By Georgina King a Senior Associate of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
The High Court has handed down an important decision regarding the impact of a mistake in the naming of the intended beneficiary of performance bonds issued by a bank.
In its appeal decision handed down on 7 December 2016 in Simic v New South Wales Land and Housing Corporation [2016] HCA 47, the High Court of Australia has held that while performance bond documents naming a party incorrectly could not be construed (as held previously) as referring to the right party, it was appropriate to order that the security instruments be rectified so that they refer to the correct name and are able to be relied upon on that basis.
The case, heard by the High Court on appeal from a decision of the Court of Appeal of the Supreme Court of New South Wales, involved performance bonds issued by a bank in the form of unconditional undertakings. The performance bonds were required to be provided by a contractor to a Principal pursuant to a construction contract. When obtaining the undertakings from the bank, the applicant for the undertakings named the Principal, being the intended beneficiary of the undertakings, incorrectly by mistake. In fact no entity of the name given to the bank and subsequently stated on the undertakings and an indemnity and guarantees provided in relation to the undertakings, existed.
When the Principal named in the construction contract made demand for the monies in accordance with the undertakings, the bank refused to pay on the basis that the Principal was not the entity named in the relevant instruments. Unsurprisingly, the Principal wanting to enforce the undertakings took the matter to court.
The primary judge held at first instance that as a matter of construction, the instruments were to be taken to refer to the correct rather than incorrect (non-existent) entity and were therefore enforceable on that basis. That finding was upheld on appeal by the Supreme Court of New South Wales Court of Appeal.
On appeal, contrary to the earlier decisions, the High Court found that the instruments could not be taken as a matter of construction to refer to the correct entity. This conclusion was reached having regard to a range of matters including a) the principle of autonomy applicable to instruments in the nature of unconditional undertakings to pay and bank guarantees which holds that subject to fraud by the beneficiary such an instrument is independent from any underlying transaction and other contract, b) the commercial purpose of undertakings and guarantees being to provide security on the terms set out in the security instrument issued without being concerned with other matters, c) a party issuing a banking instrument of this nature relies upon and acts in accordance with the instructions of the applicant for the security and is contractually bound (in the absence of rectification of the contract) to do so, d) it is more efficient for a Principal to review the security before rather than after performance and if the Principal acts without doing so they should bear the costs, and d) the principle of strict compliance in respect of instruments of this nature.
Importantly, however, having reached these conclusions the High Court found that the undertakings and underlying finance applications should be rectified so that they refer to the correct beneficiary. Rectification was granted on the basis that it was the common intention of the applicant for the undertakings and the bank that the security given by way of the undertakings be provided to an entity with which the applicant for the undertakings had contracted in respect of the construction services. The fact that they were mistaken about the name of the entity the applicant was contracting with did not alter that intention and the mistake was one that it was appropriate to rectify.
The High Court’s decision is relevant for all parties who have dealings or involvement in bank guarantees and performance bonds.
Read the judgment here
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Georgina King on (02) 9806 7485 or georginak@matthewsfolbigg.com.au or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
