claim that the applicant was labouring under a misapprehension as to the respondent’s right to enforce the Guarantee unconditionally and yet, the witnesses who could apparently establish the applicant’s corporate state of mind as to this matter, did not give any evidence to that effect. In the circumstances, an adverse inference should be drawn against the applicant. With respect, this argument does not respond to the applicant’s case. There is no difficulty in drawing the conclusion that the applicant knew that the conditions it proposed (e.g., six weeks’ notice before calling on the Guarantee) were unacceptable and were not included in the Guarantee. The applicant thought the Guarantee was a demand guarantee, but of its obligations to BCMC. It contends that it has discharged those obligations. The applicant’s case is that, in those circumstances, calling on the Guarantee is unconscionable. In other words, the applicant’s argument is a different one and is not as to conditions attaching to the Guarantee, but as to the agreement it secures. I should say in this context that I accept that the applicant believed the Guarantee secured its obligations to BCMC. That is Mr Young’s evidence and is demonstrated by, among other items of evidence, cl 14.7 of the Alliance Agreement. The Alliance Agreement is described below (see [78] and following).

17    I accept most of Mr Chapman’s evidence. His recollection of events was not particularly good and he was defensive at times and slow to accept matters which seemed obvious. I refer by way of example, to his evidence about the person who made the changes to the draft credit submission prepared by Mr Hoare in February 2016. In addition, he was aware that there was a dispute between BCMC and the applicant about a week earlier than he said in his affidavit. Furthermore, I do not accept his evidence that he did not have a conversation with Mr Ekanayake about a division of assets between BCMC and Bluenergy Global JV Pty Ltd (Bluenergy Global) for the reasons I will set out. I formed the strong impression that Mr Chapman’s approach at the time of a number of the relevant events was based on his belief that, as he put it at one stage in his evidence, “NAB [was] the entity that’s obliged to pay us if we call on security”.

18    Mr Ekanayake was a straightforward witness and I accept his evidence.

19    In addition to the evidence of these witnesses, a tender book of four volumes and a small number of additional documents were put before the Court.

THE FACTS

20    Many of the relevant facts are not in dispute. Where I set out matters without further comment, those matters represent my findings of fact.

21    My statement of the facts is divided into three sections. First, I will set out the main facts over the relevant period which is the period from May 2014 to April 2016. Secondly, I will set out the facts in connection with the two extensions of the term of the Bill Facility provided to BCMC by the respondent. Thirdly, I will set out the facts concerning the repayment of the Bill Facility by BCMC to the respondent and the repayment by the applicant of the advance payment.

The Main Facts over the Period from May 2014 to April 2016

22    Mr Young described the operations of the applicant and the Sino Iron project in the following terms.

23    The applicant is a wholly owned subsidiary of E & A Limited (E & A) which is a publicly listed company. The company is a mechanical fabrication and installation company which provides specialised services to the oil and gas, mining, defence and water industries. It operates a number of fabrication workshops and the services it provides includes the fabrication of pipe spooling, pressure vessels, welding of all material grades, modular skid construction, machinery and material handling manufacture, light to heavy general steel and plate construction. The applicant has performed a number of site based construction projects throughout Australia. The following are examples: the fabrication of in excess of 36 km of carbon steel pipe spooling on the Western Mining Corporation/BHP Billiton Olympic Dam expansion; the fabrication of pipe spools for the Ravensthorpe Nickel project on behalf of AKER Kvaerner/Chemetics which included the fabrication of 800 tonne of spooling from a variety of materials; the fabrication and supply and erection of approximately 400 tonne of structural steel on platforms; and the fabrication and installation of carbon steel and stainless steel pipework at the Uranium One project north west of Broken Hill; and with respect to the Sino Iron project (described below) which involved a 450 MW Combined Cycle power plant operated by CITIC Pacific Mining Ltd (now known as CITIC Ltd) (CITIC), the applicant was one of the main subcontractors to CITIC and it installed turbines, boilers, stacks, fans, steelwork structures, piping, pumps and associated equipment.

24    CITIC developed the Sino Iron project at Cape Preston. Cape Preston is 100 km south west of Karratha in Western Australia’s Pilbara Region and 14,090 km north of Perth. The project is the largest magnetite mining and processing operation in Australia. The operation has been designed with sufficient capacity to produce millions of tonnes per annum of final magnetite concentrate over a production life of 25 years.

25    CITIC is incorporated in Hong Kong and is listed on the Hong Kong stock exchange. CITIC Pacific Mining Management Pty Ltd (CPM) and Sino Iron Pty Ltd (Sino Iron) are subsidiaries of the company. There are two dewatering buildings known as Dewatering Buildings 313 and 314 at a distance of approximately 25 km from the Sino Iron project mine site. The dewatering buildings are located in the concentrator area and their purpose is to dewater the concentrated magnetite from the slurry pumped from the concentrator prior to barging the extracted magnetite ore to ships for export.

26    On 20 May 2014, Mr Chapman met with Mr Tim Symonds and Mr Don Patterson. Mr Symonds introduced Mr Patterson as being from BCMC. In subsequent correspondence, Mr Patterson is described as the business manager of BCMC. There was a discussion at the meeting about a new potential project. Mr Chapman could not recall whether Mr Millen was at the meeting. After the meeting, Mr Chapman asked Mr Patterson to provide further information to the respondent which in due course Mr Patterson did. Mr Chapman said that the matters being discussed at that time were the prospect of the respondent providing bank guarantees, working capital and asset finance facilities.

27    On 17 June 2014, Mr Chapman met with Mr Patterson and Mr Millen at a café and had further discussions about a future relationship between the respondent and BCMC.

28    On 8 July 2014, BCMC entered into a contract with Sino Iron for the installation and commissioning of mechanical equipment and piping associated with Dewatering Buildings 313 and 314 (the Head Contract). The contract stated that it included two separable portions of work which were described as follows:

(1)    Mechanical and Piping Installation and Commissioning Works related to Dewatering Buildings 313 and 314 (Separable Portion of Works #1);

(2)    Repair of Damaged Belt Conveyors and modification works in relation to Separable Portion of Works #1 (Separable Portion of Works #2).

The contract sum was AUD22,698,000.

29    It was a condition of the Head Contract that BCMC provide two performance guarantees for 10% of the contract sum with one to be released within seven business days of the date of practical completion and the other to be released within seven business days of the expiration of the defects liability period. In September 2014, the respondent, at the request of BCMC, issued two performance guarantees in favour of Sino Iron. These guarantees were secured by term deposits held by the respondent.

30    BCMC approached the applicant and asked it to submit a tender to perform the scope of works in the Head Contract. In addition, BCMC asked the applicant to submit a proposal for the supply of labour only for the variation works being carried out in the project. BCMC provided the applicant with all of the tender documentation provided to it by CPM on behalf of Sino Iron.

31    By letter dated 11 July 2014, the applicant submitted a proposal to BCMC for “the supply of labour, plant and equipment for the mechanical installation as detailed within the documentation provided being for the Dewatering buildings 313 & 314”. The price offered by the applicant was $17,350,000 (excluding GST). The proposal also included a request by the applicant for an upfront or advance payment of 15% on the signing of the contract and payable within seven days from the receipt of a supporting bank guarantee. The payment terms under the applicant’s proposal were that progressive invoices were to be rendered based on the percentage completion of the project each month, including material received in the workshop and on the site. Invoices were to be paid within 30 days.

32    On 31 July 2014, Mr Patterson, on behalf of BCMC, made an application to the respondent for a credit card facility.

33    It is appropriate to refer at this point to the practice of the respondent upon receiving a finance or credit application to the extent that it is relevant to this case. It seems that the application would be made by letter or email, or perhaps orally. A bank officer would prepare a document which was called a credit submission. The credit submission would contain details of the customer, the facility sought, the security offered or sought and the decision on the application and, to varying degrees depending on the nature of the application, the reasons for the decision. If the application was approved, then the customer would be advised by letter and, relevant to this case, sent a Business Finance Agreement for execution. Subsequent credit submissions for new facilities for the same customer would often contain information about the customer and existing facilities taken from earlier credit submissions.

34    A number of credit submissions relating to applications by BCMC over the period from May 2014 to April 2016 were put in evidence, but I will refer only to those that are directly relevant.

35    I return to BCMC’s application for a credit card facility. In a section in the credit submission titled, “Relevant Recent Events”, the following appeared:

August 2014

Bluenergy CMC (previously A/C held with the WBC Victoria Park Branch), Troy Millen & related entities (previously managed by WBC Kewdale BBC) was transferred to this connection to support a banking relationship for Bluenergy CMC related activities.

RM Jarrod Smith advised that a number of adverse account behaviours were evident in the previous banking relationship out of the Kewdale BBC. Issues have been rectified and the Director Troy Millen advises that the adversity mostly relates to his previous business partners banking activities and issues have now been resolved. The Director assures going forward that he will manage the banking relationship to ensure for future adversities are faced in the current banking arrangements.

36    The application for the credit card facility was approved by the respondent and the facility was made available to BCMC on 22 August 2014. The offer in respect of that facility was made by way of a Business Finance Agreement dated 25 August 2014.

37    On 7 August 2014, Mr Patterson sent an email to Mr Chapman about the Sino Iron project. He identified the applicant as the subcontractor. There was a reference to bank guarantees being provided by the applicant to BCMC and by BCMC to Sino Iron.

38    On 21 August 2014, the applicant entered into a contract with BCMC to perform the works which were described, by way of a “High level description of the Works”, as follows:

The Works shall include but are not limited to installation and commissioning of mechanical equipment and piping associated with Dewatering Buildings 313 and 314, install of all free-issued and Contractor supplied equipment, piping, in-line valves, in-line instruments, various supports, brackets, etc., as further detailed in Schedule 1 (Scope of Work) and Schedule (Specifications)

(the Subcontract.)

39    As one of the witnesses put it, the Head Contract and the Subcontract were essentially “back to back” contracts. The applicant was to do the bulk of the work. BCMC was to perform some supervision and engineering services.

40    The applicant and BCMC did reach an agreement about an upfront or advance payment by BCMC to the applicant, but it was not included in the Subcontract. It was a side agreement negotiated between Mr Young and Mr Millen. Mr Young believed that Mr Millen was the managing director of BCMC. The circumstances surrounding the making of the agreement were as follows.

41    I have already referred to a request for an upfront or advance payment in the applicant’s proposal dated 11 July 2014. On 7 August 2014, Mr Millen sent an email to Mr Brian Tidswell, chief executive officer of the applicant, suggesting an advance payment of 10% of the contract price under the Subcontract. The email was followed by further emails which passed between Mr Alaraj and Mr Patterson.

42    On the weekend of 16 August 2014, Mr Young met Mr Millen in Adelaide and they agreed that BCMC would make an advance payment to the applicant of 10% of the contract price under the Subcontract, namely, an amount of $1,735,000 (including GST). It was agreed that the advance payment would be made prior to commencement. It was agreed that each month when the applicant rendered an invoice to BCMC, the latter would retain 10% of the amount paid under the invoice for the purpose of reducing the outstanding balance of the advance payment. It was agreed that the applicant would provide BCMC with a bank guarantee in the amount of $1,735,000 in support of completing the works so as to ensure repayment of the advance payment. A bank guarantee for a lesser sum would be exchanged from time to time to recognise the reduced value of the advance and in order to free up the applicant’s banking facilities. I will refer to this agreement as the Advance Payment Agreement.

43    Mr Young said, and I accept, that BCMC agreed to make the advance payment to the applicant to enable the applicant to mobilise to a relatively remote project site in preparation for the performance of the scope of works under the Subcontract. The advance payment was to be progressively repaid by the applicant by mobilising and completing the scope of works. Mr Young said that he also sought the advance payment because he had previously found Sino Iron “a very slow payer and very difficult”. Mr Young said that the bank guarantee was to support the applicant’s obligations to complete the scope of works so as to repay the advance payment. I accept that that was the applicant’s understanding of the arrangement.

44    On 25 August 2014, the applicant mobilised to the site. This was before the advance payment was made by BCMC to the applicant.

45    BCMC had to borrow the funds which it needed to make the advance payment from the respondent. It applied to the respondent for a Bank Bill Business Line in the amount of $1,735,000. I will refer to this as the Bill Facility.

46    The respondent approved the Bill Facility and an offer was made to BCMC on 18 September 2014. The offer was accepted and Ms O’Brien, who was the director of BCMC, executed a Business Finance Agreement for the Bill Facility on 25 September 2014.

47    It is necessary to refer to a number of matters concerning the granting of the Bill Facility.

48    On or about 27 August 2014, the applicant agreed with BCMC that it would pay 50% of the costs associated with the Bill Facility.

49    On or about 1 September 2014, Mr Patterson sent an email to Mr Chapman with a copy to Mr Millen, which included the following statement:

During the week we will receive from our primary subcontractor one Bank Guarantee in favour of the Westpac bank. This is to support borrowings on our part of $1,735,000 to be made available as a prepayment to the primary Subcontractor. The loan will be repaid out of the last primary subcontractor Progress Claim, in approximately 12 month’s time.

50    In early September 2014, there were negotiations concerning the proposed wording and terms of the Guarantee to be provided by the applicant. I will deal with these negotiations separately below.

51    The credit submission for the approval of the Bill Facility reveals the following matters about the parties, the terms of the Facility and the respondent’s knowledge of the purpose of the Facility.

