Shinetec (Australia) Pty Ltd. v. The Gosford Pty Ltd. [2024]

Factual Summary:

To support[[1]] its performance and funding obligation for The Gosford Pty Ltd.’s (Principal/Beneficiary) construction project, Shinetec (Australia) Pty Ltd (Contractor) had its parent company, Shanxi Construction Investment Group Co. Ltd. (Contractor Parent/Applicant)[[2]] apply for and cause Bank of China Ltd., Shanxi branch (Issuer) to issue a AUD 37 million ISP98 standby letter of credit in favour of Principal/Beneficiary. The standby was advised, albeit on a “Letter of Guarantee” form, by Macquarie Bank Ltd. (Advising Bank) and would expire on 31 July 2021. Within the full copy of the “Letter of Guarantee” advice, the type was stated as “Performance”. The Judgment provided copies of the standby and presented demand.

see also: Questions and Observations on the Shinetec Case

The standby required a written demand stating that Contractor was in default, in what respects, and the amount claimed. Additionally, the standby required that “any such demand in original should be presented to us [Issuer] through your bank [Advising Bank] confirming that the signatures thereon are authentic with their confirmation by authenticated SWIFT.” While no choice of law was stated, the trial Judge applied Chinese law concluding that legal system had the closest connection to the standby. That finding was not challenged on appeal.

Work on the project began December 2020. As part of the underlying contract and annexure, Contractor agreed to fund the initial AUD 37 million of the project; the contract also stipulated that “the rights, entitlements, liabilities and obligations of the parties were suspended until all conditions precedent were satisfied.” A subsequent “Loan Agreement” was entered after the underlying contract was executed. After some works and demolition occurred, Contractor issued two progress claims which the project superintendent approved. It appears Contractor extended some AUD 4 million via the Loan Agreement but not the full AUD 37 million. Later, a dispute arose and Principal/Beneficiary issued a “show cause notice” and Contractor issued a “notice of delay”.

Project works ceased and Principal/Beneficiary began to experience financial distress: “[n]o fewer than three sets of receivers were appointed” (Appeal para.39). One day before expiration, 30 July 2021, Principal/Beneficiary, through its solicitor, made a full demand on the standby. The five-page demand stated detailed claims of breach as well as assessments of damages. The demand was made by “The Gosford Pty Ltd. (Receivers and Managers Appointed)” and signed by each receiver as “Joint Receiver & Manager”. The same day, Advising Bank sent Issuer a SWIFT message (reprinted below) authenticating the signatures. (Appeal para.42).[[3]]

Considering the documents to be complaint, Issuer forwarded the demand to its “International Settlement Discount Processing Centre in Beijing”.[[4]] After Parent/Applicant alleged the demand did not comply, Issuer sent Advising Bank a SWIFT message requesting additional documents under ISP98 Rule 6.13. The presence of the receiver signatures led Issuer to believe the ISP98 rules on Transfer by Operation of Law applied, i.e. ISP98 Rules 6.11-13.  

In response, Contractor pursued ex parte injunction orders[[5]] against Principal/Beneficiary, its receivers and Advising Bank to restrain the demand, prevent any LC proceeds from being transferred, and to prevent Advising Bank from taking further steps (although no request for withdrawal of the demand was made). No injunctive orders in Australia were requested against Issuer. The same day, Parent/Applicant initiated civil suit in the People’s Republic of China (PRC) alleging LC fraud by Principal/Beneficiary and included Issuer as “third party”. On 3 August 2021, the Taiyuan Intermediate People’s Court issued its ruling against Issuer to “suspend payment” pursuant to PRC Civil Procedure Article 100 and Article 12 of Provisions of the Supreme People’s Court on Some Issues Concerning the Trial of Cases of Dispute Over Letters of Credit. That order had been extended and was in place at the time of this appeal and until at least 24 July 2024. Notably, Principal/Beneficiary had not been served process of these proceedings.

In the Australian proceedings, Contractor obtained eight broad restraining orders from its ex parte application. Issuer unsuccessfully sought a stay on the basis of forum non conveniens. After further procedural matters, the dispute was set for trial in October 2023. The trial court dismissed each of Contractor’s claims. Separately, Principal/Beneficiary cross-claimed Issuer for an order that it honour the standby. The cross-claim was granted but judgment stayed pending resolution of the PRC civil action. Contractor appealed. The New South Wales Court of Appeal, Leeming, Kirk and Ward, JJ., dismissed an application to adduce new evidence and dismissed the appeal.

