The New South Wales Land and Housing Corporation entered into a contract with Nebax Constructions Australia P/L for the demolition of existing buildings and the construction of unit blocks in Bomaderry.
A special condition of the Contract required Nebax to provide two performance bonds. Nebax approached ANZ to issue the performance bonds but erroneously named the beneficiary as the non-existent “New South Wales Land & Housing Department trading as Housing NSW”.
The mistake went unnoticed until the Corporation sought payment and ANZ refused because of the error. The Supreme Court of NSW held that the Performance Bonds could be construed as referring to the Corporation, and ordered ANZ to pay the amounts to the Corporation. The Court of Appeal agreed.
The High Court had a different view. They held that it was not possible to construe the Performance Bonds as being in favour of the Corporation:
- The Corporation and a ‘department’ of the New South Wales Government are legally distinct entities.
- The Court endorsed the principle of ‘autonomy’ – that for the purposes of construction of the terms of the Performance Bonds, the Performance Bonds and the underlying Contract are independent instruments. The underlying Contract is however, significant for the purposes of rectification.
- ANZ was not required or intended to be concerned with the terms of the underlying Contract. The commercial purpose of performance bonds and guarantees is to provide security on the terms set out in the security instrument issued without being concerned with any other matters not set out on the face of the instrument.
- ANZ is contractually bound (in the absence of rectification by Nebax) to act in strict compliance with the instructions provided to them by Nebax.
- The Corporation should have reviewed the Performance Bonds upon receipt from Nebax. If the Corporation had noticed the error, they should have refused the Performance Bonds and notified Nebax that it was in breach of its obligations under the Contract.
Nevertheless, the High Court ultimately ruled that ANZ was still bound to pay the Corporation. Using the equitable remedy of rectification, the Bonds could be rectified so that they referred to the Corporation as the favouree. Nebax was obligated to indemnify ANZ.
The takeaway is that when dealing with a misdescribed instrument, the bank is not required to make enquires or to have any regard to any underlying documents in determining whether to pay out on a bank guarantee.
If it can be proven that the issuing bank intended to issue a bank guarantee to a particular party but that party is not the named favouree, that party can apply to the Court to seek to have the bank guarantee rectified. This is an expensive exercise that could have been easily avoided in the first place.
Click here to read the full judgment.