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

Last Updated: 14 June 2017
Article by Nicholas A S Brand and Lachlan Chisholm

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.

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
Nicholas A S Brand
Lachlan Chisholm
 
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”

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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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