On 7 December 2016 the High Court of Australia handed down its decision in Simic v NSW Land and Housing Corporation [2016] HCA 47, which confirmed that where there are common mistakes with contractual documentation, the Courts, where possible, will uphold the parties’ actual or true intentions.

The appeal to the High Court concerned a refusal by the Australian and New Zealand Banking Group Limited (ANZ) to pay out on performance bonds which contained a misdescription as to the favouree of the bonds.

The decision also serves as a warning that where incorrect documentation is submitted to a third party (such as a bank), the third party is not required to make inquiries or to investigate the proper intention of the parties, and doing so will be at the third party’s own risk.

Background

Nebax Constructions Australia Pty Ltd (Nebax) entered into a contract with the New South Wales Land and Housing Corporation (Corporation) for the construction of home units. Under the contract, Nebax was required to obtain financial facilities from the ANZ including two unconditional performance bonds (Bonds).

The Bonds were incorrectly made out in favour of the Corporation, which misdescribed the name of the Corporation and its Australian Business Number. Further, the contract between Nebax and the Corporation was also misdescribed in the Bonds.

Applying a strict interpretation to the Bonds, the Corporation wasn’t listed as the favouree. Therefore, if ANZ paid the Corporation upon demand, ANZ would be at risk of breaching its contractual obligations to Nebax.

As such, when the Corporation called upon the Bonds in about October 2013, ANZ refused to pay the Bonds on the basis of the discrepancy.

The High Court’s Decision

In a unanimous decision the High Court held that ANZ was required to pay on the Bonds (although French CJ and Kiefel J had separate reasons), upholding the decision of the New South Wales Court of Appeal.

However, the High Court declined to follow the Court of Appeal’s reasoning which decided that the proper construction of the Bonds and the evidence provided by the Corporation to ANZ meant that it was indisputable that the Corporation was the intended favouree of the Bonds and therefore, ANZ should have paid out the Bonds to the Corporation.

Instead, the High Court applied the equitable remedy of rectification to make the Bonds “conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately”.[1]

Rectification of the Bonds gave effect to what Nebax required, as well as the stated intention of ANZ to provide the security to the Corporation with which Nebax had contracted to provide the building and constructions services. That intention was the actual or true common intention of the parties, viewed objectively.

The fact that the Corporation had been wrongly identified in the Bonds was, in the particular circumstances, a matter that could be, and should be, rectified. In part, this was because the contract expressly referenced the Bonds from which the High Court was able to infer the parties’ actual or true intentions.

The High Court was unwilling to undertake a process of construction as to the proper favouree of the Bonds, and to do so would put ANZ at risk of acting in breach of its contract with Nebax. The High Court said that ANZ was required only to pay the amount specified to the entity named in the Bonds.

Comments

Getting it right, or wrong, can be so easy. Get your documentation right by ensuring both parties properly review the documents prior to their execution and before they are sent to a third party (such as a bank). If you get it wrong, even a simple mistake may require interpretation from the Courts as to the parties’ proper intention.

[1] Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 250; [1973] HCA 23. See also Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 346; [1982] HCA 24.