There are many demand guarantee cases decided by Australian courts related to unconscionability. Some Australian courts have given judicial recognition to the concept of unconscionability and granted injunction on the basis of the unconscionable conduct under demand guarantees. The notion of unconscionability is vague and would be in the lack of certainty. It is my opinion that the unconscionability exception would have negative effect on the credibility of Australian demand guarantees and therefore the unconscionability doctrine deserves careful discussions.
There are many demand guarantee cases decided byAustralian courts related to unconscionability. SomeAustralian courts have given judicial recognition tothe concept of unconscionability and grantedinjunction on the basis of the unconscionable conductunder demand guarantees. The notion ofunconscionability is vague and would be in the lack ofcertainty. It is my opinion that the unconscionabilityexception would have negative effect on thecredibility of Australian demand guarantees andtherefore the unconscionability doctrine deservescareful discussions.
Unconscionability would generally be applied to demand guarantees and standby LCs.1 The recently approved ICC International Standard Demand Guarantee Practice for URDG (ISDGP) leaves the issueof unconscionability to applicable law and to the courts of the various jurisdictions. In the Ottowaycase2 decided by an Australian Court (The Federal Court of Australia), a contractor applied for andreceived a loan under a Credit Facility from a lender and obtained the demand guarantee in favor of thelender. The Australian court concluded that it would be unconscionable for the beneficiary (lender) to draw on the guarantee beyond the amount owed notwithstanding the fact that there was no fraud on thepart of the beneficiary. In the Good Living case3 decided by an Australian Court (The New South Wales Supreme Court), the beneficiary (landlord under a lease) of the demand guarantee terminated thelease and evidence suggested that the rent was not in arrears, but the beneficiary drew on the guaranteefor its total amount. The Australian court explained that the beneficiary’s conduct in doing would beunconscionable. In this case, the beneficiary was not entitled to receive in full the amount demandedunder the underlying contract and the full amount claimed under the guarantee was found not to beowing under the underlying contract.
From these cases, it is my understanding that where the claims by the beneficiary are not owing underthe underlying contract or non-performance of the underlying contract, its conduct may constituteunconscionability.4 As such, unconscionable conduct would arise from the terms of the underlyingcontract and be pursuant to the contractual arrangements entered into between the beneficiary andapplicant.
In jurisdiction of Australia, the Australian courts considered that unconscionability is a serious questionfor demand guarantee transactions. The Australian courts rarely interfere with demand guarantees asthe issuers unconditionally undertake to pay on demand the sum demanded up to the limit specified inthe guarantees except in a clear case of fraud (the independence principle under demand guarantee), butthe courts generally should enjoin the beneficiary of a demand guarantee where there would beunconscionable conduct by the beneficiary.5 The Australian Consumer Law(ACL)( the replace ofTrade Practices Act 1974 (Cth) (TPA)) states that “a person must not in trade or commerce engage inconduct that is unconscionable within the meaning of the unwritten law from time to time.”, but neitherthe TPA nor the ACL provides a statutory definition of “unconscionable conduct”. If the beneficiary’sconduct would be unconscionable within the meaning of the provision, the beneficiary should have noright to call on the demand guarantee and it would be enjoined. There may be policy factors supportingthe statutory intervention6. As such, breach of the unconscionable provision will give the court broaddiscretional remedies to restrain the payment of the demand guarantee.
There has been litigation on unconscionability in Australia since a new exception of unconscionableconduct was introduced into Australian law7. In the Boral case8, the beneficiary’s conduct in thisstandby LC case was unconscionable according to the Australian Trade Practices Act. Notwithstanding that fraud exception was not claimed, the Australian Court (The New South Wales Supreme Court)granted the motion for injunctive relief on the basis of unconscionable conduct of the beneficiary as theindependence principle cannot override the statute. In the Board Solutions case9, as the beneficiary ofthe demand guarantee acted unconscionably, the Australian court (The Supreme Court of Victoria)granted an injunction against the beneficiary and guarantor, even though the court did not regard thebeneficiary’s actions as fraudulent. In the Telvent case also decided in Australia (The Supreme Court ofQueensland)10, the court explained that an injunction could be issued if there was conduct ofunconscionability.
From these cases, we learn that unconscionability has been established in Australian andunconscionability may be an independent ground for the courts to grant the injunction, even if fraud isnot pleaded as the courts must work within the statutory framework and are obliged to apply statutorydirection.
