Segboer & Anor v AJ Richardson Properties Pty Limited & Anor  NSWCA 253
A recent case from New South Wales in which the Court of Appeal determined that a facsimile copy of a bank guarantee that had purportedly been cancelled by the issuing bank, could still be cashed, is a reminder to participants in the construction industry of prudent practices needing to be followed when dealing with such forms of performance security.
In 2007 AJ Richardson Properties appointed Mr & Mrs Segboer as the Builder to construct an addition to the Centrepoint Shopping Centre in Tamworth. As is commonly the case in construction contracts, the Builder was required to procure performance security, which in this instance comprised two bank guarantees for $375,000 each, with AJ Richardson Properties and the project lenders as joint beneficiaries. The bank guarantees were required to be in place until 12 months after Practical Completion of the works (presumably, this period refers to the expiry of the defects liability period). However, the originals of these bank guarantees were never delivered to the beneficiaries.
Each of the bank guarantees had been signed, witnessed and sealed in accordance with the issuing bank’s requirements, and copies of the bank guarantees were faxed to the project manager, with the statement that: “The Bank is in a position to be able to provide Bank guarantees to assist Robert Segboer in the construction of the Centrepoint shopping centre development. Please find enclosed those guarantees. The originals will be forwarded to you in due course.”
The original bank guarantees were given to the Builder, who did not provide them to either beneficiary or the project manager. Part way through the construction of the project, and only 12 months after the issue of the bank guarantees, the Builder returned the originals to the issuing bank and requested that they be cancelled. The issuing bank made no further enquiries of the Builder or the status of the project generally and purportedly cancelled the bank guarantees.
Subsequently, issues arose during the defects liability period (when the construction contract still required the bank guarantees to have been in place) and AJ Richardson Properties made a demand for the full value of one of the bank guarantees. The original trial was an action by AJ Richardson Properties against the issuing bank for payment of the demand. Judgement was given in favour of AJ Richardson Properties. The Builder then appealed (as it was liable to indemnify the issuing bank).
Issues and findings
The key issue that determined the appeal arose from the legal nature of the bank guarantee as a deed, and was whether the issuing bank had ‘delivered’ the bank guarantee. The Court of Appeal decided that the bank guarantee had been ‘delivered,’ and that AJ Richardson Properties as one of the beneficiaries was entitled to cash the bank guarantee notwithstanding that they were not able to provide the original, or that the issuing bank had purportedly cancelled the bank guarantee.
The Court of Appeal found that it is well established that delivery is an essential requirement of a deed, but that the requirement of delivery can be met without physical delivery. In the absence of physical delivery, a court can consider whether the party executing the deed has evinced an intention to be bound immediately by its terms.
In this case the Builder argued that as the issuing bank held the original at the time of the demand, and the Builder had never provided it to either of the beneficiaries, it had never been delivered to a beneficiary. The Court found that the actions of the issuing bank however pointed “overwhelmingly” to an intention to be bound, most relevantly:
- The bank guarantees were executed with the requisite formality (including by sealing and witnessing);
- The documents were promptly sent by fax to the project manager; and
- The terms of the covering letter to the project manager were not conditional.
The Court of Appeal also held that the original of the bank guarantee was not required for payment, as the terms of the bank guarantee only referred to “this document” being returned to the issuing bank on termination (and not even on payment). The Court of Appeal held that the reference was to the facsimile copy of the bank guarantee being returned, and in any event it did not need to be returned until termination of the issuing bank’s obligations.
Given the Builder had misrepresented that the bank guarantee was no longer required when it requested the issuing bank to cancel it, the Court of Appeal rejected the argument that it had expired, or had been effectively cancelled when the Builder returned the original copies to the issuing bank.
This case is a reminder to construction industry participants of prudent practices needing to be followed when dealing with forms of performance security. The author suggests that specific lessons comprise:
Issuers of performance security
Entities such as banks, bond providers (such as insurers) and parent company guarantors, should take note that:
- If they do not intend to be bound by an instrument such as a bank guarantee, insurance bond or parent company guarantee, the executed copy of the performance security should not be circulated outside the issuer (or in the event that they must be circulated, to do so in draft format without being executed so that there is no mistake or confusion as to whether the issuer intended to be bound immediately or not);
- The form of the performance security should state whether the performance security must be presented in order to make a demand, and if so, whether the original is required or a copy will suffice in order to be cashed;
- The form of the performance security should state that notice is required from the Beneficiary prior to cancellation of the performance security (other than cancellation due to payment of outstanding guaranteed amounts or prior to any fixed expiry date);
- Personnel from the issuer (whether a bank, bond provider or parent company guarantor) should follow internal procedures & requirements. For example, in this case, suspicion should have arisen at the Issuing Bank by virtue of how soon after the date of issue the performance security was purportedly no longer required and returned by the Builder; and
- Such policies and procedures should include requesting evidence that the performance security is no longer required, such as a copy of the certificate of practical completion or final completion in respect of the building work, or a statement from the Beneficiary.
For any beneficiary of performance security, such as a developer (or head contractor where performance security is provided by its subcontractors), the reminder is to ensure that they are provided with the original performance security.
For project lenders (or equity participants such as investors, where applicable), requirements should be imposed on recipients of funds to provide evidence of receipt of required performance security.
For any person that has security issued to secure performance of its obligations, such as builders, the reminder is:
- To ensure that whatever is promised will be done, is performed (so as not to amount to a misrepresentation or misleading conduct); and
- The argument that the original of the performance security is required in order for it to be cashed by the beneficiary is not likely to succeed, unless the terms of the performance security clearly require the original to be presented on encashment.