Analysis of Trial Judgment:

While the trial and appellate courts gave some consideration to the precise operation of the underlying contract and Loan Agreement, ultimately little turned on those matters as Contractor had maintained from its initial ex parte application that the standby demand was “invalid and of no effect.” Critically, fraud was never alleged in the Australian proceedings while Parent/Applicant alleged fraud in the PRC. Contractor’s allegation that the demand was “invalid” was principally based on the demand containing “false” statements. A second basis, that the sole purpose of the LC was to support Contractor’s obligation to advance the initial AUD 37 million which it did by entering the Loan Agreement (put differently, Principal/Beneficiary allegedly breached an “implied negative stipulation” that it would not demand standby payment so long as Contractor advanced funds), was rejected on procedural grounds. The “implied negative stipulation” claim was advanced via an amendment one day before trial.     

Apart from its negative stipulation argument, Contractor alleged that by merely entering into the Loan Agreement, it satisfied the obligation to advance AUD 37 million. That the demand expressly alleged that Contractor failed to advance the agreed funds rendered the demand invalid. The trial court disagreed. The underlying contract expressly contemplated that Principal/Beneficiary would be “paid” the AUD 37 million, particularly in the context of when Principal/Beneficiary might be obligated to return the standby to Contractor: “that reflected the manifest commercial purpose of the Letter of Credit, which was to ensure that [Principal/Beneficiary] did not bear the risk that [Contractor] would fail to advance funds, pending determination of any underlying dispute.” (Trial Judgment para.132). What remained were allegedly false statements in the demand.

In alleging that all statements therein were “false”, Contractor argued the demand was “invalid and of no effect”. Critically, Contractor did not claim the false statements were knowingly made (fraudulent) and did not “seek to impugn the validity of the demand as against” Issuer. (Trial Judgment para.144). As the court noted, mere false statements between a beneficiary and issuer (absent an allegation of fraud or unconscionability) are immaterial. Citing ISP98 Rule 1.06, the Judge noted that banks review documents for their compliance with LC terms and conditions and are unconcerned with any underlying dispute between applicant and beneficiary. In light of how Contractor pleaded its case, the trial court dismissed Contractor’s claims and turned to the cross-claim brought by Principal/Beneficiary against Issuer.

Principal/Beneficiary cross-claimed for an order that Issuer honour the demand. Proceeding with a detailed review of ISP98, the trial court cited sections under ISP98 Rules 1, 2, and 5 to offer a general understanding of issuing bank obligations and standard practice regarding review of documents and notices of dishonour. As the standby did not state a choice of law, the trial court concluded that PRC law applied because the standby: (1) was issued in China; (2) required presentation there (Shanxi branch); and (3) designated China as the place of payment.[[6]]

Issuer, while acknowledging the PRC order suspending payment, invoked ISP98 provisions regarding transfer by operation of law, arguing the presence of signatures by Principal/Beneficiary’s receivers constituted a change in beneficiary name. Apart from the name question, Issuer agreed the demand complied and argued its SWIFT message to Advising Bank[[7]] requesting additional documents under ISP98 Rule 6.13 had suspended its undertaking to honour or give notice of dishonour.[[8]] This led the trial court to review in detail ISP98 Rules 6.11-6.13 and how interpretation of ISP98 should be approached.

The trial court noted “ISP98 is designed to facilitate harmonised practice in respect of standby letters of credit.” Citing ISP98 Rules 1.03 and 1.11, the court addressed ISP’s internal interpretive principles and, much like UCP600, the Rules are intended to be applied and read consistently worldwide.[[9]] Notably, Issuer drew attention to the ISP98 Official Commentary, arguing it “appears” to be incorporated by reference. The Judge thought that view went too far[[10]] but expressed:

It may be that the correct conclusion is that the Official Commentary is available as extrinsic evidence, resort to which could be had were there any ambiguity or uncertainty in the words used in ISP98. But I think [Principal/Beneficiary] was correct to submit that the Official Commentary could have no more than a limited role of aiding in the construction of ISP98, and could not prevail or change what appears from the text of ISP98. [Trial Judgment para.210].

Issuer, citing Official Commentary discussion of ISP98 Rule 6.11, which guides when the Rules on Transfer by Operation of Law apply, argued that a mere name change of a beneficiary may be sufficient. The Judge disagreed; nothing in ISP98 Rule 6.11 suggests a mere name change is sufficient to invoke those rules and the Commentary only mentions that a name change could “trigger” succession of a beneficiary.[[11]] As mentioned, Principal/Beneficiary delivered the demand via its solicitor and included a note that its Advising Bank would confirm via SWIFT the authenticity of the signatures.

Advising Bank sent its message the same day which expressly named Principal/Beneficiary as making the demand and that the signatures were “of the officers of [Principal/Beneficiary].” (See Trial Judgment para.230). Accordingly, the trial court ruled ISP98 Rules 6.11-6.13 were not engaged and Issuer improperly requested further documents; additionally, Issuer did not give proper notice of dishonour. As such, the cross-claim by Principal/Beneficiary was granted, but judgment stayed pending the PRC civil proceedings.  

Analysis of Appellate Judgment:

The appellate court began by noting the “unusual” submissions by Contractor and Parent/Applicant (which had been granted permission to join as second appellant). Many arguments raised on appeal were not advanced at trial, or those which Contractor was not permitted leave to pursue (the “implied negative stipulation” claim). The court lamented the need to review so much history: “[i]ndeed, the parties’ submissions about whether the appellants should be permitted to run new submissions occupied at least as much time at the hearing of the appeal as submissions about the substantive points themselves.” (Appeal para.8). As for the substantive arguments, the court noted that Contractor and Parent/Applicant “misapprehend[ed]” LC law and practice, when demands may be resisted, the “nature of the appointment of receivers”, and “the nature of interlocutory relief.” Notably, the court expressed that the “relevant law is not especially complicated.” (Appeal para.10). After reviewing general LC law and the fraud exception, the appellate court provided its own review of the facts, procedure, and reason for decisions at trial.

The appellate court expressed that the reasons given by the trial Judge in rejecting Contractor’s claims were “impeccable”. The first ground of appeal the court opted to review was Contractor’s argument that the trial court had improperly denied leave to advance the “implied negative stipulation” claim. The appellate court was not persuaded: “It is difficult in the extreme to find reviewable error in the refusal to allow a late amendment unaccompanied by any explanation for the delay on the first day of the trial based on submissions which were not made to the primary judge.” (Appeal para.115). Allowing the amendment would have procedurally prejudiced Principal/Beneficiary as it constituted “an elaborate alternative position, to which [Principal/Beneficiary] was entitled to more notice than it was given.”

The next ground for appeal went to the allegation that the demand was “invalid” as against Principal/Beneficiary because of its breach of the underlying contract. Not only did Contractor (and Parent/Applicant) attempt to reargue its trial claims, efforts were made to reinstitute its procedurally rejected “implied negative stipulation” argument. Again, the appellate court was not persuaded. As a general matter, the court noted that these arguments were “far from an ordinary case” where a party attempts to raise new matters on appeal.

While the ground to rehash this argument was rejected for procedural reasons, the principal claims seeking to invalidate the demand as between Contractor and Principal/Beneficiary led the court to unpack how misconstrued the arguments were under general letter of credit law. Here, the appellate court focused on the independence principle, also quoting ISP98 Rule 1.06 and Rule 1.07. While Contractor and Parent/Applicant suggested their claims did not interfere with independence, the court[[12]] disagreed:

But the point of that principle is that save in the case of fraud or unconscionability, an issuer must honour its standby letter of credit after being presented with documents which on their face are valid. These grounds [for appeal] fly in the face of the nature of a standby letter of credit as an independent documentary undertaking. [Appeal para.138].

In resolving to dismiss this ground for appeal, the court expressed that “[t]he claim that a demand is ‘invalid’ (or ‘void’ or ‘of no effect’) because there is a breach of the Construction Contract is bad in law. It is inconsistent with the nature of a standby letter of credit.” (para.149).

For appeal ground 6, Contractor and Parent/Applicant argued that ISP98 Rules 6.11 through 6.13 ought to have applied because the demand was expressly signed by the receivers. In essence, Issuer was right to have requested further documentary information and should have neither honoured nor given a notice of dishonour. Notably, Issuer did not appeal the decision of the trial court that ISP98’s rules regarding transfer by operation of law were not invoked. The appellate court considered allowing the argument on the basis that Parent/Applicant would be an interested party as Issuer would look to it for reimbursement (i.e. standing purposes). Nevertheless, the arguments were properly addressed at trial, and there was no basis for invoking ISP98 Rules 6.11-6.13.

