Note: In 1999, Bivami Pty Ltd (Owner/ Beneficiary) entered into a 10-year lease agreement with Universal Publishers Pty Ltd (Lessee/Applicant). Lessee/Applicant was required by the lease to "deliver to [Owner/Beneficiary], on or before the date of execution of the Lease, an unconditional bank guarantee in the amount of [AUD] 632,000 to secure [Lessee/Applicant's] obligations under the Lease and losses or damages suffered by [Owner/Beneficiary] pursuant to breach by [Lessee/Applicant] or the termination of the Lease arising from any such breach." The Lease also provided that Owner/ Beneficiary, in the event of Lessee/Applicant's default, could make a demand on the issuer to "pay to it such an amount that, in the reasonable opinion of [Owner/Beneficiary], may be due to it as a result of such default, breach or non-observance."

The Lease defined "bank guarantee" as "an unconditional undertaking or guarantee from an Australian bank in favour of the Lessor in a form and content acceptable to the Lessor to enable the Lessor to be paid on demand an amount up to the sum referred to in Item 16 total in one or more drawings and containing no expiry date."

Accordingly, Lessee/Applicant delivered to Owner/Beneficiary a bank guarantee issued by National Australia Bank Ltd dated 30 July 1999 in the amount of AUD 632,000 according to the terms of the lease agreement. Owner/Beneficiary returned the first bank guarantee to Lessee/Applicant around 20 November 2005 though it is unclear why it did so from the opinion. On or about 9 February 2006, Lessee/Applicant procured a second "unconditional banker's undertaking from Westpac Banking Corporation Ltd [(Issuer)] in favour of [Owner/ Beneficiary] in the amount of [AUD] 632,000 and delivered it to [Owner/Beneficiary]" (Second Bank Guarantee). There is no indication from the opinion whether either bank guarantee was issued subject to any applicable practice rules.

One week later, Owner/Beneficiary sold the premises to Australian Executor Trustees Ltd (Successor). The sale agreement contained the following provision:

"[Owner/Beneficiary] will use its best endeavours both prior to and after completion to obtain from the [Lessee/Applicant] a Bank Guarantee in the same terms as the Bank Guarantee attached to this contract excepting that it would name the [Successor] as the 'beneficiary' of that bank guarantee. In the event of the [Owner/ Beneficiary] not being able to obtain such substituted Bank Guarantee by Completion Date then the [Owner/Beneficiary] will on each and every occasion after Completion Date that the [Successor] in writing requests the Vendor to do so, call upon the National Australia Bank Ltd pursuant to the terms of the current Guarantee to pay to the [Owner/Beneficiary] such amount as the [Successor] requests pursuant to a default/ defaults by the [Lessee/Applicant] under the Lease, subject to the [Successor] on each such occasion indemnifying the [Owner/Beneficiary] in writing for and against any action, damages and costs commenced by the [Lessee/Applicant] against the [Owner/Beneficiary] claiming that no default had occurred which gave to the [Owner/ Beneficiary] or the [Successor] the right to call upon the Bank Guarantee."

Lessee/Applicant did not exercise its option to renew when the lease expired on 29 June 2009 and vacated the premises thereafter. Neither did Lessee/ Applicant provide a replacement "bank guarantee" to Successor nor did Successor request anything further of Owner/Beneficiary about obtaining a replacement guarantee. In late October 2012, Successor contacted Owner/Beneficiary, requesting that Owner/Beneficiary draw on the Second Bank Guarantee. Successor also forwarded to Owner/ Beneficiary on 31 October 2012 a Notice and Indemnity which stated that "[Successor] agrees to indemnity [Owner/Beneficiary] for and against any actions, damages and costs commenced by the [Lessee/Applicant] against [Owner/Beneficiary] claiming that no default had occurred which gave rise to [Owner/Beneficiary] or to [Successor] the right to call upon the Bank Guarantee."

Owner/Beneficiary acquiesced, forwarding to Issuer on 5 and 6 November 2012 a demand on the Second Bank Guarantee. Two days later on 8 November 2012, Successor sued Lessee/Applicant in the Supreme Court of New South Wales for alleged breaches of the lease and seeking damages in the amount of AUD 2.7 million. The following day, Lessee/Applicant received notice from Issuer that Owner/Beneficiary had made a demand on the Second Bank Guarantee.

