INSIGHTS
AS most of us were busy preparing for the holiday season, the High Court delivered an eagerly anticipated decision in December which serves as a reminder of the importance of double-checking the details on bank guarantees.
Bank guarantees are often used when one party requires security for the other party’s performance under a contract. For example, a company procuring construction work might seek assurance that the contractor will do what it has promised. If the contractor fails to deliver, the company can call on the bank guarantee.
But what if the bank guarantee contains an error in the name of the beneficiary, and nobody spots the mistake before the document is accepted as security? Will the beneficiary be entitled to demand payment?
The High Court considered a case where two bank guarantees mistakenly identified an incorrect NSW government department as the beneficiary. When the intended beneficiary – a different government department – called upon the guarantees, the bank refused to pay because of the error. The matter landed in court.
The judges who heard the case before it escalated to the High Court said the guarantees should be interpreted to refer to the department that was the intended beneficiary. They noted that the circumstances underlying the guarantees, including the construction contract for which the guarantees were sought as security, made clear which entity should have been named. As a result, the intended government department was entitled to demand payment.
The High Court disagreed.
Although the High Court decided the error could ultimately be fixed through an equitable remedy called ‘rectification’, to make the bank guarantees reflect the parties’ true agreement, the incorrect name could not simply be interpreted to mean the intended government department. The High Court said that banks should not need to consider the terms underlying the bank guarantees they issue, and the parties to a guarantee should review their own documents and bear the costs of any errors.
Mistakes can easily be made at the pointy end of contract negotiations, especially when the parties are often eager to conclude the deal. The High Court’s decision demonstrates the importance of taking the time to get the details right.
- Emma Hodgman is a partner at DibbsBarker. Email emma.hodgman@dibbsbarker.com. This article contains general commentary only. It is not legal advice and must not be relied upon as such. Readers should obtain specific advice relating to their particular circumstances.