52    First, BCMC is a national construction company and one would reasonably infer from the statements in the credit submission, the major operating company.

53    Secondly, the respondent was advised that the applicant was:

only agreeing to provide an undertaking in favour of Westpac Banking Corporation to only secure the BBBL facility for $1,735.

54    Thirdly, the respondent was advised that the purpose of the debt funding was to make a prepayment to the applicant. The Facility was interest only and to be repaid in 12 months (i.e., 1 October 2015). The respondent was told that the Facility would be repaid from “the projects last progress claim from the primary subcontractor in approximately 12 month’s time”.

55    Fourthly, the respondent was told that to mitigate the lump sum risk of the project, BCMC engaged the applicant, a subsidiary of the publicly listed entity, E & A, “to carry the burden of the project works while Bluenergy undertake the management/supervisory role”.

56    Fifthly, the credit submission contains the following passage:

-    The bank guarantee securing the above facilities are advanced from National Australia Bank on behalf of Ottoway Engineering Pty Ltd. Ottoway is providing a guarantee for work that they are involved in on the Sino Iron project. Legal advice for Ottoway Engineering Pty Ltd is proposed for this transaction to provide them with a legal opinion and contractual obligations they are committing to by providing a guarantee to secure facilities with Westpac Banking Corporation.

Although this statement appeared in the credit submission, the matter was not pursued by the respondent because, as I understand Mr Chapman’s evidence which I accept, it was not necessary to do so because it was NAB which was providing the guarantee. Mr Chapman said that this was not a comment which he included in the submission, nor did he instruct Mr Ekanayake to do so. Mr Chapman said that he did not consider it necessary to speak to the applicant about the fact that it would be procuring the issue of a bank guarantee in favour of the respondent to secure BCMC’s obligation to the respondent as the applicant was part of a publicly listed group and it could look after its own interests. Furthermore, it was a matter for the applicant and its banker, NAB, whether a bank guarantee would be issued. He spoke to Mr Ekanayake about these issues. He cannot recall if he spoke to anyone from the respondent’s credit team in relation to these issues.

57    Finally, there is a statement in the credit submission that the Agreement panel in the guarantee is to clearly state that the issued undertaking is to secure the lending obligations of BCMC to the respondent.

58    The Business Finance Agreement for the Bill Facility referred to the security provided in relation to the Bill Facility. The bank guarantee was described as follows:

Irrevocable Standby Letter of Credit from National Australia Bank Limited ABN 12 004 044 937 for the amount of 1,735,000.00 on behalf of Ottoway Engineering Pty Ltd ACN 125 531 428 to secure the lending obligations of Bluenergy CMC Pty Ltd ACN: 160 063 187 to Westpac Banking Corporation ABN 33 007 457 141.

59    The security for the Bill Facility also included certain term deposits lodged with the respondent by BCMC and a Guarantee and Indemnity to be given by Mr Millen and Ms O’Brien.

60    As I have said, there were negotiations about the proposed wording and terms of the earlier guarantee. It is necessary to set out the details because one of the applicant’s submissions is that BCMC was the respondent’s agent for the purposes of the negotiations. I deal with the agency argument below (at [179]).

61    It is convenient to start with the definition of the “Agreement” in the earlier guarantee as executed. It was as follows:

PROJECT MOBILIZATION COST PLANT, EQUIPMENT’S AND RECOURSE FOR CONTRACT BETWEEN OTTOWAY ENGINEERING PTY LTD ABN 70 125 531 428 AND BLUENERGY CMC PTY LTD ABN 33 160 063 187 EXECUTED ON THE 21ST OF AUGUST 2014 FOR THE PROVISION OF MECHANICAL & PIPING INSTALLATION & COMMISSIONING WORKS RELATING TO DEWATERING BUILDINGS 313 AND 314 CONVEYOR REPAIRS. THIS BANK GUARANTEE ISSUED TO SECURE THE LENDING OBLIGATIONS OF BLUENERGY CMC PTY LTD TO WESTPAC BANKING CORPORATION

62    The negotiations about the proposed wording and terms of the earlier guarantee were as follows.

63    On 5 September 2014, Mr Alaraj sent an email to Mr Patterson in the following terms:

I have attached the format and the wording of the NAB BG.

Ottoway will issue a conditional BG’s with an expiry date of 30 July 2015.

Agreement:

Refer to contract number BCA3-ME-WC-3256 between Ottoway Engineering and Bluenergy CMC Pty Ltd.

The advance payment will be against project mobilization cost plant, equipment’s and recourse.

Parties must agree on resolution before calling the BG.

The favouree must give 6 weeks’ notice before calling the BG.

64    On 5 September 2014, Mr Patterson sent an email to Mr Ekanayake in the following terms:

To assist with speeding up the process please see attached NAB draft BG. This is the proposed BG as security for the $1.735m loan [funds used for primary subcontractor mobilisation].

Ottoway is proposing a conditional BG:

(a)    It will refer to contract number BCA3-ME-WC-3256 between Ottoway Engineering and Bluenergy CMC Pty Ltd

(b)    Expiry date of 30 July 2015, ensures does not go past that date. Contract should be almost at an end by that time.

(c)    The advance payment will be against project mobilization cost plant, equipment’s and recourse.

(d)    Parties must agree on resolution before calling the BG.

(e)    The favouree must give 6 weeks’ notice before calling the BG.

A number or all of these conditions may not be acceptable to Westpac.

Anything else required please let me know.

65    On 8 September 2014, Mr Patterson sent an email to Mr Young in the following terms:

The only feedback I received today was the Bank is working on the BG content for the Prepayment Loan. I expect this to be resolved tomorrow based on the discussions.

Those discussions did note the content/conditions of the BG’s for that transaction and the Performance BG’s where they are proposed to include:

(a)    A termination date.

(b)    Agreement on resolution before calling the BG.

(c)    Favouree to give 6 weeks’ notice before calling the BG.

will not be accepted. The Content/conditions will be in line with the content/conditions of the BG’s already being issued to CP as outlined in the Contract.

I will be on the phone again early and will feedback to you any meaningful news.

66    Mr Young responded to Mr Patterson on 9 September 2014 advising him that the applicant would conform with the wording which the bank required. He also said the following:

We would like the guarantee to have an expiry date no later than 60 days after practical completion.

If that is not acceptable just add another month until they say yes.

It might be noted at this point that, if anything, this suggests that on this matter at least, BCMC was negotiating on behalf of the applicant, not the respondent.

67    On 11 September 2014, Mr Patterson sent to Mr Chapman a draft Bank Guarantee in the amount of $1,735,000. Mr Chapman’s preliminary view was that the proposed wording of the Bank Guarantee would “infer” that repayment of the Bill Facility was linked to the works being undertaken. Mr Chapman was not prepared to proceed on that basis and he sought advice from the respondent’s internal legal department. He wrote to Mr Ekanayake in the following terms:

Can you please send this to legal for their opinion with the deal, or a summary of the deal.

The Guarantee attached is a NAB guarantee, and the word doc is info suggested to be inserted. I have a feeling that it shouldn’t have the details of mobilization etc, as I think that will infer our interest in the actual works being completed.

68    The advice received was as follows:

Subject to the Accommodation Guarantees being in favour of Westpac Banking Corporation and as the NAB is issuing these Accommodation Guarantees at the request of Ottoway Engineering Pty Ltd they will appear as the Customer on the document, however in the Agreement Panel, it will need to clearly state that it is issued to secure the lending obligations of Bluenergy CMC Pty Ltd to Westpac, the format of the Accommodation Guarantees are acceptable to Westpac.

69    On 15 September 2014, Mr Chapman sent an email to Mr Patterson in the following terms:

Hi Don – We’ve just had Legal come back again with comment on the Ottoway Guarantee.

Comments below.

Subject to the Accommodation Guarantees being in favour of Westpac Banking Corporation and as the NAB is issuing these Accommodation Guarantees at the request of Ottoway Engineering Pty Ltd they will appear as the Customer on the document, however in the Agreement panel it will need to clearly state that it is issued to secure the lending obligations of Bluenergy CMC Pty Ltd to Westpac, the format of the Accommodation Guarantees are acceptable to Westpac.

Could you please forward to Ottoway and have them arrange their Guarantees in this format.

We’re nearly there Don.

70    On the following day, Mr Chapman spoke to BCMC which advised that the applicant “are happy to have the wording that our Legal suggested included in their Guarantee to Westpac”.

71    The applicant sought to make something of Mr Chapman’s concern about the reference to the works and the fact that, despite that concern, the reference remained in the earlier guarantee. I do not think that there is any significance in this evidence. Mr Chapman sought legal advice and then followed it. Mr Chapman’s concern does not necessarily represent the view of the respondent and, in any event, a subjective belief is irrelevant.

72    The applicant also sought to make something of an email from Mr Patterson to Mr Chapman on 16 September 2014, I think to support their case of a principal and agent relationship between the respondent and BCMC. The email is in the following terms:

Just been on the phone to Ottoway regarding the Bank Guarantees, indications are NAB, while reluctant, has already provided a Bank Guarantee in favour of Westpac for $1,735m, which contains the required wording [I expect to receive it in Subiaco early tomorrow morning]. However, with regards to the performance Bank Guarantees 2 x $867,500 they are prepared to issue the guarantees in favour of Bluenergy only, excluding the additional wording.

Knowing our end game – prepayment to Ottoway $1.735m, retrieve $1.735m from cash held as security to Sino, guarantees to Sino of $2.2698m what is the solution???

73    I do not think this correspondence adds to the applicant’s agency case. The correspondence is consistent with the banker and customer relationship which, in fact, existed between the respondent and BCMC.

74    On 18 September 2014, NAB provided a guarantee in favour of the respondent in the amount of $1,735,000. This is the earlier guarantee referred to in these reasons. As I have said, but for the amount, the earlier guarantee and the Guarantee were in relevantly identical terms. I set out the full terms of the Guarantee below (at [90]). In the circumstances, there is no need to set out the terms of the earlier guarantee.

75    On 18 September 2014, Mr Patterson sent an email to Mr Chapman attaching a copy of the bank guarantee issued by NAB in favour of the respondent in the amount of $1,735,000.

76    On 25 September 2014, Mr Millen and Ms O’Brien executed a Guarantee and Indemnity in favour of the respondent in relation to the liabilities of BCMC with a limit of $4,025,000. The Bill Facility was drawn down on 26 September 2014 and, on the same day, BCMC made the advance payment to the applicant by cheque in exchange for the earlier guarantee.

77    It is convenient to note at this point that Mr Chapman said, and I accept, that he had no contact with anybody from E & A or the applicant. The only dealing he had with a person who had a relationship with E & A or the applicant was when he attended at the offices of NAB and exchanged the earlier bank guarantee for the Guarantee. Mr Chapman said that he was aware that BCMC was entering into a subcontract with the applicant, although he was not provided with a copy of the Subcontract. Mr Chapman was not aware of the Alliance Agreement.

78    Shortly after mobilising to the site, it became apparent to the applicant that the completion of the scope of works under the Subcontract would be delayed by reason of a failure of Sino Iron to issue complete drawings and supply free issue materials. The applicant notified BCMC of the delays to the applicant’s work and the potential for claims by the applicant against BCMC for both time and money as a result of the failure to release a complete set of “for construction” drawings and free issue materials. Mr Young said that BCMC would have similar claims against Sino Iron because the Head Contract and the Subcontract were, for the most part, “back to back”. As it happened, the applicant did not make any formal claims under the Subcontract against BCMC. During the period from late September to early October 2014, the applicant continued to perform what works it could under the Subcontract despite the ongoing delays. In addition, it entered into discussions with BCMC for the termination of the Subcontract and the making of what would become the Alliance Agreement.

79    At about this time, the applicant and BCMC decided to work together to formulate claims for delay against Sino Iron which would be submitted by BCMC to Sino Iron. Mr Young described this as “the genesis of the basis of an Alliance Agreement between Ottoway and BCMC”. BCMC agreed to waive any requirements for the applicant to serve delay and variation notices whilst the Alliance Agreement was being negotiated.

80    Prior to the applicant and BCMC finalising the Alliance Agreement on 12 February 2015, the applicant and BCMC submitted claims to Sino Iron in accordance with the Subcontract, and BCMC withheld 10% of payments made to the applicant in accordance with the Advance Payment Agreement.

81    The applicant submitted its first tax invoice for works done under the Subcontract on 12 December 2014 and that invoice related to works performed during the month of September 2014 and was for the “October 2014 payment claim”.

82    Mr Young states, and I accept, that he reached an agreement with Mr Millen in or about October 2014 to the effect that the applicant and BCMC would abandon the Subcontract and enter into the Alliance Agreement and, as a result, all claims for payment were submitted by the applicant to BCMC and, in turn, by BCMC to Sino Iron on the basis of an alliance arrangement.

83    Mr Young gave evidence of what he considered at the time to be the benefits of the Alliance Agreement and the discussions that he had with Mr Millen and other representatives of BCMC about the Alliance Agreement. He states that it took some time to finalise the Alliance Agreement, but that between October 2014 and the finalisation of the Alliance Agreement on 12 February 2015, the applicant and BCMC conducted themselves as if the Alliance Agreement had already been entered into. For example, there were management meetings at which the finalisation of the Alliance Agreement was discussed and arrangements made for the submission of claims to Sino Iron on the basis of an Alliance Agreement. I accept this evidence.

84    Mr Young said that prior to the applicant entering into the Alliance Agreement on 12 February 2015, he understood that BCMC had been paying down its loan facility with the respondent. In his discussions with Mr Millen between October 2014 and February 2015, he asked that there be included in the Alliance Agreement a clause to the effect that the earlier guarantee provided in respect of the advance payment be replaced progressively by bank guarantees for lesser amounts. He said that as at February 2015, BCMC should have repaid to the respondent in excess of $500,000 from payments from Sino Iron as a result of the applicant performing the scope of works under the Subcontract. I accept this evidence.

85    On 12 February 2015, the applicant and BCMC entered into the Alliance Agreement. The background to the Alliance Agreement is sufficiently described in the recitals to the agreement which were as follows:

1.    The Project Owner has developed the largest magnetite mining and processing operation in Australia known as the Sino Iron project at Cape Preston, 100 kilometres South-West of Karratha in Western Australia’s Pilbara region, focused on delivering a world class magnetite Iron ore development. (Project).

2.    The Project Owner selected the Contract Owner to provide mechanical and piping installation and commissioning works relating to Dewatering Buildings 313 and 314 and Conveyor Repairs (the Works) and entered into a Works Contract number BCA3-ME-WE-3256 with the Contract Owner on or around 30 July 2014 to record each party’s rights and obligations in respect thereof (the Works Contract).

3.    The Contract Owner in turn outsourced the Works under the Works Contract to Participant 2 through a contract numbered SCBCA3-ME-WC-3256 dated 21 August 2014 (the Participant Contract).

4.    The Participants have since undertaken to enter into an agreement to perform their respective roles in relation to the Project in a spirit of cooperation and openness with the objective of performing the Works.

5.    The Participants have now agreed to enter into this Agreement for the performance of the Works and agree that the entering into and execution of this Agreement will automatically nullify and void the Participant Contract.

6.    The Participants are committed to performing their respective roles and achieving the Project Owner’s requirements in the carrying out of the Project and the performance of the Works, in return for the payments set out in the Works Contract and with a view to:

a.    performing the Works and meeting the requirements of the Works Contract; and

b.    meeting the Agreement Objective.

86    The agreement provided for progress payments from the owner to be used for the reimbursement of costs and corporate overheads (as defined) and to the extent the payments were insufficient, a “painshare” arrangement and to the extent there was a surplus, a “gainshare” arrangement.

87    Clause 14.7, which describes the applicant as Participant 2 and BCMC as Participant 1, dealt with repayment of the advance payment. It is as follows:

14.7    Repayment of Advance

Participant 2 agrees to repay the cash advance payment of $1,750,000.00 made by Participant 1 to Participant 2 (Advance) by way of distribution to Participant 1 of the first 10% of Participant 2’s portion of every progress claim made by Participant 2 until such time as the Advance has been repaid in full. For the avoidance of doubt, this amount is in addition to any other amounts to which Participant 1 is entitled to receive pursuant to this clause 14.

Participant 1 agrees to arrange for Participant 2’s portion of the bank guarantee provided in respect of the Advance to be reduced by the amount of $250,000.00 for every $250,000.00 repayment milestone met by Participant 2 in repaying the Advance (that is, Participant 1 agrees to arrange for the reduction of Participant 2’s portion of the bank guarantee in seven equal instalments whenever a cumulative $250,000 portion of the Advance has been repaid by Participant 2 to Participant 1, until the value of the Advance has been reduced to $0).

88    Clause 24.1 dealt with security and was in the following terms:

24.1    Security

(a)    As at the date of this Agreement, Participant 1 has provided an irrevocable and unconditional bank guarantee in favour of the Project Owner in the amount of $2,269,800.00 (Original Guarantee) on the terms and conditions of the Works Contract as security for performance by the Participants of their respective terms, covenants and responsibilities under this Agreement.

(b)    The Participants acknowledge and agree that all security required to be provided by them under this Agreement will at all times be provided by each Participant in the following proportions:

(1)    Participant 1 – 50% and

(2)    Participant 2 – 50%.

(c)    In recognition of Participant 1 providing the Original Guarantee, Participant 2 agrees, within 2 Business Days of the execution of this Agreement, to provide a Bank Guarantee in favour of Participant 1 for the sum of $1,134,900.00 as security for the performance of Participant 2’s obligation under this Agreement.

89    BCMC and the applicant subsequently agreed that the applicant would instruct NAB to issue on its behalf two performance guarantees in favour of the respondent. NAB issued two guarantees each in the amount of $567,450 in favour of the respondent, one to be released within seven business days of practical completion and the other to be released within seven business days of the expiration of the defects liability period.

90    On 12 June 2015, the applicant caused NAB to provide the Guarantee in the amount of $1,000,000 to the respondent as a replacement for the earlier guarantee in the sum of $1,735,000. I set it out in full, save and except for the provision of the date and the execution clause:

National Australia Bank Limited (“Bank”)

ABN 12 004 044 937

Bank Guarantee

    Guarantee No : 24705739

    Ref    :852967227 - 860556674

To:

WESTPAC BANKING CORPORATION

    A.C.N./A.R.B.N./ABN 33 007 457 141

(The Beneficiary)

For:

OTTOWAY ENGINEERING PTY LTD

    A.C.N./A.R.B.N./ABN 125531428

(The Customer)

Agreement:

PROJECT MOBILIZATION COST PLANT, EQUIPMENT’S AND RECOURSE FOR CONTRACT BETWEEN OTTOWAY ENGINEERING PTY LTD ABN 70 125 531 428 AND BLUENERGY CMC PTY LTD ABN 33 160 063 187 EXECUTED ON THE 21ST OF AUGUST 2014 FOR THE PROVISION OF MECHANICAL & PIPING INSTALLATION & COMMISSIONING WORKS RELATING TO DEWATERING BUILDINGS 313 AND 314 CONVEYOR REPAIRS. THIS BANK GUARANTEE ISSUED TO SECURE THE LENDING OBLIGATIONS OF BLUENERGY CMC PTY LTD TO WESTPAC BANKING CORPORATION

Amount: 1,000,000 Currency of AUSTRALIAN DOLLARS

Amount in words: ONE MILLION DOLLARS

1.    In consideration of the Beneficiary agreeing at the request of the Customer and the Bank to accept this guarantee in connection with the agreement, the Bank undertakes to pay the Beneficiary an amount or amounts not exceeding the Amount in total.

2.    Payment of the Amount or any part or parts of the Amount will be made by the Bank to the Beneficiary:

a)    upon the Bank receiving at any NAB branch located within Australia while this guarantee remains in force an unconditional written demand from the Beneficiary accompanied by this guarantee; and

b)    without reference to the Customer; and

c)    despite any notice given to the Bank by the Customer not to pay the Beneficiary any moneys payable under this guarantee; and

d)    irrespective of the performance or non-performance by the Customer or the Beneficiary of the Agreement in any respect; and

e)    with no obligation on the Bank to enquire as to the performance or non-performance of the Agreement in any respect by the customer or the Beneficiary; and

f)    with no obligation on the bank to enquire as to the correctness or validity of any demand pursuant to sub-clause 2(a) of this clause.

g)    at the Bank’s election in cash, bank cheque or funds transfer into the Beneficiary’s nominated account.

3.    Where a demand and payment is made pursuant to clause 2, for a sum that is less than the Amount, the Bank will issue to the Beneficiary a replacement guarantee for the balance of the Amount then remaining, after such part payment or payments.

4.    The Bank’s liability under this guarantee is not affected or discharged in any way by any variation of the Agreement or by any extension of time or other forbearance on the part of the Beneficiary or the Customer to the other.

5.    The Bank may terminate this guarantee at any time upon payment to the Beneficiary of the Amount or the balance of the Amount remaining after any part payment of the amount, or such lesser amount as the Beneficiary requires.

6.    If two or more persons are named as the Beneficiary, this guarantee takes effect for the benefit of them jointly and a demand under this guarantee by any one or more of them is deemed to be a demand by both or all of them jointly. Payment by the Bank under this guarantee to any one or more of them discharges this guarantee to the extent of the amount so paid.

7.    The benefit of this guarantee is not assignable by the Beneficiary.

8.    This guarantee continues in force until the earliest of the following occurs:

a)    this guarantee is returned to the Bank at any NAB branch located within Australia (other than for a payment in accordance with clause 2(a));

b)    notification in writing has been received by the Bank at any NAB branch located within Australia from the Beneficiary that this guarantee is no longer required;

c)    payment is made under clause 2 or 5 to the Beneficiary by the Bank of the whole of the Amount or the balance of the Amount remaining after any part payment or payments of the Amount, or such lesser amount as the Beneficiary requires;

d)    the close of business on the Termination Date (if any).

9.    In the events of clause 8(b), (c) & (d), the Beneficiary must return this guarantee to the Bank at any NAB branch located within Australia.

10.    This guarantee is governed by and is to be construed in accordance with the laws of the place where it is executed by the Bank.

91    It may be noted that the Guarantee refers to the Subcontract even though by then it had been replaced by the Alliance Agreement. Although the applicant sought to make something of this in its Amended Statement of Claim, it did not do so at trial. No doubt it had in mind that if it rendered the reference to the contract between it and BCMC ineffective, it would leave only the reference to the financial arrangements between the respondent and BCMC.

92    Two days prior to the execution of the Guarantee, that is to say, on or about 10 June 2015, Mr Patterson sent an email to Mr Alaraj with the following advice:

Note the balance of the loan account stands at $989,268.12, after last payment of $44,007.68 from the CPM April Advance Payment of $550,096.00.

93    Mr Chapman met a representative of NAB’s corporate team in Perth to exchange the earlier guarantee for the Guarantee.

94    The applicant continued to perform the scope of works and it received payment for those works from BCMC as an agreed percentage of progress payments made by Sino Iron to BCMC. Mr Young said that from in or about October 2014, the applicant and BCMC adopted a collaborative approach to the preparation of payment claims for submission to Sino Iron. The practice was that at the end of each month, the applicant’s project managers who were on site communicated the total cost of works performed by the applicant and the percentage of works completed to Mr Alaraj to enable him to communicate the information to Mr Patterson of BCMC. Based on that information, BCMC submitted progress claims to Sino Iron on behalf of BCMC and the applicant. Mr Young referred to cl 14.2 of the Alliance Agreement and said that the applicant advised BCMC of its actual costs incurred for each payment period. However, BCMC did not always inform the applicant as to its costs. Based on the profit distribution arrangements, the applicant was entitled to receive 80% of any income from Sino Iron. Mr Young said that the parties agreed in circumstances where the applicant was not aware of the costs incurred by BCMC that the applicant should be paid 80% of any recoveries from Sino Iron. This general approach operated until BCMC received monies from Sino Iron in late April 2015 at which time BCMC agreed to pay the applicant amounts determined by adopting a broad axe approach because of a significant shortfall of costs recoveries by the applicant and BCMC’s failure to supply accurate particulars of their costs. BCMC made lump sum payments to the applicant of $2,500,000 for the February 2015 progress claim and $1,600,000 for the March 2015 progress claim.

95    Further difficulties arose in the relationship between the applicant and BCMC. Mr Young described the difficulties as the applicant not being paid and carrying unpaid costs and BCMC’s employees not adopting a collaborative approach. Whatever the difficulties, they led to the termination of the Alliance Agreement and the entry into of a Labour Hire Agreement for the Dewatering Building 314 works. This came about as a result of meetings between Mr Young and Mr Millen on 30 June 2015, 1 July 2015 and 10 July 2015 respectively. Minutes of the meeting held on 10 July 2015 include the following:

CONDITION 10        PROGRESS CLAIM FINALISATION

PROPOSED

Final progress payments to be progressed as quickly as practical. Final payments to be adjusted for historical upfront advance payments. In the event final payments (June, July and outstanding claims) does not repay these advanced payments, advance payment to be continued to be reduced at 10% rate against the labour hire use. Bank guarantee for the advance to be continued to be held in this instance.

96    From 13 August 2015, the applicant and BCMC both performed the project works in accordance with the terms and conditions agreed on 10 July 2015 and the labour schedule of rates which Mr Young had forwarded to BCMC. The parties no longer had regard to the Alliance Agreement and all labour, plant and equipment supplied to BCMC, including hire of approximately 25 personnel from the applicant until 16 November 2015, were paid in accordance with the labour schedule of rates. The effect of what the parties agreed was that the advance payment reduction of 10% would continue under the Labour Hire Agreement. The applicant demobilised from the site on 16 November 2015 “as a result of the failure of BCMC to make payment of outstanding invoices to the applicant and resolve issues in dispute”.

97    On 23 December 2015, the applicant served a Creditor’s Statutory Demand for Payment of Debt dated 22 December 2015 on BCMC in the amount of $1,455,794.03 (Corporations Act 2001 (Cth), Part 5.4). BCMC did not make any payment to the applicant. On 10 February 2016, the applicant commenced winding up proceedings against BCMC. On 22 March 2016, which was the day before the winding up proceedings were listed for hearing, BCMC resolved to appoint Mr Kim Strickland and Mr David Hurt as joint and voluntary administrators of BCMC. On 30 March 2016, Mr Young became aware that the respondent intended to call upon the Guarantee. He received a telephone call from his bank representative at NAB asking which bank account he wished the draw to be charged against. On 30 March 2016, Mr Young received from NAB a copy of an unconditional written demand from the respondent to NAB dated 29 March 2016 demanding immediate repayment of the Guarantee in the amount of $858,158.96 to be substituted with a Bank Guarantee of $141,841.04.