Lessee/Applicant sought an injunction in the Federal Court of Australia, New South Wales District, to prevent Owner/Beneficiary from drawing on the Second Bank Guarantee. Successor was joined as a party and filed two separate cross claims: one against Lessee/Applicant for failure to provide a substitute bank guarantee and one against Owner/Beneficiary for refusing to make demands under the Second Bank Guarantee. Owner/Beneficiary also cross-claimed against Successor, seeking declaratory relief that it was to be indemnified as to the proceedings under the Notice and Indemnity. The parties settled the primary proceeding as well as Successor's two cross-claims, leaving only Owner/Beneficiary's cross-claim as to the Indemnity for the court to decide. In an opinion by Griffiths, J., the Federal Court of Australia denied declaratory relief that Owner/Beneficiary was to be indemnified by Successor as to the proceedings in the Federal Court.

The issue before the court was whether Successor "is bound to indemnify [Owner/Beneficiary] in accordance with [the Notice and Indemnity]. [Owner/ Beneficiary] claim[ed] that it is entitled under the Indemnity to be indemnified by [Successor] in respect of the legal costs incurred by [Owner/Beneficiary] in broader proceedings" The Judge found that the Indemnity indeed related to the action commenced by Lessee/Applicant, but that the narrower language of the Notice and Indemnity did not extend to all the actions which Lessee/Applicant brought against Owner/Beneficiary.

The Judge noted that "[Owner/Beneficiary] may well consider now that it would make more commercial sense (at least from its perspective) if the contract and the Indemnity had matched the language of the Lease. But they do not. And I do not consider that the court is at liberty to stretch the language . . . of the contract or the Indemnity."

Terms of the Second Bank Guarantee:

"Should [Issuer] be notified in writing purporting to be signed by or for and on behalf of the Favouree that the Favouree desires payment to be made of the whole or any part or parts of the Sum, it is unconditionally agreed that such payment or payments will be made to the Favouree forthwith without reference to the Applicant and notwithstanding any notice given by the Applicant to [Issuer] not to pay the same. Provided always that [Issuer] may at any time without being required to do so pay to the Favouree the Sum less any amount or amounts it may previously have paid under this undertaking or such lesser sum as may be required and specified by the Favouree and thereupon the liability of [Issuer] hereunder shall immediately cease and determine.

The Favouree shall not assign or transfer all or any part of its rights under this undertaking without the prior written consent of [Issuer].

Should [Issuer] in its discretion consent to the assignment or transfer of this undertaking then, unless the context requires otherwise, the words 'Favouree' shall include each such assignee or transferee."

Terms of the Lease:

"19.3 The Bank Guarantee shall be in a form acceptable to the Lessor.

19.4 In the event that the Lessee: defaults in the payment of Rent or in the performance or compliance of any other obligations under this Lease; or breaches of any other obligation, term, condition or covenant under the Lease, the Lessor is hereby authorised to demand that the guaranteeing bank pay to the Lessor such amount that (in the reasonable opinion of the Lessor) may be due to the Lessor as a result of such default, breach or nonobservance by the Lessee or termination of the Lease pursuant to it.

19.5 The Lessor shall be entitled to recover Rent and damages for breach of covenant or arising from termination of this Lease without being limited to the amount secured under the Bank Guarantee.

19.6 Any demand made shall not in any way be deemed to constitute a waiver by the Lessor of any default, breach or non-observance by the Lessee and shall not prejudice any other right of the Lessor arising from such default, breach or non-observance.

19.7 Should any amount of the Bank Guarantee be demanded from time to time by the Lessor as aforesaid then the Lessee shall upon demand by the Lessor and within twenty-one (21) days from the date thereof provide to the Lessor a further Bank Guarantee for the amount so demanded (in a form acceptable to the Lessor) in order to reinstate the amount of the Bank Guarantee to an amount equal to the amount shown in Item 16, or to any amount equal to Rent for the number of months specified in Item 16.

19.8 The Lessor shall return to the Lessee the Bank Guarantee three months after expiry or termination of this Lease subject to the Lessee vacating the Premises and otherwise complying with its Obligations under the provisions of this Part have come into operation."



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.