Australia: High Court rules: a demand under a guarantee must comply with the terms of the guarantee

Services: Banking & Finance, Dispute Resolution & Litigation, Property & Projects
Industry Focus: Financial Services, Property

What you need to know

  • The High Court has handed down a decision which will interest those who deal with bank guarantees, whether as the party issuing them or otherwise seeking or making demands under them.
  • The High Court unanimously overturned a NSW Court of Appeal decision in which it was held that even though two bank undertakings identified the incorrect beneficiary, the intended beneficiary of the undertakings was still entitled to make demands under those undertakings.
  • While the High Court found that the equitable remedy of rectification could be applied, enabling the name of the entity who wished to call on the undertakings to be substituted for the named beneficiary, the decision is a reminder of the difficulties that can arise for all parties when undertakings or bank guarantees contain errors.

On 7 December 2016 the High Court handed down its decision in Daniel Matthew Simic & Ors v New South Wales Land & Housing Corporation & Ors [2016] HCA 47, ruling on the enforceability of two undertakings with an incorrectly named beneficiary. The High Court unanimously overturned the decisions of the NSW Supreme Court and NSW Court of Appeal, which held that despite the wrong name having been inserted in two undertakings issued by ANZ in respect of a construction contract, the intended beneficiary of the undertakings was entitled to make demands under the undertakings.

However, the High Court found that in the circumstances, the equitable remedy of rectification was available so that the name of the entity who wished to call on the undertakings could be substituted for the named beneficiary.

The High Court's decision is important from two perspectives:

  1. For banks, it confirms that the principle of strict compliance applies to performance bonds or bank guarantees. Banks are not required to be concerned with the underlying terms of the contract, however strict compliance is not a rigid rule – it must be applied intelligently, not mechanically, and requires the exercise of some judgment by banks.
  2. For those who take such instruments as security for performance under a contract, such as a lease or construction contract, the case provides a valuable lesson. It demonstrates the importance of carefully checking the accuracy of the security to avoid delays and costs when a call for payment is made, and most importantly, to avoid the risk that the security is found to be worthless.

Recapping the path to the High Court

In July we published a detailed update which set out the background facts to the matter and summarised the decisions at first instance and on appeal.

In brief:

  • At the request of its customer (Nebax), ANZ issued two undertakings in favour of 'NSW Land and Housing Department t/as NSW ABN 45 754 121 940' as favouree (and also described as the Principal), as security for Nebax's obligations under a construction contract. However, the named favouree was an error. The construction contract was not with the party described as the Principal in the undertakings, but rather a different entity 'NSW Land and Housing Corporation ABN 24 960 729 253' (Corporation).
  • The Corporation commenced proceedings in the Supreme Court of New South Wales seeking a declaration that the description of the Principal should be construed as referring to the Corporation, or otherwise an order that the undertakings be rectified by substituting the name of the Corporation for the named Principal.
  • The primary judge made the declaration sought by the Corporation and said that although it was unnecessary to deal with the rectification claim, he considered that the prerequisites for the making of an order for rectification were satisfied.
  • The guarantors of the undertakings to ANZ appealed this decision to the Court of Appeal. The Court found that despite the error there had not been and could not be any suggestion that the description of the Principal in the undertakings was capable of referring to any entity other than the Corporation. There was no finding made on the question of rectification in light of this finding.

The High Court's decision

Keifel J and French CJ each gave separate judgments while Gageler J, Nettle J and Gordan J provided a joint judgment.

Their Honours examined the construction of the undertakings and the question of whether the equitable doctrine of rectification could be relied upon to address the error in the undertakings.

Construction of undertakings

In their joint judgment Gageler J, Nettle J and Gordan J said:

  • it was not open to construe 'New South Wales Land and Housing Department' as referring to the Corporation, noting that the Corporation and the Department of the New South Wales Government were legally distinct
  • although the construction contract or agreement referred to in the undertakings provided a link to the Corporation, it was either irrelevant or of no assistance for the purposes of construction
  • an instrument of this nature (i.e. an unconditional promise to pay on demand) is independent of any underlying transaction and any other contract
  • when dealing with performance bonds or guarantees, the issuer is not required or intended to be concerned with the terms of the underlying contract or whether the construction contractor has sufficiently performed its obligations under the contract
  • bank guarantees, performance bonds and similar securities create a type of currency and should be treated as being as good as cash
  • instruments of this nature are essential to international commerce and, in the absence of fraud, should be allowed to be honoured free from interference by the courts
  • the commercial reality is that in issuing a banking instrument of this nature, the issuer relies upon and acts in accordance with the instructions of the applicant, and is contractually bound to do so
  • ANZ followed incorrect instructions provided by its customer and the undertakings recorded those incorrect instructions
  • without the error being rectified ANZ would be at risk of acting in breach of contract if, contrary to its customer's express instructions, it were to treat the instruments as referring to the Corporation
  • from a commercial and banking perspective, it is more efficient to require the principal to review the security before rather than after performance and if the principal acts without seeing or examining the security, the principal should bear the costs
  • the principle of strict compliance requires that an issuer like a bank should only accept documents that comply strictly with the requirements stipulated in an instrument of this nature; the principle is fundamental to the efficacy and dependability of banking instruments such as the undertakings in this case.

Their Honours accepted that the principle of strict compliance is not a rigid rule and it must be applied intelligently, not mechanically, and the issuer must exercise its own judgment about whether the requirements stipulated in the instrument have been satisfied. However, their Honours said that here the demand did not comply with the undertakings, and they noted that the discrepancies and errors were not minor or merely typographical.

Rectification

In finding that the equitable remedy of rectification was available in this case, the joint judgment of Gageler J, Nettle J and Gordan J noted:

  • for rectification to be available it must be demonstrated that:
    • when the written instrument sought to be rectified was executed, there was an 'agreement' between the parties in the sense that the parties had a 'common intention' (viewed objectively from their words or actions) and that the written instrument was to conform to that agreement
    • critically, the written instrument does not reflect the 'agreement' because of a common mistake
  • in this case it was apparent that all parties to the transaction intended that the undertakings would be available for the benefit of the party with which Nebax had entered into the construction contract
  • ANZ unwittingly perpetuated a mistake, however Nebax told ANZ and therefore ANZ knew that Nebax obtained a contract with the entity trading as Housing New South Wales and that the applications and the resulting undertakings were acquired under that contract
  • as the primary judge said, if at the time the undertakings were issued someone had told Nebax and ANZ that the name of the counterparty was wrong, the error would have been plain and obvious to both of them; there can be no doubt that their actions were the result of a common mistake.

Their honours concluded that rectification would give effect to what Nebax required, as well as ANZ's stated intention to provide the security to the entity which Nebax had contracted to provide the building and construction services. That intention was the actual or true common intention of ANZ and Nebax and that was the actual intention of each party viewed objectively.

Key takeaways

For banks who are faced with calls made on bank guarantees or performance bonds by eager beneficiaries, the High Court's decision is helpful in affirming that banks are not required to have regard to the underlying contract. However, the principle of strict compliance should not be applied too rigidly and on occasion a bank may need to make a judgment call about whether the discrepancy is minor or merely typographical in nature.

For those who rely on such instruments as security for a party's performance under a contract, at times the pressure to close a deal can mean that important details get overlooked. This case serves as an important reminder to carefully check the accuracy of such instruments before accepting them. The additional time spent getting it right at the outset can avoid the significantly greater delays and costs encountered when a call is made on a defective instrument, as well as the potential for the security to be rendered worthless if a remedy such as rectification isn't available.

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

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions