Why your bank guarantee may not be worth the paper it is written on

Bank guarantees are often accepted as security for leases and other contracts.

However, your bank guarantee is of no value to you if you cannot claim on it. The High Court of Australia’s recent decision in Simic v New South Wales Land and Housing Corporation [2016] HCA 47 (Simic case) is a good reminder of how a simple error may mean that a bank guarantee is not worth the paper it is written on. The Simic case involved performance bonds. However, the principles in that case can equally apply to bank guarantees.

What happened?

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).

The Contract required Nebax to provide security in the form of 2 performance bonds (the Bonds). Nebax arranged for ANZ to prepare the Bonds in favour of “New South Wales Land & Housing Department trading as Housing NSW ABN 45754121940” when in fact the beneficiary should have been “New South Wales Land and Housing Corporation (ABN 24 960 729 253)”. The mistake went unnoticed until the Corporation sought payment of $146,965.06 and ANZ refused to pay because of the error.

Near enough was not good enough

The High Court found that ANZ was correct to refuse to pay the amount for the following reasons:

  • Whilst the name on the Bonds may seem like it was similar to the name on the Contract, they were not the same entity.
  • The Corporation could not rely on the Contract to imply that the beneficiary of the Bonds should be treated as being the same as the entity named in the Contract. The Bonds and the Contract are independent documents and the Bonds expressly stated that ANZ was not required to make inquiries to ascertain whether the beneficiary was the same entity as the principal in the Contract.
  • ANZ was correct to take a strict approach to the demand for payment and was not required to investigate the background of the demand for payment. The beneficiary was entitled to claim the Bonds at any ANZ branch in Australia and it was likely that the employee who processed the claim for payment would have no official understanding of the transaction. Therefore, it is risky for the bank to do anything but strictly comply with the conditions of the documents.
  • Nebax incorrectly instructed ANZ to complete the Bonds and the Bonds reflected those instructions. ANZ would have been in breach of its contractual obligations, even though they were based on erroneous instructions, if it had honoured the Bonds by treating the Corporation as the beneficiary rather than the non-existent entity.
  • It was the Corporation’s obligation to review the Bonds to check if they complied with the obligation in the Contract to name the Corporation as beneficiary. If the Corporation had noticed the error, then it could have given notice to Nebax requiring Nebax to rectify the breach of its obligations under the Contract.

All is not lost

Luckily for the Corporation, the High Court found that the Bonds could be rectified so that they referred to the Corporation as beneficiary. ANZ was ultimately bound to make payment to the Corporation. It was the High Court’s view that if, at the time the Bonds were prepared, Nebax and ANZ had noticed that the name of the beneficiary on the Bonds was different to the Corporation, they would have agreed that it was a mistake. Accordingly, it was clear that the actual common intention of Nebax and ANZ was that the beneficiary of the Bond should be the Corporation and it was appropriate that the High Court order rectification of the instruments.

How to avoid this situation

If there is an error in your bank guarantee, you may be able to ask the court to rectify it. Whether or not a court would make an order for rectification depends on the facts of the case. Also, seeking court orders is an expensive exercise that can be easily avoided by carefully checking that the details of the bank guarantee are correct when you receive it.

We recommend to all our landlord clients that we review the bank guarantees they receive to minimise the risks of not being able to claim on the bank guarantee when required. The team at Meyer Vandenberg would be happy to assist you if you have any questions or concerns regarding your bank guarantee.

For more information contact the Property, Commercial and Finance Team:

Christine Murray — Partner — Property, Commercial and Finance Team
(02) 6279 4402

Jennifer Jaeschke — Associate — Property, Commercial and Finance Team
(02) 6279 4361