Orrcon Operations Pty Ltd v Capital Steel & Pipe Pty Limited [2007] FCA 1319 (29 August 2007)

Last Updated: 31 August 2007

FEDERAL COURT OF AUSTRALIA

Orrcon Operations Pty Ltd v Capital Steel & Pipe Pty Limited [2007] FCA 1319

TRADE PRACTICES – CONSUMER PROTECTION – UNCONSCIONABLE CONDUCT – Application for interlocutory injunctions – where contract for sale of goods – where seller beneficiary under irrevocable documentary letter of credit – where third-party bank assignee of proceeds under letter of credit – where third-party bank relied upon assignment – where goods alleged to be defective – where seller alleged knowingly to have delivered defective goods – where seller purported to draw down on letter of credit – where seller not able to repay amounts drawn down – whether serious question to be tried that goods defective – whether serious question to be tried that seller engaged in trade or commerce in conduct that is unconscionable within the meaning of the unwritten law contrary to s 51AA Trade Practices Act 1974 (Cth) – whether s 51AA an exception to the autonomy principle – whether alleged conduct capable of constituting unconscionable conduct as a matter of law – whether serious question to be tried of facts alleged – whether interest of third-party bank prevents relief from being granted – whether balance of convenience favours relief.

Held:- serious question to be tried that goods defective – no serious question to be tried that seller engaged in conduct that is unconscionable contrary to s 51AA – balance of convenience favours refusal of relief – application dismissed.

Bank of New South Wales Act 1850 (NSW)
Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth) s 23
Federal Court Rules O 25A, r 5(5)
Trade Practices Act 1974 (Cth) s 51AA, s 52

Australian Broadcasting Authority v Lenah Game Meats Pty Limited [2001] HCA 63; (2001) 208 CLR 199 referred to
Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 80 ALJR 1672 referred to
Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (No 2) [2000] FCA 2; (2000) 96 FCR 491 referred to
Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; (2002) 117 FCR 301
Boral Formwork and Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) (2003) ATPR 41-953 referred to
Cardile v LED Builders Pty Limited [1999] HCA 18; (1999) 198 CLR 380 referred to
Ciavarella v Balmer [1983] HCA 26; (1983) 153 CLR 438 referred to
Clough Engineering Limited v Oil and Natural Gas Corporation Ltd [2007] FCA 881 referred to
Clough Engineering Limited v Oil and Natural Gas Corporation Limited (No 2) [2007] FCA 927 referred to
Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 referred to
Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 referred to
Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 referred to
Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489 referred to
Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315 referred to
United City Merchants (Investments) Limited v Royal Bank of Canada [1983] 1 AC 168 referred to



































ORRCON OPERATIONS PTY LTD v CAPITAL STEEL & PIPE PTY LTD, EDWARD STUDDY, WESTPAC BANKING CORPORATION AND COMMONWEALTH BANK OF AUSTRALIA
NSD 1346 OF 2007

BESANKO J
29 AUGUST 2007
CANBERRA (VIA VIDEO LINK TO SYDNEY AND ADELAIDE)

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1346 OF 2007

BETWEEN:	ORRCON OPERATIONS PTY LTD Applicant
AND:	CAPITAL STEEL & PIPE PTY LTD First Respondent EDWARD STUDDY Second Respondent WESTPAC BANKING CORPORATION Third Respondent COMMONWEALTH BANK OF AUSTRALIA Fourth Respondent

JUDGE:	BESANKO J
DATE OF ORDER:	22 AUGUST 2007
WHERE MADE:	ADELAIDE (VIA VIDEO LINK TO SYDNEY AND ADELAIDE)

THE COURT ORDERS THAT:

1. The application for interlocutory relief be dismissed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1346 OF 2007

BETWEEN:	ORRCON OPERATIONS PTY LTD Applicant
AND:	CAPITAL STEEL & PIPE PTY LTD First Respondent EDWARD STUDDY Second Respondent WESTPAC BANKING CORPORATION Third Respondent COMMONWEALTH BANK OF AUSTRALIA Fourth Respondent

JUDGE:	BESANKO J
DATE:	29 AUGUST 2007
PLACE:	CANBERRA (VIA VIDEO LINK TO SYDNEY AND ADELAIDE)

REASONS FOR JUDGMENT

1 On 13 July 2007 Orrcon Operations Pty Ltd ("Orrcon") issued a proceeding in this Court against Capital Steel and Pipe Pty Ltd ("Capital Steel"), Mr Edward Studdy and Westpac Banking Corporation ("Westpac").

2 Orrcon is a corporation duly registered under the Corporations Act 2001 (Cth) ("Corporations Act") and at all material times traded in the name and style of "Orrcon Operations Pty Ltd" ACN 094 103 090. At all material times, Orrcon engaged in the business of, inter alia, the manufacture of steel products within Australia. Capital Steel is also a corporation duly registered under the Corporations Act. At all material times it traded in the name and style "Capital Steel and Pipe Pty Ltd" ACN 095 843 039 and engaged in the business of, inter alia, trade in steel pipe. At all material times, Mr Studdy has been the sole director and shareholder of Capital Steel. Westpac is a company incorporated under the Bank of New South Wales Act 1850 (NSW) and is a corporation duly registered under the Corporations Act. At all material times, it engaged in the business of banking, including the provision of documentary letters of credit.

3 On 31 July 2007 the Commonwealth Bank of Australia ("Commonwealth Bank") applied to be added as a party to the proceeding. On that day, Branson J made an order that the Commonwealth Bank be joined as a fourth respondent to the application.

4 In its application Orrcon sought the following interlocutory relief against Capital Steel and Westpac:

"4. A mandatory injunction requiring the first respondent [Capital Steel] to countermand all demands made under the letter of credit.

5. An interim injunction restraining the first respondent, until further order of the court, from making any further demand under the letter of credit.

6. An interim injunction restraining the third respondent [Westpac], until further order of the court, from making any payment pursuant to the letter of credit.

7. In the alternative to paragraphs 4, 5 and 6 above, a freezing order pursuant to order 25A, rule 2 restraining the first respondent from disposing of or dealing with any proceeds received by the first respondent under the letter of credit until further order."

5 On 31 July 2007, Branson J also made an order that Orrcon’s application for interlocutory relief be listed for hearing on 14 August 2007. The hearing proceeded before me on that day and continued on 15 and 16 August 2007. During the hearing, Orrcon reformulated its application for interlocutory relief, and it now seeks the following relief by way of interlocutory relief:

"1. The First Respondent [Capital Steel] be restrained from making any further demand under the Letter of Credit.

2. Third Respondent [Westpac] be restrained from making any payment under the Letter of Credit.

3. The Fourth Respondent [Commonwealth Bank] be restrained, by itself its servants or agents, from calling up, making demand for, or otherwise seeking repayment of, all or any part of the outstanding balance of $12,814,164.85 (together with any interest accrued thereon) of the facility provided by the Fourth Respondent to the First Respondent in the letter of approval date 4 May 2007 from the Fourth Respondent to the First Respondent described as ‘Special Project IDLC Amounts Relating to Orrcon – on temporary basis until project is completed’ of $18,590,000.00 (‘the Facility’).

4. The Fourth Respondent be restrained, by itself, its servants or agents, from exercising any of the securities held by it as security for the Facility, and in particular, the securities listed in the Schedule to the Approval letter dated 4 May 2007 as set out in page 29 to 30 of Exhibit PJG1 to the affidavit of Philip James Grainger sworn on 10 August 2007 in these proceedings.

5. Note that the above orders are not intended to restrain the Fourth Respondent from calling up, making demand for or otherwise seeking repayment of any other facility granted by the Fourth Respondent to the First Respondent, or from exercising any security in respect of any such facility.

6. Note that the Applicant gives to the Court the usual undertaking as to damages with respect to these orders.

7. Note that the usual undertaking as to damages is intended to include any loss caused to the Fourth Respondent by reason of its inability to call up, make demand for or otherwise seek repayment of the Facility or exercise its securities in relation to the Facility until the final hearing of this matter, regardless of the outcome of these proceedings upon a final hearing.

8. Note that the Applicant shall be at liberty to withdraw the undertaking provided by it to the Court as a term of obtaining interlocutory relief upon giving the First and Fourth Respondent 30 days notice in writing, in which event these interlocutory orders will be discharged upon the expiration of that 30 days."

6 I will refer to these orders as the "reformulated orders". The reformulated orders were opposed by Capital Steel and the Commonwealth Bank. Westpac appeared by a solicitor but did not seek to play a part in the hearing.

7 On 22 August 2007 I made an order that the application for interlocutory relief be dismissed. I said that I would deliver reasons and these are my reasons.

