There are three basic issues to be considered with bank
guarantees: autonomy rules, balance of convenience, and the
Bank guarantees are readily accepted in lieu of cash deposits
under contracts for sale and as security bonds under leases.
However, both the beneficiary under a bank guarantee and the giver
of the bank guarantee (usually the buyer under a contract or a
tenant under a lease) should be aware of the risks associated with
accepting or providing a bank guarantee.
As good as cash?
Being "as good as cash" in the eyes of those to whom
it is issued is an essential function of any guarantee or
bond1. This is a result of the "autonomy
principle" – that a beneficiary can demand payment on a
bank guarantee and the bank must meet the demand, regardless of
whether the party that provided the guarantee is in breach.
If this were not the case, cash bonds would arguably be the only
form of security accepted.
It is widely accepted that there are three principal exceptions
to the rule that a court will not direct the issuer of a guarantee
or bond from performing its unconditional obligation to pay the
to prevent the beneficiary from acting fraudulently;
to prevent the beneficiary from acting unconscionably; or
in circumstances where there has been a contractual promise by
the beneficiary not to call on the guarantee.2
Giving and accepting bank guarantees is all about the allocation
of risk: as with most circumstances in commercial world, the party
who requires it the most is generally the party that is willing to
accept greater risk. In property transactions, the party
benefitting from the giving of a bank guarantee or a deposit bond
is almost always the buyer or tenant, in that their cash is not
tied up for the term.
Where a party clearly accepts the risk under an agreement, it
then has a significant hurdle to overcome when that risk
Is your bank guarantee really unconditional?
The unconditional quality of the bank guarantee is impacted upon
not only by the construction of the instrument itself but also by
the provisions of the agreement under which it was provided.
There are generally two motives for a beneficiary to require a
to provide security for a valid claim by the beneficiary;
to allocate risk between the parties as to who shall be out of
pocket pending resolution of a dispute between
There is often no need for the beneficiary to show it is owed
the moneys – it is just a risk allocation
However, it has recently been held that a contractual obligation
for a beneficiary to act "reasonably" in making a claim
against a bank guarantee precluded the beneficiary from making the
How can you best secure your rights?
Autonomy rules: beneficiaries should ensure
their right to call on the bank guarantee is unfettered, so that
recourse to the giver of the guarantee is not required before the
bank will release the moneys.
Balance of convenience: the party who accepts
the risk under an agreement will wear the risk when the right to
call on the bank guarantee is triggered, even in circumstances
where the giver of the bank guarantee disputes the
beneficiary's right to payment.
Construction of the agreement: the right to
call on a bank guarantee will be strictly construed in accordance
with the agreement. Even the softening of a right by requiring
reasonableness can affect a beneficiary's right to call on a
1 Wood Hall Ltd v Pipeline Authority 
HCA 21 per Stephen J at . [back]
2 Saipem Australia Pty Ltd v GLNG Operations
Pty Ltd  QSC 310 at , citing Clough Engineering Ltd v Oil
and Gas Corporation Ltd (2008) 249 CLR 458. [back]
3 ibid. at . [back]
4 Fletcher Constructions Australia Ltd v
Varnsdorf Proprietory Ltd  3 VR 812. [back]
5 Patterson Building Group Pty Ltd v Holroyd
City Council  NSWSC 1484 at - citing Fletcher
Constructions Australia Ltd v Varnsdorf Proprietory Ltd  3 VR
812 at 821, 826. [back]
6Mittelman, Toby, "Sweet nothings: Sugar
Australia's recourse to bank guarantee injuncted – Lend
Lease Pty Ltd v Sugar Australia Pty Ltd", (2014) 26(10) ACLB
167 at 168, 169 citing Lend Lease Pty v Sugar Australia Pty Ltd
 VSC 476.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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