The short point is that there is no successor to which [Principal/Beneficiary]’s property has been transferred by operation of law. The receivers did not issue the demand in their own name. They did not seek payment to themselves. They made the demand in their capacity as receivers of [Principal/Beneficiary], and the funds were to be paid into [Principal/Beneficiary]’s bank account. [Appeal para.163].

The ISP98 Rules hinge on presentation of documents by a party other than the named beneficiary as if it were an “authorised transferee” of the beneficiary. As the trial court properly concluded, the demand was not being made by the receivers in their personal capacity, but rather by Principal/Beneficiary through its authorised receivers and officers.[[13]] In dismissing this argument, the court proceeded to final issues regarding effect of the PRC order suspending Issuer’s undertaking to honour and allegations of abuse of process.

Contractor and Parent/Applicant claimed the trial court erred in its decision granting the cross-claim lodged by Principal/Beneficiary against Issuer. The appellate court disagreed. The arguments relied in part on ISP98 Rules 6.11-6.13 being invoked, and in part on interpretation of the PRC order suspending payment. As had been settled, there was no basis for the ISP98 rules on transfer by operation of law applying. As for clarifying the effect of the PRC order, the appellate court noted the “confusion” of these arguments regarding

… the primary rights and obligations as between the parties, and the interlocutory orders made by courts. [Issuer] was obliged to make payment following presentation of the demand. It was excused, for the time being, from doing so following the granting of injunctions. But that did not mean that the [AUD] 37,000,000 was not due and payable for the purposes of determining whether there was a debt. Instead, it meant that, for the time being, [Issuer] was unable to pay. [Appeal para.187].

Accordingly, this led the appellate court to the “problems brought about by the parallel proceedings commenced” by Contractor and Parent/Applicant. While not all such proceedings are “vexatious or oppressive”, the court considered the instant action “a very clear case” of abuse. After quoting a lengthy trial court transcript excerpt wherein Contractor failed to adequately respond to questions on how the duel proceedings and legal claims were not abusive (see Appeal para.193), the appellate court expressed:

There is no reason that a claim for fraud could not have been made in the proceedings in New South Wales, assuming there is a proper basis for one. There is no reason why any of the relief sought by [Parent/Applicant] in the Taiyuan Intermediate People’s Court could not have been sought in the Supreme Court for New South Wales, assuming there was a proper basis to do so. [Appeal para.194].

Interestingly, Parent/Applicant refused to abandon its proceedings in the PRC while also successfully joining the appeal and seeking to raise arguments Issuer had lodged to defend the cross-claim against it at trial. Ultimately, the appellate court did not render an order regarding abuse of process but indicated that a formal request could be made to the trial court when resolving the stayed judgment against Issuer. Thus, the entirety of the appeal was dismissed, although the court mentioned in Appeal para.201 that Contractor and Parent/Applicant have already filed a further notice of appeal.

[[1]]: Some factual background derived from Trial Judgment

[[2]]: Hereinafter “Parent/Applicant”

[[3]]: Notably, the 30 July 2021 SWIFT message by Advising Bank expressly stated that the signatures on the demand “have been sighted by us and are authentic signatures of the officers of [Principal/Beneficiary].”

[[4]]: There was some evidence Issuer directly notified Parent/Applicant about the demand; Parent/Applicant requested Issuer to dishonour. See Trial Judgment paras.45-46

[[5]]: From the Supreme Court of New South Wales Equity Division

[[6]]: Trial court also cited ISP98 Rule 1.08(d)

[[7]]: As mentioned, the ex parte order obtained by Contractor enjoined Advising Bank from responding to Issuer or taking any further action. See Trial Judgment para.185

[[8]]: Pursuant to ISP98 Rule 6.13(b)

[[9]]: Quoting Heytex Bramsche GMBH v. Unity Trade Capital Ltd., [2022] EWHC 2488 [England], summarised in Apr. 2023 DCW at 16

[[10]]: Ultimately, the Judge did not render a decision on the precise role of the Official Commentary, but the positive comments on its use could arise in future actions

[[11]]: Citing Official Commentary, page 259

[[12]]: Also citing favourably, P. Ellinger & D. Neo, The Law and Practice of Documentary Letters of Credit (Hart Publishing 2010) at p.138

[[13]]: See Appeal para.173: “In order to reach that conclusion, it has not been necessary for us to have regard to the Official Commentary on the International Standby Practices by Professor Byrne, as to which there was an unresolved dispute as to whether, in accordance with Chinese law, regard might be had. But we heard full submissions on the passages on which the appellants sought to place reliance, and they do not alter our conclusion.”