Australia: What's in a name? High Court to rule on enforceability of bank guarantees naming incorrect beneficiary

Last Updated: 15 July 2016
Article by Emma Hodgman
Services: Financial Services, Property Projects
Industry Focus: Financial Services, Property

What you need to know

  • Bank guarantees have long been considered a reliable and attractive way to obtain security in a range of circumstances, from landlords seeking security in relation to their leases through to businesses requiring assurance in connection with construction work they procure.
  • The High Court is about to hear an appeal from a decision of the NSW Court of Appeal which casts doubt on how banks should treat a bank guarantee that identifies the incorrect beneficiary.
  • The Court of Appeal found that despite the error, the intended beneficiary was entitled to make demands under two bank guarantees in which it had not been named.

The High Court is set to hear an appeal later this month which could impact those who deal with bank guarantees, whether as the party issuing them, seeking them or making demands under them.

In Simic v NSW Land and Housing Corporation [2015] NSWCA 413, the NSW Court of Appeal held that payment should be made on two bank guarantees despite the entity calling on them having a different name from the favouree named in the bank guarantees.

If the High Court upholds this decision, banks may find themselves having to do more 'homework' than they might have expected when facing demands under a bank guarantee, potentially needing to make enquiries or refer to documents beyond the bank guarantee itself. If the decision is overturned, the High Court's ruling will send a timely reminder to those who seek or make claims under bank guarantees to carefully check their accuracy before accepting them.


ANZ issued two instruments (Bank Guarantees) in favour of 'NSW Land and Housing Department t/as Housing NSW ABN 45 754 121 940' as favouree and described as "the Principal".

ANZ issued the Bank Guarantees at the request of Nebax Constructions Pty Limited (Nebax) as security for its obligations under a construction contract. Nebax's obligations to ANZ were also guaranteed.

The Bank Guarantees included the following description of Nebax's construction contract:

"Australia and New Zealand Banking Corporation Limited (ANZ) asks the Principal to accept this bank guarantee (Undertaking) in connection with a contract or agreement between the Principal and customer for job number: P0409021, Bombaderry – design and construct 3-7 Karowa Street contract number BG2J8".

The problem was that Nebax's construction contract was not with the party described as the Principal in the Bank Guarantees. It was with a different entity, 'NSW Land and Housing Corporation ABN 24 960 729 253' (the Corporation).

When demands were made under the Bank Guarantees by the Corporation, ANZ refused to meet them on the basis that they had not been made by the Principal named in the Bank Guarantees.

The Corporation commenced proceedings for the amount it believed it was entitled to under the Bank Guarantees.

The first instance decision

The Court found that a mistake had been made in naming "NSW Land and Housing Department t/as Housing NSW" as the Principal in the Bank Guarantees.

The Court considered it clear beyond doubt that the Bank Guarantees were given in favour of an entity that was a party to a contract with Nebax, who was the applicant for the credit provided by ANZ. That party was the Corporation, and it was the Corporation that was intended to be named as the Principal.

This finding appears to have been a decisive factor for the Court at first instance (and on appeal), despite ANZ not having been given a copy of the contract between Nebax and the Corporation.

The Court ordered:

  1. ANZ to pay the Corporation the amounts owing under the Bank Guarantees
  2. ANZ was entitled to be indemnified by Nebax and the guarantors were liable to ANZ under the guarantees.

The guarantors appealed.

The decision on appeal

The Court of Appeal said the Bank Guarantees were not guarantees in any ordinary sense but were in the nature of performance bonds, with the terms "performance bond" and "bank guarantee" being essentially interchangeable.

The Court noted that all forms of letters of credit, including performance bonds given by banks, are governed by three principles:

  1. the documentary nature of instruments
  2. strict compliance
  3. autonomy.

The second and third principles, those of strict compliance and autonomy, were relevant in this case.

The Court upheld the primary judge's decision that the Corporation was entitled to make demands on the bank guarantee despite the documentary error in naming the Principal.

In reaching this conclusion, the Court said:

  • Letters of credit, like the Bank Guarantees, are contracts to which the ordinary principles of contractual construction apply. The Court also noted that little judicial attention appeared to have been squarely directed to the inter-relationship between those ordinary principles on the one hand and the principles peculiar to letters of credit on the other, being the principles of strict compliance and autonomy.
  • However, the Court said that properly construed, the reference in the Bank Guarantees to the "New South Wales Land & Housing Department" should be understood as a reference to the Corporation, and that process of construction preceded the application of the principles of strict compliance and autonomy.
  • The primary judge was correct to hold that the principle of strict compliance is properly classified as one of performance. The principle applies when considering whether a document tendered in purported pursuance of a letter of credit complies with the requirement imposed by it, after the letter of credit has been construed.
  • The principle of autonomy is properly classified as one of construction. It is directed at which documents can be taken into account for the purpose of determining what the letter of credit means in order to establish whether it has been strictly complied with.
  • There was a question about whether the autonomy principle prevented ANZ from having regard to the construction contract to determine the correct description of the beneficiary of the Bank Guarantee. On this issue:
    • The Court drew a distinction between construing a letter of credit with reference to the terms of the underlying contract, and construing such an instrument with reference to the mere identification of that underlying contract, particularly where the contract is already identified in the instrument itself.
    • The Court noted that the construction contract and the identity of the parties to it were both referred to in the Bank Guarantees – it followed that it was permissible to have regard to the construction contract to that extent, to determine the correct construction of the Bank Guarantees.
    • The Court said that although ANZ was certainly not required to do so, a simple enquiry by ANZ of Nebax would have clarified the situation.
  • If there are two ways of construing the Bank Guarantees, one of which means that they are quite ineffective because they are addressed to a non-existent entity, and one which gives them the effect that, on their face, they are clearly intended to have, the latter construction must be adopted.
  • The primary judge made no error in concluding that on the proper construction of the Bank Guarantees, the words "New South Wales Land & Housing Department trading a Housing NSW ABN 45 754 121 940" meant the Corporation.

High Court to rule

The High Court will soon have the opportunity to rule on the inter-relationship between the peculiar principles which govern the interpretation of letters of credit, performance bonds and bank guarantees on the one hand, and the ordinary principles of contractual construction on the other.

If the NSW Court of Appeal decision is upheld, banks could potentially need to look beyond the face of a bank guarantee to determine whether or not a claim made under it should be met. This would raise questions for banks as to how far they must go to satisfy themselves that they can refuse a demand.

If the NSW Court of Appeal decision is overturned and the High Court finds that the documentary error was fatal to the Corporation's ability to make a claim under the Bank Guarantees, this will serve as a timely reminder to those who rely on bank guarantees for security of the importance of ensuring the accuracy of bank guarantees before accepting them.

This article is intended to provide commentary and general information. It 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 article. Authors listed may not be admitted in all states and territories

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