Article

Note: Structural Systems (Sub-contractor/ Applicant) provided security for the performance of a construction contract of an apartment block in Melbourne, Australia in favor of Hansen Yuncken (Principal Contractor/Beneficiary) in the form of two demand guarantees issued by National Australia Bank in the amount of AU$316,500. Although the Subcontractor/Applicant's work of concreting, posttensioning, and form work was "substantially completed", various disputes persisted. When they were not resolved, Principal Contractor/Beneficiary issued a formal notice of claim required by the contract and drew down both demand guarantees, which were honored.

Claiming that the drawing was unconscionable under the Australia Trade Practices Act, Structural Systems (Sub-contractor/Applicant) sued Principal Contractor/Beneficiary for compensation and moved for pre-judgment relief requiring immediate repayment of AU$316,000, the amount of one of the demand guarantees as a result of a contractual provision requiring release of one half of the security when a certificate of partial completion was issued. Principal Contractor/Beneficiary alleged, however, that Applicant/Sub-contractor had not complied with the requirements of the underlying contract and that it was therefore not under any obligation to reduce the amount of the security to be drawn.

The Federal Court of Australia, Victoria District, Tracey, J., denied Sub-contractor/Applicant's motion for return of AU$316,500 drawn under the Guarantee conditioned on Principal Contractor/Beneficiary maintaining a balance of at least AU$316,000 in an account at its bank, indicating that if it were not prepared to do so, the request for the return of this amount would be granted. The Judge avoided concluding whether the conditions for the Guarantee had been satisfied as he opined that it would have little bearing on the resolution of the commercial disputes between the parties and would interfere in their resolution.

Comment:

1. Unconscionability: Here is another Australian case brought by an Applicant invoking the vague notion of "unconscionability". Applicant urged the court to consider the effect of a drawing on a guarantee on its reputation. While the line of standby and demand guarantee cases permitting interruption of the obligation to honor is troubling, this case differs considerably. It is a post honor case involving the right to proceeds. As a result, the notion of unconscionability here is unrelated to LC laws and falls within the general law of contractual obligations.

[JEB/map]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.