98    On 5 April 2016, Mr Young attended the first meeting of creditors of BCMC held at the offices of WA Insolvency Solutions in Perth. Mr Young said that at that meeting, the administrators informed the meeting that BCMC had ceased trading and Mr Patterson added that there were only two employees remaining in February 2016. The administrators informed the meeting that BCMC had substantial creditors exceeding $20,000,000. On 13 April 2016, an order was made in the winding up proceeding that BCMC be wound up in insolvency and that Mr Michael Joseph Ryan be appointed as liquidator of BCMC. On 14 April 2016, Mr Martin John, Mr Dermott McVeigh and Mr Andrew Smith of Ferrier Hodgson were appointed as Receivers and Managers of BCMC by Bluenergy Capital Pty Ltd (now Ecap Finance Pty Ltd) pursuant to a General Security Agreement entered into on 5 November 2015.

The Facts in connection with the Two Extensions of the Term of the Loan by the Respondent to BCMC

99    I will come to the detail shortly, but it is helpful to set out first an overview of the two extensions of the term of the Bill Facility.

100    There is some confusion about the date upon which the term of the Bill Facility expired, but it is immaterial. The respondent’s records indicated that it expired on 1 October 2015. There is a credit submission for a three month extension of the Bill Facility to 1 January 2016. The extension was approved by Mr Chapman on 17 September 2015 and a Business Finance Agreement was sent to BCMC on 18 September 2015 and executed by the company on 16 October 2015. In addition, on 16 October 2015, the guarantors (Mr Millen and Ms O’Brien) consented to the extension. The respondent did not approach the applicant about the extension.

101    The first extension expired on 1 January 2016 and, on or about 29 January 2016, the respondent approved a further extension of the Bill Facility to 31 March 2016. That approval was given by the credit section of the respondent as Mr Chapman did not have the authority to grant a second extension. The approval was given by Mr Scott Thompson. The respondent offered the second extension on 1 February 2016 and BCMC executed a Business Finance Agreement on 4 February 2016. In addition, on 4 February 2016, the guarantors (Mr Millen and Ms O’Brien) consented to the extension. The respondent did not approach the applicant about the extension.

102    I turn now to examine the relevant events in detail.

103    On 31 August 2015, Mr Chapman sent an email to Mr Patterson advising him that the Bill Facility was due to be repaid on the following day. On 1 September 2015, Mr Patterson sent an email to Mr Chapman seeking an extension of the period for the repayment of the Bill Facility. In that email, Mr Patterson said the following:

In regards to the loan, as far as I am aware the NAB Bank Guarantee [recently reduced to $1m value from $1.735m] has no end date and supports the Loan until Project end. The project at this stage is due to be completed end of October 2015. It is likely the balance will continue to be reduced during that time, if a balance then remains it will be finalised at project end.

104    Mr Chapman said that he approved the extension because it was consistent with the terms on which the Bill Facility was initially approved, namely, that it would be repaid on completion of the project. I accept that evidence.

105    On 26 November 2015, Mr Chapman received a copy of an email in relation to a new account in the name of Bluenergy Global. Mr Chapman did not discuss with Mr Patterson or anyone else why the account was being opened. It was not material to the management of his portfolio because it was to operate as a credit only account. Mr Chapman said that he can recall a discussion with Mr Patterson about Bluenergy Global in late 2015 of a general nature relating to the possibility that Bluenergy Global might be used as a vehicle to acquire an engineering business. The discussion did not include any reference to the respondent providing facilities to assist in that acquisition. Mr Chapman said that he was aware that at various times the respondent opened credit only accounts for a variety of companies related to BCMC. He did not have a discussion with anyone as to why those accounts were being opened, or what business those companies were pursuing. I accept that evidence.

106    On 4 January 2016, Mr Chapman sent an email to Mr Patterson and Mr Millen in the following terms:

The following loan in the name of Bluenergy CMC is maturing today and requires payment in full. We had previously extended this for a 3 month period beyond its original maturity date, however, we are unable to extend this further.

Could you please arrange transfer of sufficient funds to arrange its clearance by the close of business today.

BSB [number given] Account Number [number given]. Balance requiring transfer is $854,021.53.

107    Mr Patterson responded in the following terms:

As you are aware the purpose of the Loan was to enable Ottoway Engineering Pty Ltd to coordinate pre-payment funds assisting with mobilisation to site for works on a Contract where they took on the role of subcontractor to Bluenergy CMC.

The Loan was to be repaid by deduction of amounts from each of their Contract Progress Claims. With the task just completed and Ottoway Engineering’s performance not able to complete repayment we are looking to Westpac to exercise on their security being an unconditional Bank Guarantee drawn on the NAB Bank in favour of Westpac.

The Bank Guarantee for the sum of $1m to be utilised to meet the outstanding debt due to Westpac in the first instance, including fees and charges with the balance to Bluenergy Business One account 422412.

Bluenergy CMC is not currently in a position to consider paying out the Loan.

It may be noted that in this correspondence BCMC was asking the respondent to enforce the Guarantee so as to clear the debt and to pay the balance to it.

108    On 5 January 2016, Mr Chapman sent Mr Patterson an email in the following terms:

I had seen that there were funds in the other account and assumed there was sufficient to clear the loan now.

If those funds are not available for the loan reduction, then going down the line of acting on our security and “calling on” another banks guarantee is quite a serious process and normally entails a legal recovery process which could impact on Bluenergy’s standing with the bank.

I will need to engage our credit team and legal team if this is the case.

When do you foresee that the loan will be cleared in full if I can have the bank agree to extend the term of the loan rather than going through that process? Or are you saying that the loan will not be able to be repaid due to Ottoways performance at any point, and the loan will be in default.

109    Mr Chapman spoke to Mr Patterson about his suggestion that the respondent make a call on the Guarantee. He said to Mr Patterson that that was not a step that was lightly undertaken and that the respondent’s preference was to give its customer time to repay the debt rather than enforce its security. Mr Chapman also asked Mr Patterson about the credit funds in BCMC’s trading account and Mr Patterson advised him that those funds were required to pay other suppliers in relation to the project and it was not available to repay the Bill Facility. Mr Chapman said he did not discuss with Mr Patterson BCMC’s dealings with the applicant or the applicant’s performance in respect of the project. Mr Patterson did not advise him that there was a dispute between BCMC and the applicant. Mr Patterson advised Mr Chapman that he would contact him in relation to the issue of repayment of the Bill Facility when he had considered it further. I accept that evidence.

110    On or about 8 January 2016, the respondent renewed three term deposits it held for BCMC until 14 January 2016.

111    On 11 January 2016, Mr Chapman met with Mr Patterson. I accept Mr Chapman’s evidence about his conversation with Mr Patterson. Mr Patterson advised Mr Chapman of the following:

(1)    there was a dispute between BCMC and the applicant in relation to the contract between those entities concerning the project;

(2)    the original contract between BCMC and the applicant concerned the construction of two buildings;

(3)    the applicant substantially controlled the construction of the first building, but a substantial dispute arose between the applicant and Sino Iron in relation to cost overruns in respect of that building and the time within which construction was being completed;

(4)    in light of that dispute, BCMC took over construction of the second building, that resulted in a substantial reduction to the costs and it was completed in a more timely manner;

(5)    the applicant was making a claim against BCMC in respect of the work it had undertaken and BCMC was making a claim against the applicant for the profits it had lost as a result of the applicant’s conduct;

(6)    BCMC was of the view that the applicant would owe it many millions of dollars;

(7)    BCMC no longer proposed that the respondent should call on the Guarantee to repay the Bill Facility as Mr Patterson did not want that to impact on BCMC’s discussions with the applicant in relation to the resolution of the dispute;

(8)    the project had not been finalised; and

(9)    he expected that the Bill Facility would be repaid on finalisation of the project and the dispute, but he would contact Mr Chapman about that issue in the near future.

112    Mr Chapman said that until the meeting of 11 January 2016, he was not aware of any dispute between BCMC and the applicant and he was not advised by Mr Patterson or anyone else that the applicant had served a Statutory Demand on BCMC. I think that he was aware that there was a dispute between BCMC and the applicant about a week earlier when he received Mr Patterson’s email of 4 January 2016 and that his evidence-in-chief is incorrect to that extent. I accept that he was not told about the Statutory Demand. At that time, Mr Chapman was of the view that as the applicant was part of a publicly listed group that had significant operations, it could and would look after its own interests. I accept that that was his view.

113    Mr Patterson sent an email to Mr Chapman following the meeting. The email referred to the cancellation of the credit card facilities made available to BCMC and sought a credit facility in the name of Bluenergy Global. It also stated that Mr Patterson will respond shortly “on the outstanding loan in Bluenergy CMC Pty Ltd”. The email was in the following terms:

Following meeting this morning, a couple of requests:

1.    For the 1st of the Term Deposits of $567,500 to be released [together with one of the NAB Bank Guarantees for the same amount in favour of Westpac], we are expecting to receive our Practical Completion Certificates this week, as we lodge our final Claim on the Project. Once the Practical Completion Certificates are received it generally takes 3-4 working days to retrieve the Bank Guarantee from Citic Pacific. At this point in time if we can roll the TWO $567,500 Term Deposits for a further 14 days, at the end of this time we expect to seek release of one Term Deposit [together with one of the Bank Guarantees provided by NAB in favour of the Westpac] and rollover the other Term Deposit to a date into the future [given the remaining Bank Guarantee in favour of Citic Pacific is not due to be released until 12 months after Practical Completion].

2.    In regards to the other Term Deposit in support of credit card facilities in Bluenergy CMC Pty Ltd, please note we wish to cancel all three cards and have the Term Deposit proceeds returned to the trading account 422412. Before they are cancelled please arrange for two new cards in the name of Bluenergy Global JV Pty Ltd – one designated Office [limit $5,000] and the other designated Troy Millen [limit $15,000]. Same basis of security, let me know when ready and we will provide from Bluenergy Global JV Pty Ltd.

3.    Please arrange a new Debit Card for Kelly and add to the Millen personal online profile. We will be arranging a weekly deposit to that card when in operation [let me know the account number when available].

4.    I will respond back to you shortly on the outstanding Loan in Bluenergy CMC Pty Ltd.

114    On 13 January 2016, Mr Patterson sent an email to Mr Chapman in the following terms:

In regards to the Loan account, at this point we are preparing to submit our last Progress Claim [this week] for the Project.

We are also working through the “wrap up” of the Project including – documentation, manuals, commercial arrangements, supplier claims, demobilisation, equipment and inventory checks etc. which will take a little time to complete.

Given the basis on which the Loan Account was provided and its purpose being integral to the Contract and the Contract conclusion, we seek an extension of the Loan period until end of February 2016.

115    On 19 January 2016, Mr Chapman sent an email to Mr Ekanayake asking him to compile a credit submission in respect of an extension to the term of the Bill Facility for a further three months. The email states the following:

Clients have advised that the loan account was due to be repaid form (sic) the progress payment relating to a contract with Sino Iron.

Clients are also working through the “wrap up” of the Project including – documentation, manuals, commercial arrangements, supplier claims, demobilisation, equipment and inventory checks etc. which will take a little time to complete.

Given the basis on which the Loan Account was provided and its purpose being integral to the Contract and the Contract conclusion, we seek an extension of the Loan period until 31/3/2016.

Security consists of a Bank Guarantee issued on NAB which we have confirmed has no expiry date and can still be relied upon.

116    On or about 20 January 2016, Mr Patterson, on behalf of Bluenergy Global, sought two performance guarantees ($125,260 per guarantee) in favour of Sino Iron in relation to a contract for the “Supply and Installation of Raw Water Pipeline from Raw Water Pond to Cooling Water town contract Number BCA3-P1-WC-3272”.

117    CITIC certified the works as practically complete on 16 January 2016 and BCMC was seeking the return of performance guarantees effective to practical completion. The respondent was aware at the time it granted the second extension that the project had reached practical completion on 16 January 2016.

118    Late in January 2016, there was correspondence about another Bluenergy company, Bluenergy Assist Management Pty Ltd. Furthermore, at this time, BCMC was arranging the return of the respondent’s performance guarantee in favour of Sino Iron with a view to that guarantee being cancelled and the term deposit lodged by BCMC with the respondent as security for the respondent’s performance guarantee being released to BCMC.

119    It seems clear from the credit submission prepared for the second extension that this term deposit was part of the security for the repayment of the Bill Facility as was, as I have previously said, a Guarantee and Indemnity by Ms O’Brien and Mr Millen.

120    The description of the “deal” in the credit submission includes the following:

This loan is due to have been repaid in full on 25/9/2015 and was previously extended under SRM CAL 2 for a period of 3 months to 31/12/2016. The facility has now a (sic) matured and a further extension is requested.

Clients have advised that the loan account was due to be repaid form (sic) the progress payment relating to a contract with Sino Iron, however was not paid due to some disputes which has resulted between contractors and project managers which is required to be rectified prior to finalising final payments.

Clients are now working through the “wrap up” of the Project including – documentation, manuals, commercial arrangements, supplier claims, demobilisation, equipment and inventory checks etc. which will take a little time to complete to finalise matters relating to the project.