Some laws outside Australia do not recognize the doctrine of unconscionability11. English lawrecognizes fraud as the only ground on which a guarantee could be restrained. Demand guarantee isunconditional in nature, and it could only be restrained by fraud. Under English law, the only narrowexception abrogating the right to receive payment is fraud.12 The courts universally require a serious oregregious fraud standard and fraud is a higher threshold to clear than unconscionability. In theShanghai Electric case13, a Singapore court concluded that since English law (not Singapore law)governed the demand guarantee in this case, the application to restrain the drawing only needed toaddress the issue of fraud, not unconscionability. In the Boustead case decided in Singapore14, it wasobserved that English law does not acknowledge unconscionability for injunctive relief. In this case,English law governed the counter-guarantee, but the applicant argued that the guarantor made thedemand under the counter-guarantee unconscionably and pursued an injunction. As a court must usethe law of the counter-guarantee for issuing an injunction, the court rejected the applicant’s argumentof unconscionability and did not grant injunctive relief as to the demand. In the New Civi case15, theapplicant claimed that the beneficiary had engaged in unconscionable behavior. A Singapore courtconcluded that banks under the demand guarantee cannot be restrained other than for fraud once fraud or unconscionability is established. In general, the word ‘unconscionability’ appeared alongside theword ‘fraud’.
From these cases, we learn that the unconscionability doctrine has not been followed by the courts insome jurisdictions outside Australia. The courts considered that if there is no fraud involved in thebeneficiary’s call on the demand guarantee, the unconscionability argument would be moot. As such,only in the case of a fraud could the court grant a restraining order and the issue of fraud instead ofunconscionability is to be addressed.
Unconscionability doctrine would potentially damage the demand guarantee product. The notion ofunconscionability is vague and there is no room for the application of any vague notion ofunconscionability. It depends on the facts of each case and any determination must be considered on acase-by-case basis. As this approach does little to serve the need for certainty of demand guarantee16, itis at best unwise and at worst bad law. The letter of credit / demand guarantee community remainsconcerned about the independence principle and the integrity of the demand guarantee as theindependent character of the undertaking should be subject to the fraud exception.17 Some experts areunwilling to introduce the concept of unconscionability into independent undertaking law and practice.The introduction of the unconscionability concept into independent undertaking law also disables theindependent undertaking18 and it would be a mere promise. It is my opinion that it is not good practiceas it may result in an inevitable backlash from sane beneficiaries of demand guarantees.
The Australian courts’ intervention in the demand guarantees would not be welcome. The Australiancases involving unconscionability refused complying drawings for breach of contracts even thoughthere is no fraud.19 I do not agree to the proposition that the exception of unconscionability would notsignificantly undermine the commercial value of payment instruments,20 but I consider that thisexception will diminish the utility of the demand guarantees. The exception of unconscionability wouldimpinge on the autonomy principle21. It will result in the demand guarantees less reliable and uncertainty to the issuer’s independent obligation as there is not a uniform interpretation of the term“unconscionable conduct” in Australia, but the only exception to the autonomy principle recognizedwidely by international letter of credit /demand guarantee community is demands involving fraud orforgery. This approach would encourage the applicant to include in the underlying contract an expressprovision specifying certain conditions which need to be satisfied before a beneficiary can make aclaim on the demand guarantee. The demand guarantee may no longer be considered the functionalequivalent of cash. The international letter of credit / demand guarantee community is concerned of thejudicial intervention by the Australian courts against the autonomy principle on basis of theunconscionability doctrine. As such, demand guarantee cases related to unconscionability decided bysome Australian courts remain questionable internationally and the Australian courts should considercarefully the implications. It is my opinion, that unconscionability should not be a basis to restrainpayment on the demand guarantee, absent the presence of fraud as the terms of the underlying contractshould not be incorporated by reference to restrict the beneficiary’s right to make demand.
Unconscionability may be a basis for interrupting payment on a demand guarantee and it is a specialcharacter of the Australian demand guarantee cases. Some Australian courts supported the grant ofrelief where the beneficiary under a demand guarantee acted unconscionably, but there was insufficientevidence to establish that fraud existed. This approach is not generally used in other jurisdictionsoutside Australia. It is my view that unconscionability should not be a basis to restrain payment on thedemand guarantee, absent the presence of fraud. The approach by some Australian courts related tounconscionability under demand guarantees remains questionable internationally and may significantlycurtail the use of demand guarantees to be issued by the Australian banks.
1 STANDBY & DEMAND GUARANTEE PRACTICE: UNDERSTANDING UCP600, ISP98, ANDURDG758, by James E. Byrne, IIBLP, p.203.
2 Ottoway Engineering Pty Ltd. v. Westpac Banking Corp. ( [2017] FCA 39; [2017] FCA 1500) [Australia],abstracted at 2018 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 575.