Letter of Credit

8 The starting point is the Letter of Credit referred to in the interlocutory orders sought in the application and the reformulated orders. It was issued by Westpac on or about 22 December 2006 and relevantly provides:

"To: COMMONWEALTH BANK OF AUSTRALIA

SYDNEY

...

Form of Doc Credit IRREVOCABLE

Doc Credit Number SD3BM872029

Date of Issue 061222

Applicable Rules UCPURR LATEST VERSION

Expiry Date 070630 Place IN THE BENEFICIARY’S COUNTRY

Applicant Orrcon Operations Pty Ltd

Beneficiary CAPITAL STEEL AND PIPE PTY LTD

...

Amount Currency AUD Amount 19.337.670

...

Available with/by ANY BANK

BY NEGOTIATION

Drafts at ... 120 DAYS FROM BILL OF LADING DATE

Drawee WESTPAC BANKING CORPORATION SYDNEY, AUSTRALIA

Partial Shipments PARTIAL SHIPMENTS ARE ALLOWED

...

Latest Date of Ship 070620

Descript of Goods SPIRAL STEEL PIPE TO AS1579

...

Documents required DOCUMENTS REQUIRED IN DUPLICATE UNLESS OTHERWISE STATED.

+ FULL SET CLEAN ON BOARD OR SHIPPED NEGOTIABLE MARINE BILL OF LADING TO ORDER AND BLANK ENDORSED MARKED FREIGHT PREPAID.

+ COMMERCIAL INVOICES"

The Rules are the Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No 500 ("UCP Rules").

9 I will refer to the Letter of Credit as the "Westpac letter of credit".

The applicant’s claim

10 The following is a summary of Orrcon’s claim as set out in its statement of claim.

11 Dong Bu Steel Co Limited ("Dongbu") is and was at all material times a Korean manufacturer of steel products including spiral steel pipes. As I understand it, Dongbu’s parent company is and was at all material times Daewoo International Corp ("Daewoo") of Seoul, Korea.

12 In October 2006 Orrcon engaged in negotiations with the State of Queensland for the supply of steel pipe by Orrcon to the State of Queensland. The pipe was to be used in a project to be undertaken by the State of Queensland called the "South East Queensland Water Grid Projects" ("SEQ Water Grid Projects").

13 In November 2006 Mr Studdy, for and on behalf of Capital Steel, engaged in negotiations with Orrcon for the supply of steel pipe by Capital Steel to Orrcon to be used in the SEQ Water Grid Projects. The steel pipe was to be manufactured by Dongbu. Orrcon alleges that it had various communications with Mr Studdy and Capital Steel between 27 October 2006 and 21 November 2006. Those communications consisted of electronic messages, specifications and telephone conversations. As a whole they are referred to in Orrcon’s statement of claim as "the November conduct". One important aspect of the communications in the circumstances of Orrcon’s claim is the reference to the yield strength (in terms of megapascals (MPa)) that the pipe was to meet.

14 Orrcon entered into a contract with Capital Steel "for the supply of 33,000 metres each of 960 mm and 1086 mm x 8 mm spiral steel pipe manufactured by Dongbu to AS1579 with 300 MPa yield strength and with mill test certificates". The communications alleged to make up the contract are set out in the statement of claim. It is not necessary to set them out in these reasons. At the time the contract was made, Capital Steel and Mr Studdy knew that the pipe to be supplied under the contract was being acquired by Orrcon for re-supply to the State of Queensland for the SEQ Water Grid Projects.

15 The terms of the contract between Orrcon and Capital Steel are said to be as follows:

1. The price of the pipe was AUD19,337,670 (exclusive of GST).

2. The pipe was to be delivered in five shipments ex-South Korea at the end of January, February, March, April and May 2007 to Port Kembla, Australia.

3. Payment was to be made 120 days from the provision of clean bills of lading.

4. Orrcon was to establish an irrevocable letter of credit for the contract price.

5. The pipe was to comply with the specifications and, in particular, certain minimum technical requirements.

6. If less than 50 per cent of the pipe length formed from any heat, coil or heat treat lot complied with all requirements of the specification, Orrcon was entitled to reject all the pipe from the affected heat, coil or heat treat lot.

7. Pipe quality and project delivery were of the essence.

16 As will become clear, Orrcon’s right to reject pipe (term 6 [15] above) is important.

17 It is alleged by Orrcon that it was a term and condition of the contract that Capital Steel was not entitled to make a claim for payment under the letter of credit unless all of the pipe delivered complied with the specification and AS1579 in all respects. Orrcon alleges that such a term and condition arises as a matter of construction from the description and specification of the pipe to be delivered and the requirement that payment was not due unless the pipe was delivered. In the alternative, Orrcon alleges that such a term arises by implication and pleads the well-known factors for the implication of a contractual term (see Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 ("Codelfa").

18 In December 2006 and in accordance with the specification, a pre-production meeting was convened at Dongbu’s manufacturing plant in Korea for the purpose of reviewing the quality plan and manufacturing procedures to be followed during production of the pipe. The meeting was attended by representatives of Capital Steel, Dongbu and Orrcon. It is said that during the meeting the representatives of Orrcon were told of certain aspects of the manufacturing process which bore upon the minimum yield strength of the pipe and that Pohang Iron and Steel Company (otherwise referred to as "Posco") was to provide the raw material, hot rolled coil. There was discussion about the minimum yield strength of similar sized water pipes manufactured by Dongbu. There then followed communications between Capital Steel and Orrcon, and the upshot of those communications for present purposes was that Orrcon agreed to what it alleges were reduced minimum mechanical properties, the most important one of which was the proposed minimum for yield strength of the steel pipe of 270 MPa (aim 290 MPa). I note that Capital Steel asserts that a figure of 250 MPa was agreed, but it accepts that question is one for trial.

19 On 11 December 2006 Orrcon entered into a formal contract with the State of Queensland for the supply of pipe for the SEQ Water Grid Projects. It alleges that it did so relying on the November conduct and the representations at or about the time of the pre-production meeting. Also relying on those matters it alleges that it instructed Westpac to issue an irrevocable import documentary credit number SD3BM872029 in the amount of AUD19,337,670 in favour of Capital Steel. That was done on 21 December 2006 and the letter of credit was said to contain the following terms:

1. Partial shipments were permitted.

2. Credit was payable within 120 days from the bill of lading date.

3. The latest date of shipment was 20 June 2007.

4. The date of expiry was 11 July 2007.

5. The documents required to be presented to Westpac were a full duplicate set of clean "on board" or "shipped", negotiable marine bill of lading to order blank endorsed marked "freight pre-paid" and commercial invoices.

6. The payment documents must be presented to Westpac within 21 days after issue of the transport document but within the validity of the letter of credit.

20 Orrcon instructed Westpac to amend the letter of credit to increase the document presentation period from 10 to 21 days and to extend the expiry date from 30 June 2007 to 11 July 2007.

21 On 22 February 2007, Orrcon sent Capital Steel a letter dated 5 February 2007 confirming the terms of the contract.

22 Three shipments of pipe were made by Capital Steel. Orrcon says the pipes delivered were defective in that they did not comply with the specification or AS1579. The particulars of non-compliance are that the pipe did not have the reduced minimum specified mechanical properties because the yield strength of the pipe was consistently less than specified. Orrcon also alleges that the yield strength of the coils from which the pipes were manufactured were significantly variable through each coil. Details of the shipments and the invoices rendered by Capital Steel as alleged by Orrcon are as follows:

First shipment:

On about 23 February 2007, Capital Steel shipped 500 lengths of each size of the pipe from Korea and on or about 9 March 2007 Capital Steel rendered tax invoice number 2371 for AUD4,305,632.10 (including GST) to Orrcon for purported delivery of the first shipment.

Second shipment:

On or about 14 March 2007, Capital Steel shipped 476 lengths of each size of the pipe from Korea and on or about 30 March 2007 Capital Steel rendered tax invoice number 2381 for AUD4,133,114.77 (including GST) to Orrcon for purported delivery of the second shipment.

Third shipment:

On or about 14 April 2007, Capital Steel shipped 501 lengths of each size of the pipe from Korea and on or about 18 April 2007 Capital Steel rendered tax invoice number 2424 for AUD4,346,689.83 (including GST) to Orrcon for purported delivery of the third shipment.