Given the basis on which the Loan Account was provided and its purpose being integral to the Contract and the Contract conclusion, we seek an extension of the Loan period until 31/3/2016.

Security consists of a Bank Guarantee issued on NAB which we have confirmed has no expiry date and can still be relied upon.

In relation to other facilities, one GX of $1,134 is expected to be given back to Westpac and facility cancelled in the next 2 weeks. The other GX of $1,134 will remain and relates to ongoing maintenance program. Discussions have been held with CCM Adrian Tingey, who is aware of this matured loan and is supportive of the extension of facility for a further 3 months to mature 31/03/2016.

121    The decision comments made by Mr Thompson include the following:

Evaluation Notes:

•    Client created Bluenergy Global JV due to ongoing dispute between Bluenergy CMC and Ottoway Engineering (who is the principal contractor on the Sino Iron project) with precautionary steps taken to divide assets between the two entities while they are completing the contractual obligations of the project.

•    Approval provided and extension of BBBL (Bluenergy CMC) on basis that the performance guarantee issued by nab in support of the borrowings have no expiration date and can continue to be relied upon.

122    In relation to these matters, Mr Chapman said that he did not have a discussion with Mr Patterson about a division of assets. He said that if he had had a discussion with Mr Patterson to that effect, “it is a matter that would have been of concern to me and I would have discussed it with an employee of Westpac’s credit team”. Mr Chapman said that he did not read the comments in the credit submission and that it was Mr Ekanayake who submitted the submission to the credit section of the respondent. I do not accept this evidence for reasons set out below (at [210]).

123    On 4 February 2016, Mr Chapman met with Mr Patterson, Mr Millen and Mr Rodney Carter. He did so in order to collect documents signed on behalf of BCMC and Bluenergy Global. He said that there was no discussion during the course of the meeting about the dispute between BCMC and the applicant or how BCMC would repay the Bill Facility. At the meeting he also collected one of the Banker’s Undertakings and he subsequently instructed Mr Hoare to arrange for cancellation of that Banker’s Undertaking and to return to NAB one of the performance guarantees and to return to BCMC one of the term deposits in the amount of approximately $570,000. The term deposit was returned to BCMC on 19 February 2016. Mr Chapman says that he does not recall any other discussions he had with Mr Patterson or anyone else from BCMC concerning repayment of the Bill Facility on and after 4 January 2016. Mr Chapman said that he was aware that the respondent issued Bank Guarantees at the request of Bluenergy Global after it became a customer of the bank, although he was not involved in those transactions to any great extent. He said that as the security was offered in the form of cash backed security, Mr Hoare predominantly dealt with those facilities. The respondent did issue two bank guarantees at the request of Bluenergy Global on or about 1 February 2016. He said that he was told by Mr Patterson at the February meeting that BCMC was a special purpose vehicle for the purposes of the project and once it was finalised, BCMC would be closed down. On the basis of his dealings with BCMC to that point, Mr Chapman understood that its only business activity concerned the project.

124    Mr Chapman was cross-examined at length about this meeting. He said that he thought that the meeting was a day or two before 9 February 2016. I find that the meeting took place on 4 February 2016.

125    Mr Chapman understood Mr Millen to be the “main driving force” behind BCMC, although he was not a director of the company. As I have said, Ms O’Brien was the director of BCMC. He understood Ms O’Brien to be Mr Millen’s wife.

126    Mr Chapman knew Mr Carter because Mr Carter used to be a client of his when Mr Chapman was a bank officer at Bankwest. He understood that Mr Carter and Mr Millen were associates. He thought that Mr Carter had some involvement with Bluenergy Global, but he was not aware of the nature of that involvement.

127    Mr Chapman said that he understood that a company called Esplanade Holdings was the trustee of Mr Carter’s family trust. He said that he had heard of a company called Empire Hotels and that it had some association with Mr Carter, but he did not know the nature of that association.

128    During the meeting it was made clear to Mr Chapman by Mr Patterson or Mr Millen, or both, that they did not want BCMC supporting, by a General Security Agreement, the guarantees to be issued by the respondent at the request of Bluenergy Global.

129    Mr Chapman was also given the following information: there is no feasible connection between BCMC and Bluenergy Global; BCMC had now completed the project; BCMC was created as a special purpose vehicle; and BCMC would be closed down shortly.

130    The draft credit submission prepared by Mr Hoare and amended by Mr Chapman on 9 February 2016 confirms these matters. The credit submission relates to the release of two term deposits held by the respondent on behalf of BCMC (one for $20,000 and the other for $569,866.16), a performance guarantee to be provided to Sino Iron by the respondent at the request of Bluenergy Global for $171,867, and the release of security to be provided by BCMC in relation to facilities (being two guarantees in the amount of $125,260) offered to Bluenergy Global.

131    As to the return of one of the term deposits in the amount of $20,000, the proposal was for the reallocation of the term deposit from a facility used by BCMC to a facility to be used by Bluenergy Global. I refer to Mr Patterson’s email to Mr Chapman dated 11 January 2016 (see [113] above). Bluenergy Global is described in the credit submission as “the main trading entity”.

132    As to the provision of a performance guarantee in favour of Sino Iron by the respondent at the request of Bluenergy Global, two matters should be noted. First, the performance guarantee relates to a new contract between Sino Iron and Bluenergy Global (not BCMC) for the construction of a raw water pipeline (see [116] above). Secondly, at the request of Mr Millen or Mr Patterson, Mr Chapman removed one of the securities being proposed for the facility, being (as per Mr Hoare’s draft submission):

Guarantee by Bluenergy CMC Pty Ltd supported by a by GSA Bluenergy CMC Pty Ltd over all assets and uncalled capital.

133    As to the release of the security to be provided by BCMC in relation to performance guarantees to be issued by the respondent at the request of Bluenergy Global, Mr Chapman was advised by Mr Millen or Mr Patterson that there is no feasible connection between BCMC and Bluenergy Global “with differing directors” and that BCMC had now completed the project it was created for as a special purpose vehicle and would be closed down shortly. Mr Chapman was told those matters at the meeting on 4 February 2016.

134    The bank statements for BCMC’s operating account were in evidence. Those statements show payments into the account of large amounts from Sino Iron late in 2015 and early 2016 and payments out of the account of large amounts to Esplanade Holdings in January and February 2016. As to the latter, the details are as follows:

135    I accept Mr Chapman’s evidence that he did not see these entries at the time. On the entries being brought to his attention in cross-examination, he agreed that they looked “strange”. I also accept Mr Chapman’s evidence that when he checked the account balance on or about 4 January 2016 (as referred to in his email dated 5 January 2016, see [108] above), that is all he checked, that is to say, the account balance.

136    On 10 March 2016, Mr Chapman was advised by another employee of the respondent, that the applicant had commenced winding up proceedings against BCMC. Although he was aware that there was a dispute between BCMC and the applicant, this was the first occasion he became aware of action being taken against BCMC by the applicant.

137    There is no mention in the credit submission for the Bill Facility in September 2014 of BCMC being a special purpose vehicle. Rather, as I have said, it is suggested that BCMC is the major operating company.

138    Thereafter, Bluenergy Global was the company in the Bluenergy Group which had dealings with the respondent.

The Repayment by BCMC of the Bill Facility and the Repayment by the Applicant of the Advance Payment

139    With respect to the repayment by BCMC of the Bill Facility, I find as follows:

(1)    As at the time the earlier guarantee was replaced by the Guarantee, the amount under the Bill Facility owing was in the order of $989,000.

(2)    As at about 29 March 2016, the amount owing under the Bill Facility was $858,158.96.

I did not understand either of these figures to be in dispute.

140    There is a dispute between the parties as to the amount the applicant has repaid under the Advance Payment Agreement.

141    The parties agreed that the accounting records as between the applicant and BCMC show a “repayment” of $1,202,379.29 by the applicant to BCMC and that was done while the parties were operating under the Subcontract and the Alliance Agreement. The respondent does not agree that that amount can be taken to have been repaid under the Advance Payment Agreement because all payments under the Alliance Agreement were on account and subject to an audit. That audit has not been carried out.

142    The minutes of the meeting which dealt with the termination of the Alliance Agreement (i.e., the minutes of 10 July 2015) indicate that the parties agreed that there would be an audit of dealings under the Alliance Agreement and that was Mr Young’s evidence. He said that up to 31 July 2015, “a proper interpretation of our contractual entitlements would be, … a full audit would be done under the alliance contract”. He agreed that an audit would be a long and costly exercise which has not been undertaken.

143    In essence, the applicant responds by pointing out that it has not been paid on its labour hire invoicing to the extent of approximately $2.5 million and, in addition, there are deductions of hundreds of thousands of dollars and a delay and disruption claim in the order of $10 million.

144    The parties agreed that the applicant “repaid” $81,750.59 under the Advance Payment Agreement while operating under the Labour Hire Agreement. This was an amount deducted by BCMC from a payment made to the applicant.

145    The applicant submits that the matter of repayment can be dealt with simply and without reference to the claims identified by Mr Young. The balance of $450,870.12 is easily erased by, at the very least, the debt acknowledged by the director of BCMC in the Report As To Affairs of $1,663,885.53, if not by the larger amount identified by Mr Young as due and owing.

146    It is difficult to reconcile the amounts referred to in Mr Young’s trial affidavit, the amounts in his affidavit under s 459E(3) of the Corporations Act and the amount stated by BCMC’s director in the Report as to Affairs.

147    I am prepared to find on the evidence before this Court that on a proper accounting, BCMC would be indebted to the applicant in a substantial amount. Despite the absence of an audit, I am prepared to find, with respect to the payments made by BCMC to the applicant under the Subcontract, the Alliance Agreement and the Labour Hire Agreement, an amount of $1,284,129.88 was repaid by the applicant to BCMC under the Advance Payment Agreement.

148    That leaves for consideration an amount of $450,870.12. I am prepared to find that there has been a repayment by the applicant to BCMC in respect of the 10% of labour hire services provided by the applicant to BCMC, but not paid for by BCMC. There seem to be two possible amounts for this item on the evidence; an amount in the region of $260,000 (as per the table in paragraph 107 of Mr Young’s trial affidavit), and an amount of just under $150,000 (as per the table in paragraph 8 of Mr Young’s affidavit under s 459E(3) of the Corporations Act). As the onus is on the applicant to establish this matter, I would take the lower of the two amounts.

149    Either way, there is an amount left to be dealt with by reference to the applicant’s submission that it has a number of claims against BCMC which mean that it has no existing liability to BCMC under the Advance Payment Agreement. On the evidence before me, I think that that is correct.

150    The respondent submitted that the fact that the applicant might have cross-claims against BCMC which might result in a balance in favour of the applicant, does not mean that there has been actual repayment of the full amount of the advance payment for the purpose of the Guarantee. The argument was not developed to any extent and the applicant did not respond to it. If the argument is correct, it would mean on my findings that the applicant would not have repaid approximately $300,000 under the Advance Payment Agreement even though I am satisfied on the evidence before me that on full accounting of claims and cross-claims between the applicant and BCMC, it would be found that BCMC was substantially indebted to the applicant. I do not propose to decide the point because, for the reasons I will give, the applicant’s case fails even on the assumption that it has fully repaid the advance payment to BCMC.

ANALYSIS

151    The main issues are the proper construction of the Guarantee and whether the respondent was guilty of misleading and deceptive conduct in relation to the execution of the earlier guarantee and whether, in connection with the two extensions of the term of the Bill Facility, the respondent should be precluded from enforcing the Guarantee by reason of unconscionable conduct or fraud.

The Proper Construction of the Guarantee

152    A key issue in this case is the proper construction of the Guarantee.

153    The applicant puts submissions in the alternative. Its primary submission is that the Guarantee is a performance bond or demand guarantee which secures its obligations to BCMC under the Advance Payment Agreement. It has performed those obligations, that is, it has repaid the advance payment and, in those circumstances, it is unconscionable for the respondent to call on the Guarantee. The applicant’s secondary submission is that if, contrary to its primary submission, the Guarantee secures BCMC’s obligations to the respondent, then the Guarantee is a contract of suretyship or an agreement analogous to a contract of suretyship. The applicant’s obligations under the Guarantee were discharged by the respondent’s conduct in extending the time for repayment on two occasions of the main or principal contract (i.e., the Bill Facility) without reference to the applicant.

154    The respondent’s submission is that the Guarantee is a performance bond or demand guarantee and there is no room for an inquiry about the nature of the agreement it secures. In the alternative, if it is necessary to consider the nature of the agreement it secures, then it is the agreements between BCMC and the respondent under which the former undertook repayment obligations to the latter.

155    The title of the document as Bank Guarantee is of marginal or no significance. The true nature of the document is to be ascertained from its terms and conditions. As French CJ said in Simic & Ors v New South Wales Land and Housing Corporation & Ors [2016] HCA 47; (2016) 91 ALJR 108 (Simic) at [2], performance bonds are sometimes misleadingly called “bank guarantees”. A similar point was made by Tuckey LJ in Gold Coast Ltd v Caja De Ahorros Del Mediterraneo and Others [2002] 1 Lloyd’s Rep 617 (Gold Coast) at [21] (see also Wood Hall Limited v The Pipeline Authority and Another (1979) 141 CLR 443 (Wood Hall) at 445 per Barwick CJ). It is the language of the document itself, not what it is called which is important.

