If you are a builder or contractor in South Australia who deals with bank guarantees as a form of security under construction contracts, this recent decision from the Court of Appeal in South Australia is highly relevant.
The decision serves as a case study of the circumstances when a principal can make a claim in relation to bank guarantees provided as security.
Key Facts/Background
- GSA North Terrace Pty Limited ATF GSA North Terrace Unit Trust (GSA) engaged Synergy Construct Australia Pty Ltd (Synergy) for the design and construction of a building in Adelaide under an AS4902-2000 contract.
- Under the terms of the contract, Synergy provided GSA with three bank guarantees. A dispute arose and GSA sought payment under the bank guarantees. In the Supreme Court of South Australia, Synergy applied for an injunction to stop GSA from demanding payment under the bank guarantees. The injunction was refused.
- Synergy appealed the Supreme Court decision.
The Decision
- Once the bank guarantees were returned, no demand could be made upon them and the risk allocation function ended.
- The risk allocation role of the bank guarantees is intended to perform during the period in which GSA was entitled to hold them.
- Interlocutory application to be granted.
Key Reasoning
- The court held that during the time the bank guarantees were in the possession of GSA, they performed a "risk allocation function".
- The bank guarantees were intended to "operate not merely as security for the recovery of any proved claims or entitlements GSA had against Synergy." It also allowed GSA to make a demand upon the bank guarantees to satisfy any bona fide / genuine claim it had against Synergy.
- The court held that the bank guarantees were required as part of a "pay now and argue later" framework.
- The court found that based on the construction of the particular AS4902-2000 contract between the parties, once GSA was required to return the bank guarantees back to Synergy, GSA was precluded from making a demand upon them. This was because the risk allocation function had ended as the bank guarantees was no longer in the possession of GSA.
Why this matters
- When drafting terms of the contract, a clause which makes clear that bank guarantees perform a risk allocation function will be an effective way for the principal to claim recourse to the bank guarantees without a proven claim.
- A properly drafted clause which sets up a "pay now, argue later" contractual framework, is therefore beneficial for principals but adverse to contractor's interests.
- Relatedly, careful drafting is required to clearly indicate when any bank guarantees should be returned. Once the bank guarantee is required to be returned under the terms of the contract, the principal can no longer claim any rights in relation to them.
- This decision refers to cases from NSW and Victoria to support the reason and findings regarding recourse to bank guarantees. The interstate authorities were relied upon because the legal position in South Australia was previously unsettled, particularly in relation to the principles governing recourse to security provisions. The court adopted consistent reasoning from NSW and Victorian decisions, where the law is settled.
- This promotes consistency across states and strengthens the precedent for interpreting security provisions in construction contracts. Particularly, there was no conflict between the interstate authorities and this decision as similar principles now clearly apply across these jurisdictions and the court was not required to choose between conflicting approaches.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