23 It is alleged that Capital Steel presented documents to Westpac purporting to draw on the letter of credit for each of the three shipments. The documents consisted of invoices, packing lists, original bills of lading and mill test certificates. It is not necessary for me to set out the details of the documents presented. On 14 March 2007, Capital Steel presented documents to Westpac purporting to draw on the letter of credit for the first shipment and on the same day and in reliance of the authenticity of the first shipment payment documents, Westpac issued Orrcon with a schedule of term drawing under documentary credit for AUD4,334,360.25 with a maturity date for payment to Capital Steel of 25 June 2007. On 10 April 2007, Capital Steel presented documents to Westpac purporting to draw on the letter of credit for the second shipment and on the same day and in reliance of the authenticity of the second shipment payment documents, Westpac issued Orrcon with a schedule of term drawing under documentary credit for AUD4,133,114.77 with a maturity date for payment to Capital Steel of 12 July 2007. The maturity dates in relation to the first and second schedules were extended to 24 August and 10 September 2007 respectively. On 9 May 2007, Capital Steel presented documents to Westpac purporting to draw on the letter of credit for the third shipment and, on the same day, in reliance on the authenticity of the third shipment payment documents, Westpac issued Orrcon with a schedule of term drawing under documentary credit for AUD4,346,689.83 with a maturity date to Capital Steel of 11 October 2007.

24 Orrcon alleges that conduct by Capital Steel in November 2006 and at the meeting in December was misleading or deceptive or likely to mislead or deceive in contravention of s 52 of the Trade Practices Act 1974 (Cth) ("TPA"). It alleges that Capital Steel knew or ought to have known that Dongbu intended to source its hot rolled coil from Tangshan Iron and Steel Co Limited ("Tangshan") rather than Posco. It alleges that the pipes delivered by Capital Steel were defective and did not comply with the specification or AS1579. Further, or in the alternative, Orrcon alleges that the first, second and third purported drawings down on the Westpac letter of credit (or any one of them) was conduct by Capital Steel that was misleading or deceptive or likely to mislead or deceive in contravention of s 52 of the TPA. It is unnecessary for me to set out the details of this plea. It is sufficient to say that it relates to the accuracy of the mill test certificates in terms of the pipe actually delivered. Orrcon alleges that Mr Studdy aided, abetted, counselled or procured Capital Steel’s contravention of s 52 and was directly or indirectly, knowingly concerned in or party to that contravention within the meaning of s 75B of the Trade Practices Act.

25 Orrcon makes a further plea which is important in terms of its present claim for interlocutory relief. It is a plea of unconscionable conduct within s 51AA of the Trade Practices Act 1974 (Cth) and it is in the following terms:

"42. Further and in the alternative, by its knowing failure to deliver pipe that complied with the specification and AS1579 in breach of its obligations under the contract but nevertheless making and seeking to rely on the first, second and third purported drawings down on the letter of credit is particularised in paragraphs 31, 33 and 37 above, in circumstances where it lacks the financial capacity to repay those drawings down, Capital Steel has engaged and is engaging in unconscionable conduct within the meaning of s 51AA of the Trade Practices Act 1974 (Cth)."

26 A good deal of the argument before me focused on whether Orrcon had established a serious question to be tried in terms of that plea.

27 Orrcon also alleges that by reason of the delivery of defective pipe, the failure to deliver the pipe on time or at all and the making of the first, second and third purported drawings down on the Westpac letter of credit, Capital Steel had breached its contract with Orrcon. Those breaches were such that Orrcon was entitled to terminate the contract which it did by letter dated 12 July 2007.

28 Orrcon alleges that it has suffered loss and damages as a result and it claims the following:

"1. Orrcon has been unable to supply the pipe under the head contract and thereby Orrcon has lost profits of AUD9,376,781.

2. Orrcon has incurred additional costs of AUD2,682,453.14 comprising:

(a) testing costs of AUD1,297,770.02;

(b) handling costs of AUD647,807.54;

(c) transportation costs of AUD657,134.70;

(d) travelling costs of AUD79,740.88."

29 In terms of final relief, Orrcon claims various declarations, injunctions and damages. Importantly, it claims a mandatory injunction requiring Capital Steel to countermand the drawing requests it has made pursuant to the Westpac letter of credit and to consent to the cancellation of the Westpac letter of credit. It also seeks an injunction restraining Capital Steel from making any further demands on Westpac pursuant to the Westpac letter of credit and an injunction permanently restraining Westpac from making payments to Capital Steel pursuant to the Westpac letter of credit.

The Commonwealth Bank

30 The Commonwealth Bank was joined as a party to the proceeding and is the fourth respondent. It is convenient at this point to outline briefly the basis upon which it claims an interest in the proceeding.

31 The Commonwealth Bank has been the principal banker to Capital Steel since approximately October 2005. Among the various facilities that it has extended to Capital Steel is a trade finance facility for the purpose of supporting Capital Steel’s international trade and related domestic transactions.

32 It seems that on 14 March, 10 April and 9 May 2007, Westpac informed the Commonwealth Bank in the latter’s capacity as advising bank that the Westpac letter of credit drawings had been accepted in respect of the subject amounts and informed the Commonwealth Bank that it would remit those respective amounts at the respective maturity dates. The maturity dates have been extended by the consent of all parties and no moneys have as yet been remitted by Westpac, as the maturity dates have not yet arrived. However, the Commonwealth Bank has advanced discounted amounts to Capital Steel on the faith of the communications it received from Westpac and those amounts have been used to pay Dongbu or its holding company. The Commonwealth Bank asserts, and this does not appear to be in dispute, that if Westpac does not make payment under the Westpac letter of credit it may need to protect its position by making a demand on Capital Steel. It appears that Capital Steel would not have the funds to meet that demand. The Commonwealth Bank applied to be joined because it had an interest in whether or not interlocutory relief was granted and because it wished to be in a position to "address the Court on the broader issue of policy considerations relating to the integrity of the letters of credit".

33 Mr Phillip Grainger is an employee of the Commonwealth Bank. He is a manager, trade – services, sales. He was involved in the provision of a facility to Capital Steel in relation to the pipe to be purchased by it and to be supplied by it to Orrcon. At the request of Capital Steel the Commonwealth Bank issued letters of credit in favour of Daewoo. Mr Grainger relied on the Westpac letter of credit and decided that it was unnecessary for Capital Steel to provide further security for the facility which it then sought. Had Mr Grainger thought that there was any risk that Westpac would not pay out in accordance with the Westpac letter of credit, he would not have authorised the granting of a facility to Capital Steel without first obtaining further tangible security. Mr Grainger gave evidence as to the importance of the integrity of the letters of credit being preserved.

34 Mr Grainger gave details of the process whereby the Commonwealth Bank granted a temporary increase in the trade finance facility it provided to Capital Steel. In the context of that increase, on 2 January 2007 Mr Studdy, for and on behalf of Capital Steel, signed what is referred to as a request for assignment of proceeds. The key clause in the document signed by Mr Studdy on that day is as follows:

"Capital Steel and Pipe Pty Limited being the beneficiary of Irrevocable Documentary Credit No: SD3BM872029 established by Westpac Banking Corporation, Sydney, dated 22 December 2006, which documentary credit is held by the Commonwealth Bank of Australia (CBA), Trade Services, Level 3, 120 Pitt Street, Sydney, hereby irrevocably authorises the CBA, upon their receipt of clear proceeds from drawings under the documentary credit to apply the funds in the consideration of any amount that may be payable (or having already been paid) with regard to the documentary credit(s) that Capital Steel and Pipe Pty Limited seeks to have established in favour of Daewoo International Corp and/or Dongbu Steel Co Limited, of Korea."

35 That document was said to have been given in response to a condition of the facility provided by the Commonwealth Bank to Capital Steel to the effect that Capital Steel was to sign a letter "assigning proceeds of the Westpac letters of credit (issued by Orrcon in favour of Capital Steel and Pipe Pty Ltd) to the CBA".

36 On 9 January 2007, the Commonwealth Bank issued an import documentary letter of credit (IDLC No 3523722255) in favour of the supplier of the first shipment of steel, namely Daewoo International Corp of Seoul, Korea, ("Daewoo") in the sum of USD1,922,915. A condition of the Commonwealth Bank’s approval to the issue of the documentary letter of credit in favour of Daewoo was the prior receipt or advice of the Westpac documentary letter of credit from Orrcon in favour of Capital Steel. Mr Grainger states that had it not been for the receipt of the Westpac letter of credit, he would not have authorised the issue of the letter of credit in favour of Capital Steel’s Korean supplier. The Commonwealth Bank has paid Daewoo under the letter of credit. The Commonwealth Bank has forwarded to Westpac the documents required under the Westpac letter of credit. That was done on 8 March 2007. On 13 March 2007 the Commonwealth Bank was advised by Westpac that it had received acceptance from Orrcon of an amended amount of AUD4,334,360.25. On 16 March 2007, Westpac confirmed in writing that at maturity it would remit the relevant amount to the Commonwealth Bank. A similar process occurred in relation to the second and third shipments. Details are set out below ([74]-[82]).