156    The Guarantee was provided in the context of two construction contracts. There was the Head Contract and the Subcontract. In connection with the Subcontract, there was also the side agreement in the form of the Advance Payment Agreement. The applicant, which was the subcontractor, caused its bank to provide the Guarantee not to the main contractor, but to the main contractor’s bank. This is an unusual feature of the Guarantee, assuming it is a performance bond or a demand guarantee. Ordinarily in circumstances such as the present, the beneficiary or favouree would be the main contractor. In this case whatever agreement the Guarantee secures, it is not an agreement between the party described in the Guarantee as the customer (the applicant) and the party described in the Guarantee as the beneficiary (the respondent). There is no agreement between those parties. This creates a difficulty in terms of giving effect to clauses 2 d), 2 e) and 4 which seem to have been drafted on the assumption that there is an underlying agreement to which both the customer and beneficiary are parties. It may be that what occurred here is similar to what occurred in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 343 ALR 58 (Ecosse Property Holdings) where Gageler J referred at [51] to the use of an “ill-fitting off-the-shelf precedent”. The respondent did make some submissions about how cl 4 might be read so as to be given some effect. It submitted that the first part of the clause up to the word “agreement” could be given effect and the rest ignored. I think the respondent accepts that some clauses in the Guarantee cannot operate. However, this does not wholly advance the applicant’s case because a similar problem with the wording arises, even on its case as to the relevant agreement, because there is no agreement between the customer and the beneficiary.

157    These difficulties lead me to note an important matter at this stage. Both parties presented their cases on the basis that the Court was to construe the Guarantee as best as it could. Neither party sought rectification of the document. Other than a passing reference by the applicant to the doctrine of uncertainty and Thorby and Others v Goldberg and Others (1964) 112 CLR 597 which was not pleaded or pressed, neither party suggested that the Guarantee was fundamentally flawed in some way.

158    Although it was the applicant’s secondary argument, a convenient starting point in the analysis is whether the Guarantee is a performance bond (or demand guarantee) or a contract of suretyship.

159    The authors of Paget’s Law of Banking (Malek A and Odgers J) (14th ed, LexisNexis, 2014) describe the difference between a demand guarantee and a contract of suretyship in the following way (at [34.6]):

The essential difference between a guarantee in the strict sense (ie a contract of suretyship) and a demand guarantee is that the liability of a surety is secondary, whereas the liability of the issuer of a demand guarantee is primary. A surety’s liability is co-extensive with that of the principal debtor and, if default by the principal debtor is disputed by the surety, it must be proved by the creditor. Neither proposition applies to a demand guarantee. The principle which underlies demand guarantees is that each contract is autonomous. In particular, the obligations of the guarantor are not affected by disputes under the underlying contract between the beneficiary and the principal. If the beneficiary makes an honest demand, it matters not whether as between himself and the principal he is entitled to payment. The guarantor must honour the demand, the principal must reimburse the guarantor (or counter-guarantor), and any disputes between the principal and the beneficiary, including any claim by the principal that the drawing was a breach of the contract between them, must be resolved in separate proceedings to which the bank will not be a party. …

(Footnotes omitted.)

160    The applicant referred to those cases where the Courts have held that a relationship is analogous to that of suretyship in the context of claims for subrogation (AM Spicer and Son Proprietary Limited (In Liquidation) v Spicer and Howie (1931) 47 CLR 151 at 185 per Dixon J (as his Honour then was); Australasian Conference Association Limited v Mainline Constructions Proprietary Limited (In Liquidation) and Others (1978) 141 CLR 335 at 347 per Gibbs ACJ; Marks B and Moss G, Rowlatt on Principal and Surety (6th ed, Sweet and Maxwell, 2011) pp 5-6).

161    Both parties made submissions about the effect of the decision of the Court of Appeal in England in IIG Capital Llc v Van Der Merwe & Another [2008] 2 Lloyd’s Rep 187. In particular, I was referred to the passage in the reasons of Waller LJ (with whom the other members of the Court agreed) at [8]:

We were referred as was the judge to certain other authorities of relevance to construing the provisions with which we are concerned. First we were referred to Marubeni Hong Kong and South China Ltd v Govt of Mongolia [2005] 2 All ER (Comm) 289, [2005] 1 WLR 2497 as to the right approach to the question whether under these instruments the Van Der Merwes were assuming a secondary liability dependant on the primary liability of HPIE, or whether they were assuming a primary liability independent of the liability of HPIE. The judge cites extensively from that authority and I will not repeat those citations because there was as I understand it no issue ultimately between Mr Collings QC and Mr McGrath as to the guidance which that authority provides. It emphasises that the context in which any instrument comes into being is important. Thus performance bonds given by banks are almost invariably construed as imposing a liability on the bank to pay, whatever dispute there may be on liability under the underlying contract. ‘They have been accepted by the courts as the equivalent of irrevocable letters of credit’ (see para [23] of Carnwath LJ’s judgment). Furthermore as he says in that paragraph ‘[i]t cannot be assumed that cases relating to such banking instruments provide any useful guidance when construing guarantees given outside the banking context’. In considering the instrument in that case he said that it was not a banking instrument and that it was not described either on its face or in the supporting legal opinion in terms ‘appropriate to a demand bond or something having similar legal effect’. The absence of such language in a transaction outside the banking context created in Carnwath LJ’s view ‘a strong presumption against’ interpretation as a demand bond. That was a judgment with which Sir Martin Nourse and I agreed.

162    On the face of it, there are some indications in the Guarantee that it is a contract of suretyship. NAB has provided the Guarantee at the request of the applicant and it is security in relation to the obligations of BCMC to the respondent. Furthermore, clauses in the form of cl 4 are often inserted in contracts of suretyship to overcome the fact that a variation in the main or principal contract without the surety’s consent, such as an extension of the time within which to pay, may discharge the surety (Ankar Proprietary Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 (Ankar); Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co Ltd [1996] 1 AC 199 at 205 per Lord Jauncey; Rowlatt on Principal and Surety (2011) p 183).

163    However, in my opinion, the decisive issue is whether the obligation is a primary obligation or a secondary obligation. As the authors of Modern Contract of Guarantee (O’Donovan J, Phillips JC and Courtney W), (3rd ed, Sweet and Maxwell, 2016) at p 10 state, the distinctive feature of a contract of guarantee is the secondary obligation which is assumed by the surety or guarantor. In this case, the obligation on NAB is to pay the respondent the amount (or parts of the amount) upon NAB receiving at any of its branches within Australia an unconditional written demand accompanied by the Guarantee (cl 2 a)). That is a primary obligation. Furthermore, this is a guarantee given by a bank, not by its customer. This is a powerful consideration in favour of a conclusion that the Guarantee is a performance bond or demand guarantee. It was never made clear by the applicant in advancing its secondary submission whether it was asserting that the guarantor was NAB or itself. In addition to these matters, I note that the presence of a clause such as cl 4 is by no means decisive. As Tuckey LJ noted in Gold Coast (at [25]), there might be other reasons for including a clause such as cl 4 even though the instrument was intended to be autonomous. Finally, it is clear that a reference in an instrument to an underlying agreement does not mean that the instrument is a contract of suretyship (Gold Coast at [18] per Tuckey LJ; Paget’s Law of Banking at [34.8]).

164    In my opinion, the Guarantee is a performance bond or demand guarantee and not a contract of suretyship. It is a documentary substitute for cash or as good as cash (Wood Hall at 445 per Barwick CJ; at 457-458 per Stephen J). That brings into play the principle of autonomy referred to in the passage from Paget’s Law of Banking set out above (at [159]).

165    The principle of autonomy was discussed in Simic. French CJ said the following (at [6], [8]):

… The principle of autonomy requires that the letter of credit or performance bond be treated as independent of the underlying commercial contract. The principles of strict compliance and autonomy serve the immediate commercial purpose of such instruments of providing an equivalent to cash and the further purpose of performance bonds of allocating risk between the parties to the underlying contract until their dispute, if there be one, is resolved.

…

The autonomy principle requires that the obligations of the issuing or accepting bank under the bond not be read as qualified by reference to the terms of the underlying contract. That said, it does not prevent a party to a contract who procures the issue of a performance bond claiming as against the beneficiary that the beneficiary’s action in calling upon the bond is fraudulent or unconscionable or in breach of a contractual promise not to do so unless certain conditions are satisfied. However, this is not such a case. The primary question in this case concerns the obligation of the issuing bank to pay on demand of a party claiming to be the beneficiary which, due to error on the part of the requesting party, is not the beneficiary named in the bond.

    (Citations omitted.)

Justices Gageler, Nettle and Gordon said (at [85]):

Second, although the “contract or agreement” referred to in the third paragraph of each Undertaking provides a link to the Corporation which, as will be seen, is significant for the purposes of rectification, it is either irrelevant or of no assistance for the purposes of construction. That is because, subject to fraud perpetrated by a beneficiary, an instrument of this nature (unconditional promise to pay on demand) is independent of any underlying transaction and any other contract. That principle — the principle of autonomy — reflects that those instruments, by their nature, stand alone. Not only are they equivalent to cash, but, by their terms, they also require that the obligations of the issuer are not determined by reference to the underlying contract. The principle of autonomy dictates that the surrounding circumstances and commercial purpose of the Construction Contract are different from those of the Undertakings.

166    The respondent submits that the obligation to pay under the Guarantee is quite independent of the underlying agreement and that means there is no need to determine whether the underlying agreement is the Subcontract or BCMC’s various finance agreements with the respondent. The submission was that just as the High Court in Simic was not prepared to look at the underlying agreement to ascertain the correct name of the beneficiary of the bond, so in this case one does not look at the underlying agreements and, therefore, there is no need to determine which of the agreements is the underlying agreement secured by the Guarantee.

167    I think that this submission is correct and reflects the principle of autonomy. NAB is well removed from the relevant events and transactions. The respondent is entitled to go into any one of NAB’s many branches around Australia and receive payment upon presenting two documents: an unconditional written demand and the Guarantee itself.

168    I would add the following. If the above conclusion is the end of the construction issue, I would nevertheless hold that, in the circumstances, it would be unconscionable for the respondent to call on the Guarantee beyond the amount owing under the Bill Facility. It seems to me clear on the facts that the respondent believed that the Guarantee was provided in connection with the Bill Facility. Among other reasons for that conclusion, are the statement in the initial credit submission for the Bill Facility referred to above (at [53]) and the fact that the Guarantee was reduced in amount because the amount owing under the Bill Facility had been reduced.

169    I will now consider the matter on the basis I am wrong to this point and that I am permitted, and indeed required, to consider a broader range of circumstances.

170    I start with the construction of the Guarantee itself with a view to determining the “Agreement” which the Guarantee was intended to secure.

171    The instrument is to be construed in accordance with ordinary principles of contractual construction. In Simic (at [78]), Gageler, Nettle and Gordon JJ cited what the Court had said in Electricity General Corporation v Woodside Energy Ltd and Others (2014) 251 CLR 640 at [35]:

Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

(Citations omitted.)

172    The relevant principles were again reiterated by the High Court in Ecosse Property Holdings (at [16]-[17] per Kiefel J (as her Honour then was), Bell and Gordon JJ). In addition, Nettle J made the point that poor drafting may justify a court in being more ready to depart from the natural and ordinary meaning of the terms of a contract (at [98]) (see also Arnold v Britton [2015] AC 1619 at [18] per Lord Neuberger).

173    The respondent is the beneficiary or favouree of the Guarantee and there has never been any suggestion that BCMC had any obligation to lend monies to the respondent and, to the extent that the reference to “lending obligations” in the definition of Agreement suggests otherwise, it is plainly a mistake. The reference is clearly a reference to BCMC’s repayment obligations to the respondent.

174    In terms of the matter or agreement which the Guarantee secures, in my opinion the dominant sentence in the description of the Agreement is the second sentence. It is an express statement of the obligations secured, whereas the first sentence merely describes aspects of the work to be performed under the Subcontract. The second sentence is the controlling provision in the definition of Agreement.

175    At the same time, I reject the respondent’s argument that the instrument secures all of BCMC’s borrowing obligations to the respondent. Although the second sentence is what I refer to as the controlling provision, the first sentence is not to be ignored. It suggests that the borrowing obligations are those related to particular works (i.e., mobilisation) under the Subcontract. Furthermore, I think I am permitted to have regard to the amount secured by the earlier guarantee and the amount provided by the respondent under the Bill Facility (i.e., $1,735,000). Taking those two matters into account, I conclude that the Guarantee secures BCMC’s obligations to the respondent under the Bill Facility.

176    The applicant submitted that I should not reach that conclusion because I should take into account the agreement between it and BCMC and when that it is done, it is clear enough (so the submission goes) that the Guarantee secured the applicant’s repayment obligations to BCMC under the Advance Payment Agreement. I reject that submission for two reasons.

177    First, the Advance Payment Agreement is not part of the surrounding circumstances of the Guarantee. As Gageler, Nettle and Gordon JJ said in Simic with reference to the particular circumstances of that case, the principle of autonomy “dictates that the surrounding circumstances and commercial purpose of the Construction Contract are different from those of the Undertakings” (at [85]).