3 Good Living Co.Pty Ltd. v. Kingsmeade Pty Ltd.( [2017] NSWSC 641) [Australia], abstracted at 2018ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 499. At para [17], the court observes: ‘I consider itsufficiently arguable for present purposes, that if the defendants had no right to call on the bank guarantee, theirconduct in doing so would be unconscionable within the meaning of the section…’. And at [19] the courtreiterates: ‘I am satisfied that there is sufficient to infer that the plaintiffs may have an entitlement to make aclaim for relief on the footing that the guarantee was called on without a proper basis, so as to make thedefendants’ conduct unconscionable.’
4Matthew Bisley and James Mok, ‘Unconscionable demands under letters of credit, performance bonds and bankguarantees’ (2005) 16 Journal of Banking and Finance Law and Practice 197
5 In Simic v New South Wales Land and Housing Corporation [2016] HCA 47，the then Chief Justice of theHigh Court of Australia, French CJ, observed obiter (at [8]) that the autonomy principle did not preclude a claimof unconscionable conduct being raised against a beneficiary calling upon a performance bond.
6 Thanuja Rodrigo, ‘Injunctions restraining the enforcement of letters of credit and performance guarantees: TheAustralian experience’ (2016) 44 Australian Business Law Review 404. referring (at 415) “fundamental principleof public policy that a court will not lend its authority and assistance to a party seeking to invoke its process inconnection with seriously reprehensible conduct”.
7 The decision of the Vitorian Supreme Court in Olex Focas Pty Ltd v. Skodaexport Co Ltd [1998]3 VR 380.
8 Boral Formwork & Scaffolding Pty Ltd. v. Action Makers Limited ([2003] NSWSC 713 – Supreme Court ofNew South Wales (5 August 2003), abstracted at 2004 ANNUAL SURVEY OF LETTER OF CREDIT LAW &PRACTICE 254.
9 Board Solutions Australia Pty. Ltd. v. Westpac Banking Corporation ([2009] VSC 474), abstracted at 2010ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 453.
10 Telvent Australia Pty. Ltd. V. Acciona Infrastructure Australia Pty. Ltd (2016)QSC201 (Australia), abstractedat 2017 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 623.
11 (English)Courts will generally decline to uphold an unconscionable transactions not fraudulent but yet unfair,quoting from The Oxford Companion To Law, P.1247, Glarendon Press, Oxford, 1980.
12Thanuja Rodrigo, ‘Theoretical justifications for restraining ‘unconscionable demands under on-demandguarantees’ (2012) 40 Australian Business Law Review 5
13 Shanghai Electric Group Co v. PT Merak Energi Indonesia, abstracted at 2011 ANNUAL SURVEY OF LETTEROF CREDIT LAW & PRACTICE 557.
14 Boustead Singapore Ltd. v. Arab Banking Corp., abstracted at 2016 ANNUAL SURVEY OF LETTER OF CREDITLAW & PRACTICE 328.
15 New Civilbuild Pte Ltd v. Guobena Sdn Bhd & Anor, abstracted at 2000 ANNUAL SURVEY OF LETTER OFCREDIT LAW & PRACTICE 343.
16 FAIRNESS AT THE EXPENSE OF COMMERCIAL CERTAINTY: THE INTERNATIONALEMERGENCE OF UNCONSCIONABILITY & ILLEGALITY AS EXCEPTIONS TO THE INDEPENDENCEPRINCIPLE OF LETTERS OF CREDIT & BANK GUARANTEES, NORTHERN ILLINOIS UNIVERSITYLAW REVIEW, Vol. 32, Issue 2 – Spring 2011,by Roger J. JOHNS and Mark S. BLODGETT, reprinted at2012 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 107.
17 Fleet National Bank v. Omni Industries, abstracted at 2001 ANNUAL SURVEY OF LETTER OF CREDIT LAW &PRACTICE 221. (The case was decided by the USA Court.)
18 John F. DOLAN,“BAD FAITH AND UNCONSCIONABILITY”, reprinted at 2013 ANNUAL SURVEY OFLETTER OF CREDIT LAW & PRACTICE 102.(quoting there are grave and underestimated perils in bringing thedoctrines of unconscionability into letter of credit (or independent guarantee) law and practice.)
19 In Simic v. New South Wales Land and Housing Corporation [2016] HCA 47, the then Chief Justice of theHigh Court of Australian, French CJ, observed obiter(at[8] that the autonomy principle did not preclude a claimof unconscionable conduct being raised against a beneficiary calling upon a performance bond.
20 Rodrigo refers (at 415) ‘Even with the development of the unconscionable conduct exception, it is clear thatthe courts will seek wherever possible to preserve the autonomy principle’.
21 Bill Dixon, ‘As good as cash? The diminution of the autonomy principle’ (2004) 32 Australian Business LawReview 391
