The unconditional nature of a bank guarantee does not necessarily imply an unconditional entitlement to cash in the guarantee in the absence of an express right in the relevant contract. Where parties to a contract are in dispute and the contract is silent on the right to call on the security, a party is likely to be prevented from calling on the security even if the guarantee itself is expressed to be unconditional. Contracting parties should ensure that the rights to call on any performance security are clearly stipulated in the contract.
Since early 2013, Walton Construction Pty Ltd (Walton) and Pines Living Pty Ltd (Pines) were involved in a building defects and payment dispute. Pending resolution of the dispute, Pines sought to enforce bank guarantees provided by Walton under the contract between the parties (Contract), which contemplated the provision of the bank guarantees but was silent about when Pines might call on them. Walton sought an injunction against Pines, submitting that there was an implied contractual promise that Pines would not call on them until the dispute resolution procedure in the Contract had been followed and that recourse to the bank guarantees was only permitted once there had been an agreed or determined entitlement (and not just a claim in good faith). Conversely Pines submitted that its entitlement arose from the unconditional nature of the bank guarantees themselves and the authorities that had established that, in the absence of a clear negative stipulation, Pines was entitled to call upon the guarantees.
Master Mossop in the Supreme Court of the Australian Capital Territory considered the differing authorities and noted that:
- it was a matter of construction of contract whether a performance guarantee is provided solely as security or also as a risk allocation device (as to who will be out of pocket pending resolution of a dispute); and
- whether or not there is power to call upon security when the entitlement is disputed will depend on the subtleties of the particular contractual provisions.
In granting the injunction, Master Mossop found that:
- the Contract itself did not expressly permit Pines to call upon the guarantee while its entitlement to do so is subject to a genuine dispute;
- in a case where the contract does not expressly deal with the circumstances in which the guarantee may be called upon, any capacity to have recourse to the security must, if it exists, be implied; and
- in this situation, the implication of such a term would not be required to give business efficacy to the Contract.
See the case.