37 Mr Grainger gave evidence to the effect that if the Court granted the relief sought by Orrcon and restrained payment by Westpac of the amounts payable under the Westpac letter of credit then the Commonwealth Bank would have an unsecured loan exposure to Capital Steel of approximately AUD13,000,000. Although the Commonwealth Bank has security securing the indebtedness of Capital Steel, that would not be sufficient to secure payment of such an amount. If interlocutory relief is granted, the Commonwealth Bank may consider taking control of Capital Steel and taking such other steps as may be available to it to minimise its exposure by realising such tangible security as it holds.

38 Although this is an interlocutory application, it must be said that by and large the evidence of Mr Grainger as set out above was not challenged by Orrcon. In any event, most of the matters asserted by the Commonwealth Bank are established by the documents put before me.

39 It was the evidence of the Commonwealth Bank which appears to have prompted Orrcon to put forward the reformulated orders (see [5] above). The third and fourth orders are designed to prevent prejudice to Capital Steel resulting from the first and second orders. The seventh order is designed to prevent prejudice to the Commonwealth Bank because it is intended to provide that any loss suffered by the Bank will be paid by Orrcon irrespective of whether or not Orrcon is successful in the proceeding. I will discuss these matters in detail in the context of the balance of convenience.

Issues on the application for interlocutory relief

40 The test for the grant of an interlocutory injunction was most recently considered by the High Court in Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 80 ALJR 1672. I refer to the observations of Gleeson CJ and Crennan J at 1682-1683 [19] and Gummow and Hayne JJ at 1691-1692 [65]-[72].

41 Capital Steel submits that Orrcon has not established that there is a serious question to be tried that the steel pipe Capital Steel supplied under the contract was defective in the sense that it did not comply with the terms of the contract between it and Orrcon. If a serious question to be tried is not established in relation to that matter then, it is submitted by Capital Steel, Orrcon’s case falls away. Further, or in the alternative, Capital Steel submits that Orrcon has not established that there is a serious question to be tried that relief would be granted restraining payment under the letter of credit. The focus of the argument here was that there was not a serious question to be tried that Capital Steel has been guilty of unconscionable conduct within s 51AA of the TPA. Further, or in the alternative, Capital Steel submits that the balance of convenience favours refusing the interlocutory relief sought by Orrcon.

A serious question to be tried in relation to the allegation that the pipe was defective

42 Orrcon relied on evidence from Dr Graham Powell who is a research metallurgist. He has prepared a report dated July 2007 and a supplementary report dated August 2007. Orrcon also relied on evidence from Dr John Field who is a statistical consultant. He has prepared a report dated 9 August 2007 and a supplementary report dated 12 August 2007. Orrcon also relied on evidence from Mr Victor Konstantinoff who holds a Bachelor of Science degree and is the branch operations manager employed by ETRS Pty Ltd ("ETRS").

43 The evidence before me is to the effect that ETRS is a specialist testing laboratory that specialises in providing non-destructive inspection and testing, metallurgical testing and analysis, failure investigation and condition assessment. Tensile testing of materials, including steel, is a common procedure undertaken by ETRS and the provision of that service is one of ETRS’s key capabilities.

44 On 26 March 2007, Orrcon engaged ETRS to conduct testing on samples of steel pipe provided to it. ETRS conducted tests on the samples provided by Orrcon to ETRS in May 2007. The testing was of transverse pieces of the sample pipes. Mr Konstantinoff identified the test reports produced by ETRS.

45 I allowed brief cross-examination of Mr Konstantinoff by Capital Steel. It transpires that ETRS also performed tests on samples of steel pipe provided by Orrcon throughout April 2007. It seems that ETRS misunderstood its instructions and in April carried out tests of longitudinal pieces of the sample pipes rather than transverse pieces.

46 Dr Powell was provided with the ETRS test reports dated May 2007. He was not provided with the test reports dated April 2007. I allowed brief cross-examination of Dr Powell. It was put to him by counsel for Capital Steel that he would need to "withdraw" the conclusion reached in his report until such time as he had had the opportunity to consider the test reports carried out in April 2007. He did not agree with that proposition. He said that longitudinal results yield stress results that are always larger than the transverse results. He said that the transverse results are critical. He referred to the change in the microstructure of the steel and what happens in the rolling of the steel from the slab to the coil and the effect the rolling has on the segregation in the coil. The transverse results are lower than the longitudinal results. Dr Powell agreed that he did not consider whether the samples were statistically representative.

47 Dr John Field was given the results of the sample tests carried out by ETRS. Based on the results of the sample tests, he was asked to estimate the proportion of the overall number of pipes which did not comply with the contractual provision as to unit strength. He expressed a conclusion as follows:

"Subject to the reservations about the representativeness of the sample expressed in the previous section, it can be stated with 95 per cent confidence that at least 62.5 per cent of the pipes delivered had yield strength below 270 MPa. Thus, the delivery does not meet a minimum yield strength specification of 270 MPa."

48 Dr Field was questioned by counsel for Capital Steel on whether the sample he relied on for the purposes of drawing a conclusion as to yield strength between pipes within a coil was sufficient. He agreed that had he been given certain information as to variations between pipes within a coil, he might have concluded that it was not safe to assume that the testing which took place predominantly from the middle of the coil was in fact representative of yield strength of the entire coil.

49 Capital Steel submitted that the reservations expressed by Dr Field were such that Orrcon had not established a serious question to be tried that the pipes delivered to it by Capital Steel did not comply with the contract. I do not agree. In my opinion Capital Steel’s challenges to the expert evidence put forward by Orrcon are matters to be determined at trial. There appear to be some difficult factual issues which can only be properly determined at trial. In my opinion, the evidence put forward by Orrcon establishes that there is a serious question to be tried that the pipes delivered by Capital Steel to Orrcon did not meet the terms of the contract alleged by Orrcon.

A serious question to be tried in relation to the allegation of unconscionable conduct

50 Section 51AA of the TPA provides as follows:

"(1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the State and Territories.

(2) This section does not apply to conduct that is prohibited by s 51AB or s 51 AC."

51 Orrcon submits, and Capital Steel denies, that there is a serious question to be tried that Capital Steel, in trade or commerce, engaged in conduct that was unconscionable within the meaning of the unwritten law, from time to time, of the State or Territories and that it is entitled to injunctive relief against Capital Steel, Westpac and the Commonwealth Bank under ss 80 and 87 of the TPA. The factual elements of Orrcon’s plea of unconscionable conduct which is set out in [25] above are as follows:

1. Capital Steel’s knowing failure to deliver steel pipe that complied with the specification and AS1579 in breach of its obligations under the contract; and

2. Capital Steel making and seeking to rely on the first, second and third purported drawings down on the letter of credit; and

3. Capital Steel doing those things in circumstances where it lacked the financial capacity to repay those drawings down.

52 Orrcon submits that as a matter of law a category of unconscionable conduct (relevant to this case) is the insistence on the strict application of legal rights in circumstances where to do so is regarded, on the facts of the particular case, to be harsh or oppressive.

53 Orrcon’s plea of conscionable conduct within s 51AA of the TPA raises four issues. They are as follows:

1. What is the relationship between the autonomy principle and unconscionable conduct within s 51AA of the TPA?

2. Is it arguable as a matter of law that the facts as pleaded by Orrcon, if established, constitute unconscionable conduct within s 51AA?

3. Is there a serious question to be tried that Orrcon will establish the facts it alleges amount to unconscionable conduct and, in particular, factual elements 1 and 3 in [51] above?

4. Is there a serious question to be tried to the effect that, assuming unconscionable conduct of the type pleaded is established by Orrcon, relief in the nature of injunctions will be granted restraining Capital Steel from making any further demand under the Westpac letter of credit and Westpac from making any payment under the Westpac letter of credit having regard to the interest of the Commonwealth Bank.

54 I will address each of these questions in turn.

1. The relationship between the autonomy principle and s 51AA of the TPA

55 I was referred to a number of clauses in the UCP rules. It is sufficient to set out the terms of article 3 and to refer to articles 7, 9 and 11. Article 3 provides:

"Credits v Contracts

a Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s) even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or to fulfil any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary.

b Beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the Applicant and the Issuing Bank."

