Australia: Dont risk not collecting on your performance bond or bank guarantee

As a result of the High Court of Australia's recent decisionin Simic v New South Wales Land and Housing Corporation [2016] HCA 47, those providing performance bonds or bank guarantees in respect of property-related matters are on notice that if the name of the person to benefit from the documentation is misstated, this will preclude that person from calling on the performance of the bond or bank guarantee.

In this case, the Australia and New Zealand Banking Group Ltd (ANZ) refused to honour a performance bond due to a misstatement in the documentation, causing the New South Wales Land and Housing Corporation to expend large amounts of time and money in applying to Court to have the error rectified.

Performance Bonds

Performance bonds are commonly, but sometimes mistakenly, referred to as bank guarantees. A performance bond is issued by a bank to guarantee the satisfactory performance of a particular project by a contractor; they are a promise that the bank will pay to a third party (the Favouree) an amount up to a specified limit with conditions (or unconditionally) and without reference to the underlying contract. By contrast, a bank guarantee ensures that the liabilities of one party will be met in the event of the other party's default.

Facts of the case

In 2010, the New South Wales Land and Housing Corporation (the Corporation) entered into a contract with Nebax Constructions Australia Pty Ltd (Nebax) for the demolition of existing buildings and the construction of unit blocks in Bomaderry (the Contract).

A term in the Contract required Nebax to provide two unconditional guarantees to the value of $146,965.06 in favour of the Corporation upon execution of the contract (the Undertakings). The Corporation provided a draft of the Undertakings to Nebax, which erroneously listed the following non-existent entity as favouree: "New South Wales Land and Housing Corporation (ABN 24 960 729 253) trading as Housing NSW (ABN 45 754 121 940)".

Daniel Simic, then director of Nebax, approached and liaised with Australia and New Zealand Banking Group Ltd (ANZ) employee Ms Hanna to complete the Undertakings. Mr Simic requested for the Undertakings to be "made out to New South Wales Land & Housing Department trading as Housing NSW" as favouree, and although the Contract correctly referred to the Corporation, a copy of this was not shown to Ms Hanna by Mr Simic. Accordingly, the mistake went unnoticed and the Undertakings were executed by Mr Simic and Ms Hanna on behalf of their respective employers.

The proceedings

This dispute arose when the Corporation demanded payment and ANZ refused to honour the Undertakings because the Corporation was not the favouree named in the Undertakings.The Corporation commenced proceedings in the Supreme Court of New South Wales seeking the following:

  1. A declaration that the description of the favouree be construed as referring to the Corporation; or, alternatively
  2. An order that the Undertakings be rectified by substituting the name of the Corporation as the name of the favouree.

The Supreme Court of NSW held that the Undertakings could be construed as referring to the Corporation, after which Nebax appealed to the High Court of Australia (HCA).

Construing the Undertakings

The HCA held that it was not possible to construe the Undertakings as being in favour of the Corporation; rather, the Undertakings could be rectified so that they referred to the Corporation as favouree. Therefore ANZ was ultimately bound to make payment to the Corporation, and Nebax was bound to indemnify ANZ.

The HCA said it could not construe the Contract as favouring the Corporation for following reasons:

  1. Nebax incorrectly instructed ANZ to complete the Undertakings. Accordingly, the Undertakings reflected the erroneous instructions. ANZ would have been in breach of its contractual obligations if it had honoured the Undertakings by treating the Corporation as the favouree rather than the non-existent entity.
  2. It was a condition of the Contract that Nebax provided the Undertakings in the form of two performance bonds favouring the Corporation. The Corporation should have reviewed the Undertakings following completion by Nebax and ANZ. If the Corporation had noticed the error, it had cause to give notice to Nebax that it was in breach of its obligations under the Contract.
  3. The banking system relies on the efficacy and veracity of documents like the Undertakings. Where, as in this case, the documents can be presented at any branch of the bank in Australia, to employees who have no official understanding of the transaction, it is risky for the bank to do anything but strictly comply with the conditions of the documents. Further, the Undertakings expressly stated that ANZ was not required to make inquiries to ascertain the intended, as opposed to the specified, favouree.

Rectification

It is presumed that a written agreement expresses the intentions of the parties unless it can be shown that there was a common mistake. The HCA emphasised that an order for rectification of a contract can only be made in circumstances where the written instrument, at the time that it is executed, does not conform to the common intention of the parties.

In this context the HCA had to objectively consider the common intention of Nebax and ANZ at the time the Undertakings were completed. It was noted that ANZ was aware that Nebax had entered into the Contract with the Corporation and, further, if Mr Simic and Ms Hanna had been made aware that the name of the favouree was wrong, their mistake would have been obvious to both of them. This reasoning was used to justify the order for rectification of the Contract.

The take-home message

Although this case involved performance bonds, it would seem that it would equally apply to bank guarantees. For all of those persons involved with the preparation of such documents, this case serves as a cautionary tale: banks will only act in accordance with the explicit terms of the guarantee. If the name of the favouree is listed incorrectly in the documentation, and the bank refuses to honour the guarantee, the favouree will have to apply to Court to seek rectification. It is not sufficient to argue that the parties' names are almost the same, or that the underlying contract clarifies the error.

If you have any queries in relation to performance bonds, bank guarantees or property law in general, please contact Nicholas Brand or Lachlan Chisholm on (03) 9614 7707.

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Authors
Nicholas A S Brand
Lachlan Chisholm (formerly with Pointon Partners)
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