KEYWORDS: ERRORS IN BANK GUARANTEES
KEY TAKEAWAY
The High Court will soon consider whether errors on the face of bank guarantees (or at least misdescription of the beneficiaries) can be corrected. This is an important practical issue, as it is not unknown for there to be errors in formal details in bank guarantees and similar documents.
Background
Historically, bank guarantees have been governed by the doctrine of strict compliance and autonomy which confines the interpretation of a bank guarantee to the four corners of the document. The New South Wales Court of Appeal took a wider approach and construed a bank guarantee by reference to the identifying features of a related document. In doing so, the Court corrected the name of the beneficiary of the bank guarantee and required the bank to honour the obligation under the agreement. This decision arguably erodes the historical position. The High Court will consider whether the Court of Appeal's approach was correct.
The Court of Appeal decision allows superficial errors in bank guarantees, which sometimes occur, to be corrected. However, looking beyond the corners of the agreement imposes a greater onus on the banks when issuing and honouring bank guarantees. This may change the "cash like" properties that define bank guarantees.
History of the proceedings
Nebax Constructions (Australia) Pty Ltd (Netbax) entered into a construction contract with the New South Wales Land and Housing Corporation (Corporation), a body corporate established by the Housing Act 2001 (NSW). Nebax was required to provide security of $146,965.06.
At Nebax's request, ANZ issued two bank guarantees in favour of the non-existent entity "New South Wales Land & Housing Department". This does not appear to have been Nebax's intention.
Nebax entered liquidation and was in breach of its contract with the Corporation. The Corporation demanded payment under the bank guarantees, which ANZ declined to pay as the Corporation was not the named beneficiary. The Corporation sought a declaration that the guarantee should construe the Corporation as the beneficiary or appropriately rectify the document.
The trial judge (Kunc J) construed the reference to "New South Wales Land & Housing Department" as a reference to the Corporation and therefore required ANZ to pay the demanded amount to the Corporation.
That decision was appealed, not by ANZ, but by the guarantors of Nebex's obligations to ANZ. The Court of Appeal dismissed the appeal. Emmett AJA, with Bathurst CJ and Ward JA agreeing, held that Kunc J was correct to construe the bank guarantees as he did. Emmett AJA1 drew a subtle distinction. His Honour suggested that, in general, it would be impermissible to construe a bank guarantee by reference to the terms of other documents. On the other hand, it might be permissible to interpret a bank guarantee in light of the identifying features of other documents (here, the names of the parties) or even particular clauses of them, where they are referred to in the bank guarantee.
On 5 May 2016, Nettle and Gordon JJ granted Simic and the other guarantors special leave to appeal the Court of Appeal's decision. In accordance with the High Court's current practice, this was done on the papers. Written submissions have been filed, and the appeal has been set down to be heard on 20 July 2016.
http://www.austlii.edu.au/au/cases/cth/
HCATrans/2016/102.html
(High Court transcript)
http://www.hcourt.gov.au/cases/case_
s136-2016
(High Court case page)
https://www.caselaw.nsw.gov.au/decisio
n/56723f5be4b05f2c4f04a132
(Court of Appeal decision)
https://www.caselaw.nsw.gov.au/decisio
n/54fcc953e4b0bcd7fe7b82c2
(First instance decision)
Footnote
1 At [106]
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.
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