1. How does this affect you?

Three recent decisions from around the country confirm the willingness of Australian courts to take a common-sense approach to contract administration. 

The cases each happily demonstrate courts will not necessarily take an overly stringent approach to construing contractual security provisions or execution arrangements.  Despite that, the fact these questions have actually been able to reach a courtroom in the first place, is perhaps illustrative of the need for caution when negotiating and executing such documents.  

2. The conditions of unconditional instruments

In Simic v NSW Land and Housing Corporation [2015] NSWSC 176, the NSW Court of Appeal confirmed that obvious errors in describing the beneficiary to a bank guarantee don’t necessarily enable, of themselves, an issuing bank to reject otherwise valid demands on the instrument.

On the facts, Nebax Constructions had provided contract security, purportedly in favour of the NSW Land and Housing Corporation (the Corporation).  However, Nebax obtained the instrument (from ANZ) in favour of an incorrectly described entity which actually didn’t exist.

When the Corporation ultimately made a demand on the guarantee, ANZ declined to pay on the basis the demand had not been made by the beneficiary specified on the instrument.

In contesting ANZ’s position, the Corporation relied on the “autonomy principle” and the (undisputed) intent of the parties for the Corporation to be the correct beneficiary.  Under the autonomy principle, the provisions of an unconditional instrument are construed independently of any underlying transaction, except to the extent expressly referenced in the instrument.

In this instance, because the construction contract (and the correct parties to it) were expressly referenced in the instrument, the identity of the parties could be considered when determining the instrument’s beneficiary.  

As the Corporation was the counterparty to Nebax, and because there was no suggestion the bank guarantee could be for any other person’s benefit, the bank guarantee was construed as being for the Corporation’s benefit.

3. Consulting the contractor

In Yuanda Australia Pty Ltd v John Holland Pty Ltd [2015] WASC 453, the WA Supreme Court confirmed that a bank guarantee beneficiary, which had been put on notice of an intended application for injunctive restraint against it, was not, simply because of that notice, restrained from making a valid call on the instrument.

On the facts, Yuanda had contractually agreed with John Holland to perform certain works at the Perth Children’s Hospital and to secure those obligations by providing an unconditional bank guarantee in favour of John Holland.  Relevantly, the contract provided at clause 4.1 that:

“[John Holland was] entitled to convert the security into cash at any time and may…utilise [it] to pay for any costs, expenses or damages which [it claims that it has or might incur as a consequence of a breach].”

Following a dispute between the parties regarding alleged defects in Yuanda’s work, John Holland notified Yuanda of its intention to call on the bank guarantees.  Yuanda requested John Holland undertake to notify it before making any such call.  John Holland refused.  

Some days later, Yuanda announced it would seek an injunction from the WA Supreme Court restraining John Holland from calling on the instruments.  The next day, before the WA Supreme Court had opened, John Holland called on the instruments in Sydney and deposited the proceeds into its Sydney bank account.

Yuanda contended John Holland was not entitled to either call on the instruments or to use the proceeds of any such call, because Yuanda had (the day before) put John Holland on notice that it would seek an injunction to restrain John Holland from doing so. 

The WA Supreme Court rejected Yuanda’s contention, noting that the appropriate time for Yuanda to have sought injunctive relief (if it felt it was so entitled) was immediately after John Holland had refused to undertake not to make a call on the instruments.  The fact Yuanda had put John Holland on notice that it would seek injunctive relief against it did not, of itself, alter John Holland’s right to make demand.

Yuanda also contended that clause 4.1 contained an implied promise by John Holland not to convert the bank guarantees into cash unless John Holland had first claimed against Yuanda for contractual breach.  The Court was not required to reach a final conclusion on this point but, in obiter, effectively rejected such construction on the basis the clause expressly (and broadly) referred to a call being permitted ‘at any time’.  

4. Taking it personally

In WM Financial Trading Systems Pty Ltd v Zamac Property Holdings Pty Ltd [2015] VSC 639, the Victorian Supreme Court usefully reviewed relevant case law regarding contract execution and confirmed that the formulation of an execution block is not necessarily definitive of the capacity in which a party has entered into a document.  

On the facts, the sale of a broiler farm business was partially vendor-financed.  Under the relevant vendor-loan agreement, the Purchaser agreed to grant the Vendor a second-ranking mortgage and “a director guarantee from Peter Wray”.  Wray was a director of the Purchaser and signed the vendor-loan agreement, which also contained the terms of his proposed director guarantee.

Wray contended later, during insolvency proceedings relating to the Purchaser, that he had executed only in his capacity as a director of the Purchaser, and not in a personal capacity.  The implication being that while he agreed the corporate Purchaser was bound (and liable) under the Loan Agreement, he argued he was not personally liable under any director guarantee.

The Victorian Supreme Court rejected Wray’s contention. 

In doing so the Court relied partly on a hand-written amendment to the signature block which purported to note Wray had also executed as a guarantor for the Purchaser.  It also relied, however, on an evaluation of Wray’s objective intent at the time and in this respect usefully restated the position with regards to multiple-capacity execution as follows, confirming that, in determining the correct capacity of execution, regard will be had to:

  • The intention of the parties (in this instance it was clearly the case Wray was intended to provide a director’s guarantee);
  • Whether anything in the document modifies the starting assumption that execution by a party will be in all capacities which it might possibly for that party to execute the document in.  Possible examples include detailed explanatory or limitation clauses in the contract and/or specifically descriptive execution blocks (in this instance there was no such language in the document); and
  • The the surrounding circumstances and nature of the transaction at hand and whether they influence the express or actual execution arrangements (in such a vendor-financed sale it was customary for director guarantees to be provided).

5. How should I respond?

We recommend all forms of contract security and execution capacities be carefully checked prior to acceptance by the parties.  

With regards to contract security provisions, proposed restrictions on the right to call on such instruments should be examined carefully for their possible impact.  If principals require the ability to call on a security unconditionally and at any time, this should be specified clearly and unequivocally in the underlying contract, and there should be no obligation to notify a contractor prior to calling on the security.