178    Secondly, the surrounding circumstances can only be those circumstances known to the relevant parties. The relevant circumstance is said to be the agreement between the applicant and BCMC concerning the Advance Payment Agreement and the understanding of the parties to that Agreement, that the Guarantee was securing the applicant’s obligations to BCMC.

179    The difficulty for the applicant is that the respondent was not a party to the Advance Payment Agreement or indeed any agreement with the applicant. The applicant sought to overcome this difficulty by an argument that the respondent used BCMC as its agent and, in those circumstances, BCMC’s knowledge of the Advance Payment Agreement, including knowledge that the Guarantee was to relate to that Agreement and not the Bill Facility, could be attributed to the respondent. Aside from the fact that agency is not expressly pleaded by the applicant, it is not made out on the facts. It is not suggested that the respondent owed a positive duty to the applicant in connection with the provision of the Guarantee and the fact that at one point somebody in the respondent considered the applicant should be advised to obtain legal advice (a matter which ultimately was not pursued by the respondent) cannot give rise to a duty. The fact is that the respondent and BCMC had agreed upon the provision of a guarantee as part of an agreement between them and BCMC, and the applicant had agreed upon the provision of a guarantee as part of an agreement between them, and the fact that BCMC might have conveyed to the applicant its requirements in relation to the instrument as the respondent’s requirements or as resulting from the respondent’s requirements, does not mean that BCMC was the respondent’s agent.

180    In conclusion, in my opinion, the Guarantee is a performance bond or demand guarantee and not a contract of suretyship. It is not necessary to consider what is the underlying agreement, but it would be unconscionable for the respondent to enforce the Guarantee beyond BCMC’s liability under the Bill Facility. In the alternative, I conclude that the underlying agreement is the Bill Facility.

181    Before leaving this section of my reasons, I note that had the Guarantee been a contract of suretyship, it would have been necessary to consider whether one or both extensions granted by the respondent to BCMC operated to discharge the applicant from liability. The applicant did not consent to the extensions. The extensions of time would not appear to be insubstantial variations within the relevant principles (Ankar at 557-559 per Mason ACJ, Wilson, Brennan and Dawson JJ; at 568 per Deane J). However, before concluding whether the surety had been discharged, it would be necessary to consider whether there would be any room for the operation of cl 4 despite aspects of its wording.

Misleading and Deceptive Conduct and Unconscionable Conduct in Connection with the Provision of the Guarantee

182    The applicant submitted that if the Guarantee secured BCMC’s obligations to the respondent, then the respondent’s conduct in procuring the Guarantee was misleading or deceptive or unconscionable within s 20(1) of the ACL. The applicant relied on the facts surrounding the resolution of the wording of the Guarantee (see [60]-[70] above) and the assertion that in that process BCMC was acting as the respondent’s agent. The short answer to these claims is one I have already provided, that is to say, that at no time was BCMC acting as the respondent’s agent (see [179] above).

Unconscionable Conduct in Connection with the Extensions of the Term of the Bill Facility

183    The applicant submits that the respondent has engaged in unconscionable conduct within s 20(1) of the ACL in calling on the Guarantee. Section 20(1) provides as follows:

A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.

184    I note that there is an equivalent section in relation to financial services in the Australian Investments and Securities Commission Act 2001 (Cth) (ASIC Act) s 12CA(1).

185    In the course of argument, counsel for the applicant also referred in passing to s 21 of the ACL (see s 12CB of the ASIC Act). However, that section was not pleaded by the applicant and the respondent was not given an opportunity to adduce evidence as to one or more of the matters identified in s 22 (see s 12CC of the ASIC Act). Furthermore, neither party addressed the Court on the list of matters in the ACL (or the ASIC Act).

186    Section 20(1) of the ACL is in relevantly the same terms as was its predecessor, s 51AA(1) of the Trade Practices Act 1974 (Cth). Neither party suggested that the authorities which have addressed the scope and operation of s 51AA(1) are not equally relevant to s 20(1) of the ACL.

187    I will examine the facts below, but before I do that, I will address the respondent’s submission that even if the conduct identified by the applicant is established, it is not unconscionable conduct within s 20(1) of the ACL.

188    The applicant does not rely on that species of unconscionable conduct which involves one of the parties being under a special disadvantage. There are a number of cases which have addressed unconscionable conduct of that type and they include decisions of the High Court in The Commercial Bank of Australia Limited v Amadio and Another (1983) 151 CLR 447; Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Limited and Others (2003) 214 CLR 51 (Berbatis Holdings); and Kakavas v Crown Melbourne Limited and Others (2013) 250 CLR 392 (Kakavas). Rather, the applicant relies on what it claims is that species of unconscionable conduct that arises where the assertion or reliance on a legal right is, in the circumstances, unconscionable. That can only be shorthand, otherwise the proposition is incomplete because it does not identify the circumstances in which reliance on a legal right is unconscionable. The applicant relied on Muschinski v Dodds (1985) 160 CLR 583 (Muschinski v Dodds); Legione and Another v Hateley (1983) 152 CLR 406 (Legione v Hateley); Stern and Another v McArthur and Another (1988) 165 CLR 489 (Stern v McArthur); and Olex Focas Pty Ltd and Another v Skodaexport Co Ltd and Another [1998] 3 VR 380 (Olex Focas).

189    The respondent submits that the unwritten law from time to time within s 20(1) is limited to particular cases where a Court of Equity would grant relief on the ground of unconscionable conduct and that there is no general category of unconscionable conduct of the assertion or reliance on a legal right in circumstances which are unconscionable. In support of its submission, the respondent relies on two decisions of the Full Court of this Court: Australian Competition and Consumer Commission v Samton Holdings Pty Ltd and Others (2002) 117 FCR 301 (Samton Holdings) and Clough Engineering Limited v Oil & Natural Gas Corporation Limited and Others [2008] FCAFC 136; (2008) 249 ALR 458 (Clough Engineering). It also relies on the decision of the High Court in Tanwar Enterprises Pty Limited v Cauchi and Others (2003) 217 CLR 315 (Tanwar Enterprises).

190    It is clear that unconscionable conduct in equity does not mean conduct which, in the opinion of the judge, is unfair and it does not apply to unconscionable conduct at large: Australian Broadcasting Corporation v Lenah Game Meats Pty Limited (2001) 208 CLR 199; Berbatis Holdings at [7] per Gleeson CJ; Clough Engineering at [131].

191    In Berbatis Holdings, the High Court considered unconscionable conduct in a case where it was alleged that one of the parties was under a special disadvantage and the Court did not need to address or decide upon the outer boundaries of s 51AA(1) (see, for example, at [42]-[46] per Gummow and Hayne JJ).

192    That issue was addressed by this Court in Samton Holdings. The Full Court decided that unconscionable conduct within s 51AA(1) extended beyond cases involving a special disadvantage and included other cases of unconscionable conduct in equity. It identified five categories of cases of unconscionable conduct in equity whilst at the same time recognising that the list may not be exhaustive. The Court said (at [48]):

Under the rubric of unconscionable conduct, equity will:

(i)    Set aside a contract or disposition resulting from the knowing exploitation by one party of the special disadvantage of another. The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education – Commercial Bank of Australia Ltd v Amadio. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other – Louth v Diprose; Bridgewater v Leahy (1998) 194 CLR 457.

(ii)    Set aside as against third parties a transaction entered into as the result of the defective comprehension by a party to the transaction, the influence of another and the want of any independent explanation to the complaining party – Garcia v National Australia Bank Ltd (1988) 194 CLR 395.

(iii)    Prevent a party from exercising a legal right in a way that involves unconscionable departure from a representation relied upon by another to his or her detriment – Waltons Stores (Interstate) Ltd v Maher; Commonwealth v Verwayen.

(iv)    Relieve against forfeiture and penalty - Legione v Hateley; Stern v McArthur.

(v)    Rescind contracts entered into under the influence of unilateral mistake – Taylor v Johnson.

Each of these categories of case (the list may not be exhaustive) involves the identification of unconscionable conduct, albeit its content and degree will vary according to the category. It is a term which has various shades of meaning according to its context. There are different thresholds of conduct in various categories, all of which may be described as unconscionable – G Dal Pont, “The Varying Shades of ‘Unconscionable’ Conduct – Same Term, Different Meaning” (2000) 19 Aust Bar Rev 135 at p 165.

193    The Full Court said that the key question in every case was whether the case was one in which a judge sitting in equity would grant relief (at [49]). Section 51AA(1) did not extend the category of cases of unconscionable conduct, but rather it extended the remedies for existing and accepted cases and those cases which may be developed within the unwritten law (at [44]).

194    The form of unconscionable conduct identified by the applicant does not fall within the principles identified in Legione v Hateley and Stern v McArthur which are cases dealing with unconscionable conduct in the context of relief against forfeiture and penalty. I do not think reference to Muschinski v Dodds helps the applicant. That case dealt with a reasonably specific case of the removal of the substratum of a joint endeavour without attributable blame and not a principle at the level of generality formulated by the applicant. The Muschinski v Dodds category might well be added to the list set out in Samton Holdings, but it does not assist the applicant.

195    The Full Court in Clough Engineering referred to Samton Holdings without disapproval. Importantly, the Full Court said (at [138]) that in the absence of fraud, there would appear to be little, if any, scope for the application of equitable doctrines of unconscionable conduct to restrain the exercise by a party of its legal rights under a performance guarantee, although there might be extreme cases which merge into bad faith exercises of power. The Full Court said that this was the case because of the commercial purpose of such guarantees. The Court said that the wide purpose of performance bank guarantees and their character as reflecting an allocation of risk and a provision of security to their holder militate against any argument as to disproportion in their exercise.

196    In Samton Holdings, the Full Court referred to the decision in Olex Focas and said that it was concerned with the grant of interlocutory relief and the question of whether there was a serious question to be tried. The Full Court said that Batt J in Olex Focas did not express any concluded view as to the construction of s 51AA (1) (at [50]). In Clough Engineering, the Full Court referred to the facts in Olex Focas at some length and noted that the Court in that case refused to grant an interlocutory injunction in relation to the performance guarantees, as distinct from the mobilisation guarantee (at [132]-[136]). The Full Court did not say that Olex Focas was wrong or that it was not going to follow the decision. I agree with the respondent’s submission that it was not necessary for the Court to do so, bearing in mind that the decision was an interlocutory one.

197    Finally, the applicant relied on Tanwar Enterprises to make the point that the categories of unconscionable conduct are not closed. That is true, but importantly, the plurality made the point that it is a false notion to think that there is an equitable defence to “the assertion of any legal right, whether by an action to recover debt or damages in tort or for breach of contract, where in the circumstances it has become unconscionable for the plaintiff to rely on that legal right” (at [24]).

198    I do not think there is a general category of case of unconscionable conduct within s 20(1) of the ACL of the type identified by the applicant. Aside from the uncertainties of the formulation itself, it would be contrary to Samton Holdings, Clough Engineering and Tanwar Enterprises to so hold. I follow Clough Engineering and proceed on the basis that there is very limited scope for a holding of unconscionable conduct within s 20(1) of the ACL in a case involving a performance bond or demand guarantee because of the nature of the instrument.

199    There are other matters to be addressed before I turn to the facts. The applicant referred to matters which were not obviously relevant to unconscionable conduct in equity. For example, it referred to the “Baden” categories of notice (Baden and Others v Sociéte Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509) and the extent to which the High Court had adopted those categories in Farah Constructions Pty Limited and Others v Say-Dee Pty Limited (2007) 230 CLR 89 (at [175]-[177]). The applicant also referred to Barnes v Addy (1874) LR 9 Ch App 244 (Barnes v Addy) and the principles of knowing assistance. There is no case pleaded of a misappropriation of trust property or a breach of fiduciary duty and knowing assistance by the respondent. Counsel for the applicant accepted this in his closing submissions and made it clear that his case was of unconscionable conduct and that he was relying on a Barnes v Addy knowing assistance claim by way of a broad analogy.

200    As to constructive notice, Kakavas suggests that there is very little scope for the doctrine of constructive notice outside cases involving breaches of trust or fiduciary duty (at [152]-[156]). Of course, actual knowledge includes wilful blindness or wilful ignorance. While mentioning Kakavas, I note that the respondent submitted that unconscionable conduct in the context of performance bonds or demand guarantees must involve an element of predatory behaviour by the party accused of such conduct. I am disposed to think that is correct. It seems to me to align with the reference by the Full Court in Clough Engineering to conduct merging into bad faith exercises of power.

201    I did not find it easy to come to grips with the precise details of the applicant’s unconscionable conduct case. The argument seems to be that the respondent knew certain matters and it would be unconscionable for it to call on the Guarantee. Counsel for the applicant clarified the position in his closing oral submissions. He did so by reference to what he submitted was an analogous situation in the case of Jeffree v National Companies & Securities Commission (1989) 15 ACLR 217. A director who transfers assets from an old company to a new company for the purpose of avoiding the payment of a debt in the old company even at value and with legal advice may be making an improper use of his or her position within what is now s 182 of the Corporations Act. The respondent knew that BCMC was in dispute with the applicant. The respondent knew that there was a division of assets between BCMC and Bluenergy Global. It was involved in, or assisted or facilitated the division of assets. How did it do this? The applicant identified the act of granting the second extension on 1 February 2016 (4 February 2016 at the latest) and the act of releasing the term deposit in the second half of February 2016. I cannot see that the release of the term deposit is a free-standing act of assistance. The respondent was not bound to pursue repayment of the Bill Facility against the term deposit first. It was entitled to take immediate action on the Guarantee. Furthermore, if there was no unconscionable conduct associated with the granting of the second extension, then there would be no ground upon which to withhold repayment of the term deposit.