56 In United City Merchants (Investments) Limited v Royal Bank of Canada [1983] 1 AC 168 the plaintiffs sued the defendants under a letter of credit. Lord Diplock, with whom the other law Lords agreed, discussed the autonomy principle and the reasons for it. Although a lengthy passage, I set it out in full. Lord Diplock said (at 182-183):

"It is trite law that there are four autonomous though interconnected contractual relationships involved. (1) The underlying contract for the sale of goods, to which the only parties are the buyer and the seller; (2) the contract between the buyer and the issuing bank under which the latter agrees to issue the credit and either itself or through a confirming bank to notify the credit to the seller and to make payments to or to the order of the seller (or to pay, accept or negotiate bills of exchange drawn by the seller) against presentation of stipulated documents; and the buyer agrees to reimburse the issuing bank for payments made under the credit. For such reimbursement the stipulated documents, if they include a document of title such as a bill of lading, constitute a security available to the issuing bank; (3) if payment is to be made through a confirming bank the contract between the issuing bank and the confirming bank authorising and requiring the latter to make such payments and to remit the stipulated documents to the issuing bank when they are received, the issuing bank in turn agreeing to reimburse the confirming bank for payments made under the credit; (4) the contract between the confirming bank and the seller under which the confirming bank undertakes to pay to the seller (or to accept or negotiate without recourse to drawer bills of exchange drawn by him) up to the amount of the credit against presentation of the stipulated documents.

Again, it is trite law that in contract (4), with which alone the instant appeal is directly concerned, the parties to it, the seller and the confirming bank, ‘deal in documents and not in goods,’ as article 8 of the Uniform Customs puts it. If, on their face, the documents presented to the confirming bank by the seller conform with the requirements of the credit as notified to him by the confirming bank, that bank is under a contractual obligation to the seller to honour the credit, notwithstanding that the bank has knowledge that the seller at the time of presentation of the conforming documents is alleged by the buyer to have, and in fact has already, committed a breach of his contract with the buyer for the sale of the goods to which the documents appear on their face to relate, that would have entitled the buyer to treat the contract of sale as rescinded and to reject the goods and refuse to pay the seller the purchase price. The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment."

57 Lord Diplock said that there was one established exception to the general statement of principle as to the contractual obligations of the confirming bank to the seller and that was where the seller, "for the purpose of drawing on the credit, fraudulently presents to the confirming bank’s documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue" (at 183). Capital Steel accepts that there are two other exceptions and they are breach of a negative stipulation and unconscionable conduct within s 51AA of the TPA. That concession by Capital Steel appears to be correct having regard to the authorities.

58 In view of Capital Steel’s concession, the real issue in this case is whether Orrcon has established a serious question to be tried that Capital Steel has been guilty of unconscionable conduct.

2. Is it arguable as a matter of law that the facts as pleaded by Orrcon if established constitute unconscionable conduct within s 51AA?

59 Orrcon submits that there was unconscionable conduct in this case because Capital Steel was purporting to exercise a legal right, namely, the right to claim payment under the letters of credit in circumstances in which the purported exercise of that right is harsh or oppressive or unreasonable and in bad faith.

60 In order to fall within the terms of s 51AA of the TPA the conduct must be unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories. In Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315 the High Court considered the meaning of the terms "unconscientious" and "unconscionable". In the joint reasons of Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ their Honours made the point (at 324 [20]) that the terms are used across a broad range of the equity jurisdiction. It is wrong to suggest that "sufficient foundation for the existence of the necessary ‘equity’ to interfere in relationships established by, for example, the law of contract, is supplied by an element of hardship or unfairness in the terms of the transaction in question, or in the manner of its performance" (at 325 at [26]). Their Honours discuss the Court’s previous decisions in Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 and Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489. Their Honours endorse (at 328 [37]) the approach taken by Mason CJ in Stern (at 503) that Legione and Ciavarella v Balmer [1983] HCA 26; (1983) 153 CLR 438 established that the Court will not readily relieve against loss of a contract for sale validly rescinded by the vendor for breach of an essential condition "and, in particular, equity was not authorised ‘to reshape contractual relations into a form the Court thinks more reasonable or fair where subsequent events have rendered one side’s situation more favourable’".

61 The Full Court of this Court considered the scope of s 51AA in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; (2002) 117 FCR 301 ("Samton"). The Court identified five categories of case in which equity will intervene under the rubric of unconscionable conduct.

62 It said (at 318 [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 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] HCA 66; (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 [1998] HCA 48; (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."

63 The Court said that the above list may not be exhaustive. The Court made the point that unconscionable conduct within s 51AA was not limited to cases where advantage was taken of a person under a special disability. At the same time the Court said that equity does not provide a remedy simply on the basis that, in the opinion of the judge, conduct is unfair. The section cannot be applied "to unconscionable conduct at large" (at 319 [50]). The Court referred with approval to a passage in the earlier decision of French J in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (No 2) [2000] FCA 2; (2000) 96 FCR 491. In that case French J said (at 509):

"[It] prohibits conduct in respect of which a judge in equity would have been prepared to grant relief. The imposition of the prohibition precedes any actual or notional judicial decision. The judge deciding a case under s 51AA will be asking himself or herself whether he or she would have been prepared to grant relief at equity on the basis of an assessment of the conduct in question as unconscionable."

64 It is not immediately apparent that the facts alleged by Orrcon fall within one of the five categories identified in Samton. In one sense one can say that it is unconscionable or unconscientious to enforce legal rights oppressively or in bad faith but on one view of the authorities the real question is whether there is oppression or bad faith because the circumstances fall within one of the well-known cases in which equity will intervene on the ground that the conduct is unconscionable or unconscientious.

65 Orrcon referred to three first instance decisions in support of its contention that the facts as pleaded by it arguably constitute unconscionable conduct within s 51AA of the TPA.

66 In Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 ("Olex Focas"), Batt J granted injunctions in respect of mobilisation guarantees given in connection with a construction project on the ground that there was a serious question to be tried as to whether the party making a demand under the guarantee had acted unconscionably within s 51AA of the TPA. His Honour took a broad view of what might constitute unconscionable conduct. I refer to his Honour’s observations at 404. In Samton the Full Court said (at 319 [50]) that it did not need to pass on the correctness of the decision in Olex Focas.

67 In Boral Formwork and Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) (2003) ATPR 41-953 ("Boral Formwork"), Austin J considered whether an order should be made restraining a bank which had issued a letter of credit from paying any amount in excess of an undisputed amount to the beneficiary under the letter of credit. The parties seeking the order alleged that the beneficiary under the letter of credit had engaged in conduct that was unconscionable within s 51AA of the TPA. Austin J noted that the principle of autonomy applicable to a standby letter of credit could not override the provisions of the TPA. He referred with approval to the observations of Batt J in Olex Focas. Austin J considered the significance of the beneficiary being insolvent when the call is made on an irrevocable instrument. He said (at [81]):

"If the parties have agreed to protect the beneficiary from credit risk, there is unlikely to be anything unconscionable in the consequence that the beneficiary may (for the benefit of its creditors) call on the irrevocable instrument at the account party’s expense, leaving the account party to claim in the beneficiary’s insolvency if the dispute is resolved in its favour."

A little later, his Honour said (at [94]):

"I hope it is clear, that in deciding to grant the relief sought by Boral, I have given anxious consideration to the principle of autonomy and the dangers associated with any judicial intervention with the performance of unconditional commercial obligations. The terms of the irrevocable instrument and the underlying contract, properly construed, are highly relevant to the decision whether conduct in connection with those arrangements is unconscionable for statutory or equitable purposes. It is not normally unfair or unreasonable or otherwise unconscionable to exercise commercial rights under an autonomous commercial contract, even if (for example) for the purpose of applying pressure to resolve a dispute. Even if the conduct is unconscionable, the principle of autonomy is relevant to the exercise of the Court’s discretion to grant injunctive relief or leave the plaintiff to other remedies. Here the circumstances, involving as they do a call on the letter of credit on a false basis, are sufficiently special to overcome the hesitation which the principle of autonomy generates."

68 In Clough Engineering Limited v Oil and Natural Gas Corporation Ltd [2007] FCA 881, Gilmour J was concerned with an application for leave pursuant to O 8 of the Federal Court Rules to serve an application out of the jurisdiction and for orders to restrain Oil and Natural Gas Corporation Ltd ("ONGC") from taking further steps to demand or obtain payment or renewing or claiming to renew such demand in respect of certain performance guarantees granted by the three respondent banks to ONGC. The applicant, Clough Engineering Limited, sought a declaration that ONGC by demanding and threatening to make a demand on the performance guarantees granted by the banks had engaged in, or proposed to engage in, unconscionable conduct in contravention of s 51AA of the TPA. Gilmour J granted leave to serve and he made an order restraining ONGC from taking any further step to demand or obtain payment or renewing or claiming to renew a demand for payment from the banks under the performance guarantees. Gilmour J said that there was authority which clearly supported the proposition that an inappropriate threat to call or a call on performance guarantees can be unconscionable conduct within s 51AA of the TPA and he referred to the decision in Samton. His Honour considered that it was appropriate to grant an injunction restraining ONGC from making a call on the performance guarantees and he appears to have relied on the fact that there was a serious question to be tried as to whether ONGC’s conduct was unconscionable within s 51AA of the TPA. He also relied on another exception to the autonomy principle, namely, breach of a negative stipulation.

