Most Read Contributor in Australia, September 2016
In the recent decision of Other Group Pty Ltd v Wylaars
& Anor  VSC 98, the Supreme Court of Victoria
confirmed that a lessor has an almost unfettered right to call on a
lessee's bank guarantee, unless the lessee can show that the
lessor has acted:
in breach of consumer protection legislation; or
in breach of a promise with the lessee not to call on the
In 1999 the parties entered into a commercial lease. Pursuant to
the lease the lessee was required to provide security by way of
bank guarantee equal to one year worth of rent.
When the lessee vacated the premises a dispute arose as to
whether the lessee returned the premises in a reasonable condition
and whether it was still required to pay rent.
Pending the outcome of the dispute the lessor called on the bank
guarantee. The lessee brought an application in the Supreme Court
of Victoria seeking an interlocutory injunction to restrain the
lessor from dealing with the proceeds of the bank guarantee pending
the outcome of the dispute.
The question for the Court
As the lessee sought an interlocutory injunction, the question
for the Court was whether there was a serious question to be tried
about the lessor's entitlement to have drawn on the bank
Ultimately the Court held that the lessor was entitled to draw
on the bank guarantee and therefore did not grant the injunction
sought. The reasons for the Court's decision are discussed
When can a lessor call on a bank guarantee?
As the lease in question was a commercial lease (and therefore
not subject to the Retail Leases Act) the Court
immediately looked to the general law principles regarding a
party's right to call on a bank guarantee.
First, the Court reviewed the contract between the parties to
determine whether or not there were any terms that operated to
limit the lessor's ability to call on the bank guarantee. In
this case, like most commercial and retail leases, the lease did
not contain any limiting terms but rather provided the lessor with
an unconditional right to call on the bank guarantee in the event
of a breach under the lease.
The Court relied on a long line of authority that stands for the
general rule that a court will not prevent the issuer of a bank
guarantee, that is the bank, from performing its unconditional
obligation to make payment to the party calling on the bank
guarantee. In this case the Court was not in a position to disturb
the lessor's right to call on the bank guarantee.
Three exceptions apply to the general rule that a court will not
interfere with a party's unconditional right to call on a bank
guarantee. Those exceptions are:
where the party calling on the bank guarantee has acted
where the party calling on the bank guarantee has acting
unconscionably in breach of consumer protection legislation;
where the party calling on the bank guarantee has made a
contractual promise not to call on the bank guarantee
The rationale behind the general rule and the exceptions listed
above is that in a commercial relationship it is implicit that a
party who is required to provide a bank guarantee by way of
security will be out of pocket pending the outcome of any dispute
and/or until it has completed its obligations under the
In this case Justice Hollingworth found that there was nothing
in the lease the limited the lessor's right to call on the bank
guarantee, and that the lessee could not satisfy any of the
exceptions to the general rule. Therefore the Court held that the
lessor was entitled to call on the bank guarantee even through the
dispute between the lessor and lessee was still on foot.
Most leases (both retail leases and commercial leases) provide
the lessor with an unconditional right to call on a bank guarantee
where the lessee is in breach of the lease. Unless a lease contains
terms that specifically limit the circumstances in which a lessor
can call on a bank guarantee, or unless a lessee can point to one
of the three exceptions set out above a lessee will be unable able
to prevent a lessor from calling on a bank guarantee.
Section 24 of the Retail Leases Act sets out specific
requirements in relation to how security deposits are to be
obtained and maintained by lessors. The legislation does not
displace the common law which continues to apply in relation to the
question of when a lessor can validly call on a bank guarantee.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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