202    At a general level, the applicant put its case in the following way in its closing written submissions:

26.3    Westpac assisted BCMC to move assets from BCMC to Bluenergy Global JV, by granting an extension, not insisting on repayment and leaving Ottoway to meet the burden of BCMC’s unpaid debts.

203    At a more particular level, the applicant put its unconscionable conduct in four ways. The first way in which it advanced its case was to identify 11 factual matters and then to contend that, in light of those matters, it would be unconscionable for the respondent to call upon the demand guarantee. Those matters and my findings with respect to them are as follows.

204    First, the applicant alleges that the respondent knew that the Bill Facility was being provided to BCMC to enable it to make the advance payment to the applicant. The respondent knew that BCMC wanted the amount of $1,735,000 so that it could make a prepayment to the applicant. There is no dispute about this matter.

205    Secondly, the applicant alleges that the respondent knew that the Bill Facility was due to expire on 25 September 2015 and that at that time, BCMC was indebted to the respondent in respect of the Bill Facility in the amount of $989,268.12. There is no dispute about this matter.

206    Thirdly, the applicant alleges that the respondent twice offered an extension of the term of the Bill Facility; the first extension was offered on 18 September 2015 and the second extension was offered on 1 February 2016. There is no dispute about this matter.

207    Fourthly, the applicant alleges that the respondent elected to grant the second extension of the Bill Facility on 1 February 2016 knowing that BCMC was not able to repay the Bill Facility. There is no doubt that BCMC advised the respondent by email dated 4 January 2016 that it was not then in a position to repay the Bill Facility. An inability to repay the loan was an event of default, according to the applicant, of the Business Finance Agreement which was executed at the time of the first extension. The first extension expired on or about 1 January 2016.

208    With respect to this matter and some of the other matters, the applicant relied on the admissions in the Amended Defence. There are a number of admissions made by the respondent in the Amended Defence, but their purport is not always clear. The actual admission with respect to this fourth matter is that, by email dated 4 January 2016, BCMC advised the respondent it was not then in a position to consider repaying the Bill Facility and that an inability to repay the Bill Facility constituted an “Event of Default”. I doubt that, as far as this fourth matter is concerned, it matters. The respondent knew as at 4 January 2016 that BCMC was not then able to repay the Bill Facility. At least one of the reasons the respondent granted the second extension was to give BCMC the opportunity to repay the Bill Facility after it had settled its contractual relations with Sino Iron. That had not occurred by 1 February 2016 and it is reasonable to assume that BCMC’s position was the same at that date.

209    Fifthly, the applicant alleges that the respondent knew that BCMC was in dispute with the applicant. That is correct. It is also alleged that on or about 22 December 2015, the applicant served a Creditor’s Statutory Demand for Payment of Debt in the amount of $1,455,794.03 on BCMC. The respondent admits the fact, but I do not read the admission as an admission that the respondent knew the fact at the time. Mr Chapman denied that he knew the fact and I accept his evidence. There is no reason to think that either the applicant or BCMC would have advised the respondent of the Statutory Demand.

210    Sixthly, the applicant alleges that the respondent knew that BCMC was taking steps to “division assets” between BCMC and Bluenergy Global. The respondent in its Amended Defence admits that at the time it offered the second extension, it was aware that BCMC had taken steps to division assets between BCMC and Bluenergy Global. This admission is clear. Plainly, the respondent, through Mr Thompson and Mr Ekanayake, knew this as can be seen from the credit submission prepared for the second extension. I do not accept Mr Chapman’s evidence that he was not the source of this information and that he did not know it. In his closing oral submissions, counsel for the respondent seemed to accept that Mr Chapman was likely to be the source of the information. That approach is correct. On all the evidence, Mr Chapman was the most likely source of the information and the fact that he was the source was supported, at least in part, by Mr Ekanayake’s evidence in cross-examination. Counsel for the respondent submitted that it is likely there was confusion and misunderstanding between Mr Chapman and Mr Ekanayake. That is possible and there are various nuances that might attend the passing of the information. Nevertheless, I find that the thrust of the information conveyed by Mr Chapman to Mr Ekanayake was as Mr Ekanayake recorded it. As I have said, in any event, the respondent knew that BCMC had taken steps to division assets between BCMC and Bluenergy Global.

211    Seventhly, the applicant alleges that the respondent was entitled to call for repayment of the principal and interest under the Bill Facility as a result of the maturity of the Bill Facility or a default event. Certainly, before the second extension, the respondent was entitled to call for repayment of the principal and interest under the Bill Facility.

212    Eighthly, the applicant alleges that the respondent was entitled to draw upon the term deposit in the amount of $567,500 or take action under the Guarantee and Indemnity given by Mr Millen and Ms O’Brien in respect of any money owed to the respondent by BCMC. It is correct that the term deposit and the Guarantee and Indemnity were held as security for the Bill Facility and that prior to the second extension, the respondent could have called on those securities.

213    Ninthly, the applicant alleges that the respondent knew that BCMC had transferred assets to a new entity, Bluenergy Global, and that entity had established and would maintain a banking relationship with the respondent. The respondent knew that Bluenergy Global had entered into a contract with Sino Iron for the supply and installation of a raw pipeline from a raw water pond to a cooling tower (Contract BCA3-P1-WC-3272). Furthermore, by email dated 24 January 2016, Mr Patterson requested Mr Chapman to issue two bank guarantees on behalf of Bluenergy Global secured by term deposits in the name of Bluenergy Global.

214    Tenthly, the applicant alleges that the respondent did not give notice to the applicant that it had granted the first extension or the second extension. There is no dispute about this matter.

215    Eleventhly, the applicant alleges that by 22 March 2016, BCMC was in administration with significant creditors. That is correct. It is, of course, an event well after the second extension and about seven days before the demand was made under the Guarantee.

216    In considering whether the conduct constituted by the 11 matters is unconscionable conduct, I will examine whether there is anything predatory about the respondent’s conduct in the context of a performance bond or a demand guarantee or any conduct which merges into bad faith or, in case I am wrong about the scope of unconscionable conduct in the context of a performance bond or demand guarantee, anything harsh or oppressive about the respondent’s conduct.

217    The respondent held a performance bond or demand guarantee. It was from NAB, not the applicant. In the hands of the respondent it was, and indeed its whole purpose was, to be as good as cash (Wood Hall at 457 per Stephen J). The respondent, comforted no doubt by holding something as good as cash, decided to grant the second extension in order to give BCMC the opportunity to finalise its dealings with Sino Iron and to repay the Bill Facility. Whether that was a sound commercial decision without regard to the Guarantee is beside the point. The fact is it held the Guarantee and was entitled to rely on it in making its decision. I do not think that the “division of assets” comment gave rise to any obligation on the respondent to do anything. It is true that in cross-examination, Mr Chapman agreed that it was suggestive of some form of wrongdoing, but in fact neither he nor the respondent had knowledge of the details of what was occurring. The respondent owed no duty to the applicant prior to the “division of assets” comment. It could have refused the second extension and enforced the Guarantee. It is not to be assumed that that would all have been done within days. The division of assets comment did not give rise to a duty in the respondent. I do not think that there was anything unconscionable in allowing BCMC extra time to see if it could repay the Bill Facility. These points are developed further when I come to consider the third way in which the applicant puts its unconscionable conduct case.

218    The second way in which the applicant put its unconscionable conduct case was to rely on the 11 matters which I previously identified and the following additional matters.

219    First, the applicant alleges that the respondent also knew that BCMC was not involved in supporting Bluenergy Global’s funding arrangements. Secondly, BCMC’s project with Sino Iron was completed. Thirdly, BCMC was “an SPV”, being a special purpose vehicle. Fourthly, BCMC was to be “closed down shortly”. Fifthly, Messrs Millen and Patterson were taking opportunities with Sino Iron in the name of Bluenergy Global. Finally, BCMC was nearing the end of its life expectancy. The bulk of these matters came to the attention of the respondent on 4 February 2016 which was effectively after the second extension was granted. I cannot see a case that the respondent acted unconscionably in not doing something between 4 February 2016 and the end of March 2016 and no such case was developed along these lines. In any event, even if Mr Chapman knew on or about 11 January 2016 that BCMC was to be closed down and that Bluenergy Global would continue, knowledge of these matters did not mean knowledge that BCMC could not repay the Bill Facility. Again, I do not think that the circumstances gave rise to a duty in the respondent to act in a way other than it did.

220    The third way in which the applicant puts its unconscionable case is to rely on the matters identified in its first and second ways of putting its case and some additional matters.

221    The applicant pointed to the fact that Mr Chapman knew that Bluenergy Global was created due to an ongoing dispute between BCMC and the applicant and that, as a precautionary step, BCMC was dividing assets with Bluenergy Global. Mr Chapman did know those matters. By 4 February 2016, he knew that Mr Carter had some involvement with Bluenergy Global and he knew that Mr Carter’s family trust company was Esplanade Holdings.

222    Mr Chapman said that he was not aware of the payments out of BCMC’s operating account to Esplanade Holdings and it was never squarely put that that evidence should not be accepted. In any event, I accept Mr Chapman’s evidence. No argument was put that Mr Chapman’s knowledge could be aggregated with another officer or officers in the respondent and, in any event, such an argument would face substantial difficulties (Kojic v Commonwealth Bank of Australia [2016] FCA 368; (2016) 113 ACSR 220).

223    It seems to me that this third way of putting the unconscionable conduct case boils down to knowledge by Mr Chapman at the time of the second extension that BCMC was taking precautionary steps to divide assets between itself and Bluenergy Global, and Mr Chapman’s evidence that had he used those precise words, he would have been well aware that there was some form of wrongdoing going on. I have found that Mr Chapman did use those words or words to similar effect. The applicant’s case must be that, in those circumstances, the respondent should have refused the second extension and taken action to recover the amount owing under the Bill Facility. The applicant did not articulate a clear case as to what would have happened had the respondent done that. It would have been open to the respondent to enforce the Guarantee and it is not to be assumed that that would have had to be done immediately. Even if that had been done promptly and, it is to be assumed that that would have prevented further payments by BCMC to Esplanade Holdings, there is no statement of BCMC’s financial affairs which indicates how a refusal of the second extension would have impacted on BCMC and the applicant’s ability to make recoveries from it.

224    As I have said, none of these matters were addressed by the applicant. I do not need to address them either because I do not think the respondent’s conduct was unconscionable unless there was an obligation on it to make further inquiries to find out exactly what was going on, and I hold that there was no such obligation on the respondent. It is revealing that it was at this point that the applicant referred to the first four categories of Baden. As I have already said, constructive notice or knowledge is not relevant in this field of discourse.

225    The fourth way in which the applicant puts its unconscionability case is as follows. It is unconscionable for the respondent to call on the Guarantee when it knew that the applicant had completed the works and repaid the advance. The submission was that the purpose of the Guarantee was to ensure performance by the applicant of the works and repayment of the advance and (so the applicant submitted) it had discharged both of those obligations.

226    Even assuming that the applicant had fully repaid the advance payment, this way of putting the unconscionable conduct case should be rejected for the following reasons. First, although the respondent knew that the project had reached practical completion on 16 January 2016, the respondent did not know the precise relationship between the applicant and BCMC. It knew that there was a dispute between the applicant and BCMC, but it did not know the details of that dispute. The information it was receiving from its customer was that the applicant was in default. It is notorious in the construction industry that there are often disputes with claims being made on both sides. Secondly, and in any event, for the reasons I have given, the Guarantee was to secure the respondent’s advance to BCMC under the Bill Facility, not the applicant’s obligation to repay the advance payment.

227    I reject the applicant’s case based on unconscionable conduct.

Fraud

228    Fraud must be clearly alleged and clearly particularised (SZFDE and Others v Minister for Immigration and Citizenship and Another (2007) 232 CLR 189 at [15]). The applicant’s plea in its Amended Statement of Claim is that, assuming the respondent’s construction of the Guarantee is correct, BCMC has acted fraudulently because it has not repaid the Bill Facility to the respondent in circumstances where the applicant has repaid the advance payment to BCMC. It is alleged that for the respondent to call on the Guarantee would be to further the fraud BCMC has committed on the applicant.

229    There is no plea indicating how any fraud by BCMC affects the respondent’s ability to enforce the Guarantee. In other words, even if the applicant has repaid the advance payment and even if BCMC has acted fraudulently, there is no plea linking those circumstances to the respondent’s enforcement of the Guarantee. The applicant’s case of fraud is rejected.

230    The applicant put an additional argument or case on fraud in its closing written submissions. As it is not pleaded, the applicant may not rely on it. In any event, the additional argument or case on fraud fails. The applicant relies on the respondent’s knowledge of the matters identified in the context of the applicant’s case on unconscionable conduct and the respondent’s decision to grant the second extension. If, as I have held, that did not render the respondent liable for unconscionable conduct, it cannot render the respondent liable in fraud or for involvement in fraud.

CONCLUSION

231    The respondent may enforce the Guarantee to the extent of the amount outstanding under the Bill Facility, but no further.

232    I will hear the parties as to the orders necessary to give effect to these conclusions and costs.

Associate:    

Dated:    13 December 2017