69 Shortly after his Honour made these orders, the banks applied to have them set aside. Gilmour J refused to set aside the orders: Clough Engineering Ltd v Oil and Natural Gas Corporation Limited (No 2) [2007] FCA 927. His Honour said (at [43]):

"I remain satisfied that there is a serious question to be tried as to whether ONGC has acted unconscionably in contravention of s 51AA of the Act in calling on or threatening to call on the performance guarantees despite there being no legal right on its part to do so. As Austin J said in Boral Formwork v Action Makers (2003) ATPR 41-953 at [14] when referring relevantly to s 51AA of the Act: ‘the principle of autonomy applicable to a standby letter of credit, cannot override the statute’. I am also satisfied that upon the same factual matrix, there is a serious issue to be tried whether ONGC is in breach if [sic] the negative stipulation conditioning the right to call up the performance guarantees."

70 I do not think I should attempt to determine the boundaries of unconscionable conduct in s 51AA of the TPA on this interlocutory application. I am prepared to proceed on the basis that it is arguable that a seller of goods who presents the necessary documents under a letter of credit and at the time of doing so has a level of knowledge about the goods and whether they comply with the contract may be guilty of unconscionable conduct within s 51AA. I am prepared to proceed on the basis that such unconscionable conduct could found an order restraining payment under the letter of credit. That, of course, is a very general proposition. However, I am satisfied that the level or nature of the knowledge established on a serious question to be tried basis in this case cannot constitute unconscionable conduct within s 51AA such that relief in relation to the Westpac letter of credit would be granted. My reasons for reaching that conclusion are best explained under the next heading.

3. Is there a serious question to be tried that Orrcon will establish the facts it alleges amount to unconscionable conduct and, in particular, the first and third factual elements?

71 In order to determine if there is a serious question to be tried in relation to the first and third elements it is necessary to refer to the facts in more detail.

72 Although the contract between Orrcon and Capital Steel envisaged that there would be five shipments of steel pipe there were in fact only three shipments.

73 The first shipment of steel pipe arrived at Port Kembla on 13 March 2007. Daewoo/Dongbu was paid for the first shipment under a letter of credit issued by the Commonwealth Bank at the request of Capital Steel and that payment was made on 8 March 2007. On 13 March 2007 Capital Steel was advised that the necessary documents had been accepted under the Westpac letter of credit. It was the Commonwealth Bank which forwarded to Westpac the necessary documents under the Westpac letter of credit and that was done on or about 8 March 2007. In addition to paying the supplier for the first shipment, Capital Steel paid ocean freight of USD493,065.07 and customs duty and associated costs of $448,614.08.

74 The second shipment arrived at Port Kembla on 6 April 2007. On 29 March 2007 the Commonwealth Bank paid Daewoo/Dongbu for the second shipment under a letter of credit relating to that shipment. On or about 30 March 2007 the Commonwealth Bank sent the necessary documents under the Westpac letter of credit to Westpac in relation to the second shipment, including a draft for $4,133,114.77. On or about 5 April 2007, Capital Steel was advised that Orrcon had accepted the necessary documents under the Westpac letter of credit. In addition to paying the supplier for the second shipment, Capital Steel paid ocean freight of USD489,060 and customs duty and associated costs of $394,102.27.

75 The third shipment arrived at Port Kembla on 7 May 2007. On 1 May 2007 the Commonwealth Bank sent the necessary documents under the Westpac letter of credit to Westpac, including a draft for $4,346,689.83.

76 On 4 May 2007 Orrcon had not notified Westpac that it accepted the necessary documents under the Westpac letter of credit presented by the Commonwealth Bank to Westpac in relation to the third shipment. According to the evidence of Ms Priscilla Stark, who is the office manager of Capital Steel, she spoke by telephone to Mr James McDonald, who is an accountant employed by Orrcon, on that day. Mr McDonald said:

"Orrcon will not accept the letter of credit documents because the previous Dongbu pipes are non-conforming. Orrcon will not accept the letter of credit until it has in writing what was discussed and agreed upon at the meeting in Brisbane with Dongbu representatives."

77 Ms Stark asked Mr McDonald about the pipes arriving on Monday and Mr McDonald said that Orrcon still wanted to take them. Ms Stark then spoke to Mr Robert Campbell of Orrcon by telephone. She advised him that the vessel was arriving on Monday and that Orrcon was not accepting the documents. Mr Campbell said that his trucks were in place and ready to take delivery of the cargo on Monday.

78 Capital Steel’s position was that it would not permit Orrcon to take physical possession of the pipes until Orrcon had notified Westpac that it accepted the necessary documents under the Westpac letter of credit in relation to the third shipment. Capital Steel understood that Orrcon would become owner of the pipes once they passed the ship’s rail and wanted to be assured of payment. Correspondence then passed between Dongbu, Capital Steel and Orrcon. It culminated in a series of electronic messages sent on 7 May 2007. On 7 May 2007 Mr Leon Andrewartha, the managing director of Orrcon, sent an electronic message to Mr Studdy of Capital Steel as follows:

"Thanks for the e-mail and it is of comfort to Orrcon that Dongbu will replace all pipe which is not to the specification required.

The issue, however, is that two letters of credit have already been presented that commits Orrcon to paying for pipes that have a high reject rate and cannot be used for the intended purpose.

The third shipment and presentation of the letter of credit will exacerbate this problem.

Will Dongbu/Capital offer extended terms to cover this problem? (remembering that the letter of credit has terms associated with it).

Will Dongbu/Capital commit to meeting Orrcon’s costs in assessing and testing the pipe already received (and that of the third shipment)?"

79 On the same day, Mr Studdy of Capital Steel responded to Mr Andrewartha’s electronic mail in the following terms:

"Thank you for your e-mail and you would be no doubt aware that the vessel has berthed and Rob Campbell has been in contact with our office this morning.

As advised to Rob, we have been in contact with Dongbu this morning regarding the two points raised in your e-mail and can now advise as follows:

1) Dongbu/Capital will extend the payment terms under the current L/C for the third shipment from 120 days to 180 days, without any additional costs to Orrcon.

2) Dongbu advise they are prepared to contribute towards the associated costs in assessing and testing the pipe already received including that of the third shipment.

3) The above concessions are dependent upon Orrcon’s acceptance of the L/C documents for the third shipment currently with your bank. Upon your written confirmation, we will advise our bank that Orrcon will accept the documents tomorrow morning as well as the revised payment terms, as we understand today is a public holiday in Queensland.

Please therefore confirm by return so as the discharge of the third shipment can progress."

80 On the same day, Mr Andrewartha responded in the following terms:

"Thanks for expediting the resolution of these issues.

As you know I have been in close contact with Rob Campbell during this morning in an attempt to resolve outstanding issues. The way forward as I see it is:

 If there is acceptance that Capital Steel/Dongbu will extend the payment terms for shipments 1, 2 and 3 from 120 to 180 days;

 Additionally there is acceptance that Capital Steel/Dongbu will pay to Orrcon, all costs associated with sample cutting, testing, handling and transport, stockpiling, de-metring and end reparation. Pipes shall be tested in accordance with ASTMA370. If a pipe from a mid coil sample tested in the transverse direction is below 270 MPa then all pipe associated with that coil will be rejected. Orrcon accepts that the 270 MPa is in the aged condition and that an agreed tolerance will apply in accordance with AS1391.

 That these conditions are accepted by return e-mail independently by both Capital Steel and Dongbu.

then Orrcon is prepared to commit to make the required changes to the letter of credit that would see it accepted upon the opening for business of the relevant financial institutions on Tuesday morning, 8 May 2007.

You are aware of the sensitivity and urgency of this matter, so I am sure you will be able to resolve this favourably.

Furthermore, Orrcon is agreeable to Dongbu or Capital having a nominated person available at their expense to monitor all activities associated with testing and management of segregation of reject pipe.

Ed, if you can expedite these couple of issues, then I am sure we can satisfactorily complete this project."

81 Ultimately the parties agreed and the steel pipes were unloaded and delivered to Orrcon. Capital Steel had to pay the sum of $23,742.35 in demurrage costs.

82 On 9 May 2007 Westpac accepted the necessary documents under the Westpac letter of credit in relation to the third shipment. Again, in addition to paying the supplier for the third shipment, Capital Steel paid ocean freight of USD512,160.89 and $400,074.13 for customs duty and associated costs. In addition, Capital Steel paid the sum of $43,000 for marine insurance for the five anticipated shipments of Dongbu steel pipe.

