Case note: strict compliance for bank guarantee

In Simic v New South Wales Land and Housing Corporation [2016] HCA 47 the High Court of Australia decided that a bank guarantee (also known as a performance bond) where the beneficiary is wrongly named cannot be interpreted to overcome the erroneous designation of the beneficiary.

But it left open the ability of a court to rectify the guarantee to reflect the common intention of the issuing bank and the contracting party requesting the issue of the guarantee that the beneficiary be the principal in the contract in relation to which the guarantee was issued.The intention of the beneficiary is not relevant.

The case concerned the refusal by Australia and New Zealand Banking Group Ltd (“ANZ”) to make payments demanded by the New South Wales Land and Housing Corporation (ABN 24 960 729 253) (“the Corporation”) under performance bonds issued at the request of a construction company, Nebax Constructions Australia Pty Ltd (“Nebax”), which, because of a mistake made by Daniel Simic, acting on behalf of Nebax, named their beneficiary as the non-existent “New South Wales Land & Housing Department trading as Housing NSW ABN 45754121940”. The bonds were sought by Nebax in accordance with a requirement contained in a special condition of a construction contract between it and the Corporation. Nebax had provided an indemnity to ANZ in respect of each of the bonds and the appellants were guarantors whose liabilities under their guarantees depended upon Nebax’s liability, which in turn depended upon the efficacy of the bonds.

The High Court held that ANZ was entitled to refuse to pay the bank guarantees following the demand from the misdescribed beneficiary.

However it rectified the guarantee by substituting the words “New South Wales Land and Housing Corporation ABN 24 960 729 253” for the words “New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940”.

Chief Justice French describes the principles as follows:

Two complementary principles apply to letters of credit and performance bonds alike — the principle of strict compliance and the principle of autonomy or independence. According to the principle of strict compliance, a bank paying on a letter of credit or performance bond only has an obligation to do so and only has an entitlement to claim indemnity for the performance of that obligation if the conditions on which it is authorised and required to make payment are strictly observed. A demand for payment cannot be accepted on the basis that near enough is good enough. The principle of autonomy requires that the letter of credit or performance bond be treated as independent of the underlying commercial contract. The principles of strict compliance and autonomy serve the immediate commercial purpose of such instruments of providing an equivalent to cash and the further purpose of performance bonds of allocating risk between the parties to the underlying contract until their dispute, if there be one, is resolved.

The strict compliance principle requires that the party making demand on a performance bond be the party named in the bond as the beneficiary and that any conditions on payment set out in the bond are satisfied. It does not describe an obligation imposed on the issuing or accepting institution. Rather, it delimits the issuing institution’s obligation to make payment and, correspondingly, its right to claim on an indemnity promise by the party requesting the issue of the bond. Where a performance bond is expressed, as in the present case, to be unconditional, strict compliance at least requires that the beneficiary making demand for payment be the beneficiary named in the bond. Unlike the autonomy principle, it is not a rule of construction of the bond.

The autonomy principle requires that the obligations of the issuing or accepting bank under the bond not be read as qualified by reference to the terms of the underlying contract. That said, it does not prevent a party to a contract who procures the issue of a performance bond claiming as against the beneficiary that the beneficiary’s action in calling upon the bond is fraudulent or unconscionable or in breach of a contractual promise not to do so unless certain conditions are satisfied. However, this is not such a case. …”.

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