83 As to the first factual element of Orrcon’s unconscionable conduct plea, Orrcon’s case is that Mr Studdy’s knowledge can be attributed to Capital Steel and that he knew that the steel pipe delivered under the contract failed to comply with the specification and AS1579 in breach of Capital Steel’s obligations under the contract. In support of Orrcon’s claim that there was a serious question to be tried on that issue I was referred to a number of facts. The first was a meeting held on 2 March 2007 involving Mr Studdy of Capital Steel and Mr Campbell and Mr Cunningham of Orrcon. Notes of the meeting indicate that Mr Campbell expressed various concerns about the conduct of Dongbu and Capital Steel and the effects that that conduct may have on Orrcon’s contract with the State of Queensland. He said that Dongbu had changed the agreed coil supplier without prior notice or prior approval and that Dongbu was not providing the necessary data about the production of the steel pipes. Mr Cunningham advised Mr Studdy that Orrcon would be "back charging" Capital Steel for any remedial work required to pipe that did not conform with the requirements of the project Manufacturing and Inspection Process Diagram.

84 The next fact to which I was referred was an electronic message from Mr Studdy of Capital Steel to Mr D H Yoo dated 4 April 2007. Mr Yoo is alleged to be a director of an entity trading as "World Trade and Marketing" and an agent of Capital Steel. The electronic message is in the following terms:

"Orrcon are receiving further results from ETRS on the supplementary testing.

They now have four coils where pipe is well under 270 MPa min.yield. Most is around 250 MPa. This currently represents 35 pipes with 1/3rd of testing completed.

They will advise further once final results are known.

Please inform Dongbu."

85 The next fact to which I was referred was an electronic message from Mr Studdy of Capital Steel to Mr D H Yoo dated 10 April 2007. It is in the following terms:

"Further to our e-mail dated 4 April and our today’s telecom, we reconfirm verbal advice that up to 90 pipes, repeat 90 pipes from the first shipment, have been rejected by the Queensland Government due to the fact the yield strength is below and/or around 240 to 250 MPa.

As you know, Qld Govt/Orrcon were prepared to accept pipes that were somewhere below 300 MPa – in fact pipes 270 MPa and above were deemed to be acceptable but 240-250 MPa is unacceptable.

These rejected pipes will have to be replaced and I sincerely hope there will not be too many more that fall into this category.

Please inform Dongbu."

86 In terms of the facts from this point in time, I refer to the events and correspondence surrounding the third shipment which are summarised in [75]-[82] inclusive.

87 The plea that Mr Studdy knew that the steel pipe did not comply with Capital Steel’s obligations under the contract must be considered in the following context. The legal right which Orrcon submits it is harsh or oppressive to insist on is payment under the Westpac letter of credit. There is nothing further for Capital Steel to do to secure payment under the Westpac letter of credit and the question of knowledge must be considered at the various times the necessary documents were accepted by Westpac. Orrcon’s case on knowledge is strongest at or about the time the documents in relation to the third shipment were accepted by Westpac. At that time it was known by Capital Steel that some steel pipe probably did not comply with the terms of the contract but, at the same time, Dongbu had agreed to replace whatever pipe did not comply. Neither party knew whether the right of rejection under the specification arose and in fact Orrcon itself could not have known that until it knew the results of the testing carried out in May 2007. It will be remembered that Orrcon was entitled to reject all the pipe from an affected heat, coil or heat treat lot if less than 50 per cent of the pipe length formed from the heat, coil or heat treat lot complied with the requirements of the specification. I do not think the level of knowledge on the part of Capital Steel which Orrcon has shown it may establish at trial is sufficient to establish unconscionable conduct. A further question which I do not need to resolve is whether there can be unconscionable conduct where (as appears to be the case here) neither party to the contract knows more than the other.

88 I agree with the submission made by Capital Steel that there is not a serious question to be tried that Mr Studdy knew, or could have known, that the steel pipe failed the yield strength requirements in the transverse direction at any time prior to the presentation of the documents under the Westpac letter of credit for each of the three shipments and Westpac and Orrcon’s acceptance of those documents.

89 As to the third factual element of Orrcon’s unconscionable conduct plea, namely, Capital Steel’s inability to repay, there would appear to be a serious question to be tried that at the time Capital Steel through the Commonwealth Bank presented the necessary documents to Westpac in relation to the drawing down of the letter of credit Capital Steel lacked the financial capacity to repay those drawings down. In that regard, it is sufficient to refer to a conversation deposed to by Mr Michael Quinn, Manager, Credit Management, of the Commonwealth Bank with Mr Studdy. Mr Quinn said:

"Ed, if Westpac does not make payment to us under the letter of credit on 24 August, the bank will be placed in a position whereby it may need to seek repayment of the funds already advanced to the company. If that were to happen would the company be able to return those funds?"

90 Mr Studdy said:

"If that were to happen, there would be no way that we could find that sort of money that would be the end of the company."

91 It is not clear to me that this matter could be an element of unconscionable conduct within s 51AA of the TPA and I note the observations made by Austin J in Boral Formwork and Scaffolding Pty Ltd v Action Makers Ltd (see [67] above). Capital Steel is the seller of the steel pipe and Orrcon is the buyer of the pipe. It may be that Orrcon has more assets than Capital Steel. However, it was Capital Steel which obtained the benefit of the letter of credit. It was not prepared to take the risk that it would not be paid for the goods it was selling. Orrcon, which had dealt with Capital Steel in the past, did not seek any security against the contingency that the goods delivered would not be in accordance with the contract. It would be odd if the financial position of Capital Steel was an element of unconscionable conduct in those circumstances. In any event, even if it can be an element of unconscionable conduct, I have no doubt that it cannot be sufficient of itself.

92 For these reasons I do not think there is a serious question to be tried that Orrcon will establish unconscionable conduct within s 51AA of the TPA.

4. Is there a serious question to be tried to the effect that, assuming unconscionable conduct of the type pleaded is established by Orrcon, relief in the nature of injunctions will be granted restraining Capital Steel from making any further demand under the Westpac letter of credit and Westpac from making any payment under the Westpac letter of credit having regard to the position of the Commonwealth Bank?

93 The Commonwealth Bank asserted that by reason of the assignment of 2 January 2007 it had an interest in the proceeds payable under the Westpac letter of credit. The Commonwealth Bank asserted that by reason of facts it identified and which it submitted could not be challenged, it is not even arguable on a serious question to be tried basis that the Court would grant an injunction restraining payment under the Westpac letter of credit.

94 As I understood it, Orrcon did not suggest that the Commonwealth Bank was in any way guilty of unconscionable conduct, or that Orrcon has a cause of action against the Commonwealth Bank. The facts put forward by the Commonwealth Bank in support of its submission may be summarised as follows:

1. The Commonwealth Bank provided various facilities to Capital Steel for which it held various securities. In relation to the transaction the subject of this proceeding it provided a trade finance facility of $18,590,000.

2. On 2 January 2007 the Commonwealth Bank received the Westpac letter of credit from Westpac and it sent it on to Capital Steel.

3. Relying on that letter of credit the Commonwealth Bank issued its own letter of credit in favour of Daewoo.

4. In providing the facility to Capital Steel the Commonwealth Bank relied on the Westpac letter of credit and did not take into account its security position (under existing securities) in the form of tangible security. Had it not been for the Westpac letter of credit the Commonwealth Bank would have required further tangible security before issuing its own letter of credit in favour of Daewoo which further tangible security was unlikely to be forthcoming.

5. The Commonwealth Bank issued a letter of credit in favour of Daewoo in relation to each of the three shipments and the necessary documents were presented under each letter of credit and Daewoo was paid by the Commonwealth Bank, which treated the moneys paid as a capital advance to Capital Steel.

6. The Commonwealth Bank then forwarded the necessary documents under the Westpac letter of credit to Westpac authorising payment to Westpac.

7. In each case Westpac advised the Commonwealth Bank that the documents had been accepted, and confirmed that it would remit the face value of the drawing on maturity.

8. After receiving the notification referred to in 7, the Commonwealth Bank advanced to Capital Steel an amount equal to the face value of the drawing after deducting the amount paid to Daewoo and interest thereon and an interest component in relation to the period between such advance and the maturity date.

9. The Commonwealth Bank has advanced a total of approximately $13,000,000 to Capital Steel.

95 The Commonwealth Bank asserts that it would not have made any of the payments but for its reliance on the Westpac letter of credit and the subsequent communications from Westpac that the necessary documents had been accepted and that it would remit payment. It also submits that it had no knowledge of the contractual dispute between Orrcon and Capital Steel.

96 Based on the facts I have summarised, the Commonwealth Bank submitted that the Court would not grant interlocutory relief restraining payment under the letter of credit. It referred to the doctrine of estoppel, the principle that he who seeks equity must come to the Court with clean hands, the doctrine of acquiescence, considerations of hardship and unfairness, the fact damages are an adequate remedy, and that as between Orrcon and the Commonwealth Bank it is Orrcon which should bear the loss. The Commonwealth Bank’s submissions raise some difficult issues of law and fact. I do not need to consider them as I have concluded that interlocutory relief should be refused on other grounds.

A serious question to be tried in relation to other allegations

97 Before leaving the issue of whether there is a serious question to be tried, I should mention that in the course of submissions Orrcon suggested that the breach of a negative stipulation exception to the autonomy principle may be relevant. Orrcon alleged in its statement of claim that it was a term and condition of the contract that Capital Steel was not entitled to make a claim for payment under the Westpac letter of credit unless all of the pipe delivered complied with the specification and AS1579 in all respects. The Westpac letter of credit refers only to AS1579 and that Australian Standard does not refer to the minimum yield strength alleged by Orrcon. I agree with the submission of Capital Steel that none of the documents which are alleged to form the steel contract contain the words pleaded and, accordingly, there is no express term to the effect alleged. Nor do I think it can be said that there is a serious question to be tried that there was an implied term to that effect, having regard to the factors referred to in Codelfa.

98 There was also a suggestion in Orrcon’s written submissions that the presentation of mill test certificates to Westpac was misleading or deceptive conduct and that a contravention of s 52 of the TPA may be sufficient to found interlocutory relief. That submission was not developed in any detail by Orrcon and it is difficult to see how it could succeed in light of the fact that, among other things, mill test certificates are not necessary documents under the Westpac letter of credit.

The balance of convenience

99 I will consider first the balance of convenience having regard to the interlocutory orders as sought in the application. I will then consider the balance of convenience having regard to the reformulated orders.

100 Of the four orders sought by Orrcon the freezing order (that is, paragraph 7) was not pressed at the hearing. The first injunction sought is a mandatory injunction. A mandatory interlocutory injunction is rarely granted because usually an interlocutory injunction is ordered to preserve the status quo not to alter it (Meagher, Gummow and Lehane, Equity Doctrine and Remedies, 4^th ed at 788). The second injunction prohibiting Capital Steel from making any further demand under the Westpac letter of credit is probably misconceived because Capital Steel is not required to take any further action under the Westpac letter of credit. Absent a court order Westpac is under an irrevocable and unconditional obligation to pay the stated amounts on the stated dates without any further action on the part of Capital Steel. The third injunction prohibiting Westpac from making any payment under the Westpac letter of credit would probably lead to Orrcon amending its Statement of Claim to claim a declaration that it is not bound to pay Capital Steel the price under the contract (or a substantial part of it) and Capital Steel bringing a claim for the payment of the price.

101 Although there was no specific evidence before me as to Orrcon’s financial position, the suggestion was that Orrcon has substantial financial resources. There was evidence before me that Capital Steel would not have the financial resources to pay a substantial amount to Orrcon. Orrcon submits that payment now under the Westpac letter of credit would leave it with no effective remedy against Capital Steel. It would have paid the price under the contract but any set-off or cross claim it has against Capital Steel would be of no real value because of Capital Steel’s financial position and the fact that the moneys under the Westpac letter of credit would have been paid to the Commonwealth Bank. On the face of it that is a weighty consideration in favour of Orrcon. However, as against that consideration there are a number of matters suggesting that interlocutory relief should not be granted.

102 The most important consideration is the fact that Orrcon gave the Westpac letter of credit. It agreed to the issuing of an irrevocable letter of credit and that it would be governed by the UCP rules. The UCP rules make it clear that the letter of credit transaction is quite separate from the underlying sale of goods transaction. Orrcon had dealt with Capital Steel in the past and it had the choice whether it would ask Westpac to issue the letter of credit. The letter of credit was in fact designed to give Capital Steel the security of knowing that it would be paid the price for the goods and avoid the difficulty of not being paid because Orrcon asserts that the goods delivered do not comply with the contract. Furthermore, Orrcon instructed Westpac to accept the necessary documents under the letter of credit.

103 Another important consideration is the prejudice caused to Capital Steel and the Commonwealth Bank if an injunction restraining Westpac from making any payment under the Westpac letter of credit is made. Capital Steel presently owes the Commonwealth Bank over $12,000,000 and, absent payment under the Westpac letter of credit, it does not have the resources to meet that liability. The Commonwealth Bank may well take action against Capital Steel and guarantors and mortgagors under the securities it holds. It may place Capital Steel into receivership. It may prove very difficult later to unravel action taken or to restore the status quo should that be the appropriate course.

104 As far as the Commonwealth Bank is concerned it is an innocent party and Orrcon did not contend otherwise. It advanced substantial money on the faith of the Westpac letter of credit. If Westpac is restrained from paying moneys under the Westpac letter of credit then the Commonwealth Bank will or may be involved in expensive and time-consuming action in order to protect its position as best it can.

105 Two other matters should be mentioned. They are not of critical significance in terms of the balance of convenience, but at the same time they are not irrelevant. First, Orrcon has the steel pipes which were the subject of the three shipments. It was asserted that the contract between Orrcon and the State of Queensland had been, or was likely to be, terminated. On the evidence it is not possible for me to make any findings, even on a serious question to be tried basis, on that issue. Even if I assume that Orrcon’s case on that issue is correct, Orrcon has the steel pipes. They may have no value, some value or considerable value. On the evidence I simply do not know. Secondly, Capital Steel has delivered goods to Orrcon pursuant to unrelated transactions. It has not been paid by Orrcon and it asserts that Orrcon owes it in the region of $1,400,000-$1,500,000. Orrcon has not provided an explanation for not paying for the goods at least as far as the particular transactions are concerned. Those facts have been established on a serious question to be tried basis. Those two matters although, as I have said, far from being of critical significance in terms of the balance of convenience, show that Orrcon’s loss, if interlocutory relief is refused, may not be as great as it suggests.

106 As far as the interlocutory orders as originally formulated are concerned, the balance of convenience clearly favours the refusal of those orders sought.

107 The reformulated orders are an attempt by Orrcon to overcome the prejudice to Capital Steel and the Commonwealth Bank if Westpac is restrained from making any payments under the Westpac letter of credit. The claim for a mandatory injunction is not pursued. The prejudice to Capital Steel is dealt with by prohibiting the Commonwealth Bank from claiming its debt from Capital Steel and from taking any action under its securities in relation to that debt. The prejudice to the Commonwealth Bank is dealt with by Orrcon’s undertaking to pay damages. This undertaking was initially proffered in the usual terms, but counsel for the Commonwealth Bank pointed out that his client was an innocent party and irrespective of whether or not Orrcon is successful may suffer substantial loss by way of a diminution in the value of the securities between the interlocutory orders and trial. It would seem that submission led Orrcon to amend its reformulated orders by adding the words, "regardless of the outcome of these proceedings upon a final hearing".

108 Capital Steel submits that the Court did not have the power to make orders against the Commonwealth Bank and it referred to Australian Broadcasting Authority v Lenah Game Meats Pty Limited [2001] HCA 63; (2001) 208 CLR 199, Cardile v LED Builders Pty Limited [1999] HCA 18; (1999) 198 CLR 380, s 23 Federal Court of Australia Act 1976 (Cth) and O 25A r 5(5) of the Federal Court Rules. I do not need to consider that question. On any view, the reformulated orders involve a substantial interference in the commercial relationship between Capital Steel and the Commonwealth Bank. Even if the orders cover all contingencies in terms of possible loss to the Commonwealth Bank, and I am not completely satisfied that is the case, there will be time and expense involved in establishing any loss which may be suffered. Although the reformulated orders go some way towards addressing the prejudice to Capital Steel and the Commonwealth Bank if interlocutory injunctions are granted, the balance of convenience still favours the refusal of relief.

Conclusion

109 It was for these reasons that on 22 August 2007 I dismissed Orrcon’s application for interlocutory relief.

I certify that the preceding one hundred and nine (109) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.

Associate:

Dated: 29 August 2007

Counsel for the Applicant:	Mr F M Douglas QC and Mr R J Cheney
Solicitor for the Applicant:	Fisher Jeffries
Counsel for the First and Second Respondents:	Mr A G Bell SC with Mr A J McInerney and Mr D Barnett
Solicitor for the First and Second Respondents:	Foulsham & Geddes
Solicitor for the Third Respondent	Minter Ellison
Counsel for the Fourth Respondent	Mr R G Forster SC with Mr P J Dowdy
Solicitor for the Fourth Respondent	John O’Sullivan
Date of Hearing:	14, 15 and 16 August 2007
Date of Judgment:	29 August 2007