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Note: Nebax Constructions Australia Pty Ltd (Contractor) contracted with New South Wales Land and Housing Corporation (Government Agency) to clear existing dwellings for a new project. Contractor was required to provide security for its performance and did so by obtaining two bank guarantees from ANZ Banking Group Limited (Issuer) for a combined amount of AUD 146,965.06. Government Agency required that the guarantees be made payable to “New South Wales Land and Housing Corporation” (emphasis added). In its application, Applicant verbally gave Issuer the incorrect name “New South Wales Land and Housing Department” (emphasis added). Thus, when guarantees were executed, the beneficiary, or “[f]avouree” was listed as “New South Wales Land & Housing Department”.

When Contractor defaulted on the contract, Government Agency drew on the guarantee using its actual name. Issuer refused payment because the name of the beneficiary on the demand did not match the beneficiary’s name on the Guarantee. In a letter to the Government Agency, Issuer stated that the “Bank Guarantees were issued in favour of the New South Wales Land & Housing Department” but that “the party calling upon the Bank Guarantees [that being the Government Agency] is the New South Wales Land and Housing Corporation” (emphasis added).

Government Agency sued Issuer “for indemnity in respect of any liability Issuer may have to the Government Agency under the guarantees”. The Supreme Court New South Wales, Kunc, J., granted judgment in favor of the Government Agency.

The Judge first constructed the guarantees. Citing Griffin Energy Group Pty Ltd v. ICICI Bank Ltd., 56017, 2015 WL 855880 (NSWCA 29) summarized in the 2016 Annual Review of International Banking Law & Practice at ___, the Judge found that standby letters of credit are “the equivalent of a cash payment,” and thus obligated the Issuer to honor the guarantee even if the exact language differed from the Contractor and Government Agency’s contract “without regard to the performance or non-performance of the Customer or Principal under the terms of the contract or agreement”. The Judge did note that “[i]f [the Issuer] honoured the guarantees when it was not legally required to do so, then it would not be entitled to indemnity from the [Contractor].”

The Judge also ruled that the guarantees “must be construed by reference to what a reasonable business person would have understood the terms to mean”. This objective test was applied “so as to avoid [the guarantee] ‘making commercial nonsense or working commercial inconvenience’.” (citing Electricity Generation Corp. v. Woodside Energy Ltd., [2014] HCA 7; 251 CLR 640).

The Judge then concluded the error in the name of the beneficiary when drafting the guarantees amounted to a mere misnomer. A “misdescription…of that kind is not fatal to the validity of the guarantee” (citing Kingstream Steel Ltd. V. Stemcor UK Ltd., [2001] WASCA 138). The Kingstream decision provided for a drafting error to be considered as either a misnomer or correctable by rectification. The Judge found Kingstream’s rationale was persuasive and noted that the distinguishing aspects of Kingstream were irrelevant, namely that Kingstream concerned a letter of credit and not a guarantee and that Kingstream was seeking to identify the issuer and not the beneficiary.

The Judge also considered the surrounding circumstances of the guarantees’ creation determined the Contractor/Government Agency’s intended beneficiary. The Judge stated:

"A reasonable business person, without going outside the four corners of the guarantees, would understand that question [of who the intended beneficiary is] to be resolved by ascertaining who was the other party with [Contractor] to the contract identified in the Description. Sensibly and correctly, no party before me suggested that contract could be anything other than the Building Contract. Engaging the principle that evidence can be admitted to identify a party to or the subject matter of an agreement, the Building Contract establishes beyond doubt according to its terms that the other party to that contract with [Contractor] was the Corporation."

The surrounding circumstances included the Contractor and Issuer making a mistake in drafting the guarantees and that, had there been notice of the mistake, the intended beneficiary “would have been plain and obvious”.

The Judge found that if the guarantees were taken literally, they would amount to an absurdity because they referred “to a non-existent entity with the result that the Indemnity and guarantees have no legal effect”. Therefore, the guarantees could not be taken literally so as to not produce an outcome rendering the process of creating, agreeing to, and drawing on the guarantees “a solemn farce”.

In the Judge’s opinion, strict compliance with the guarantees’ language was unnecessary because the dispute arose out of a question of construction and not contractual obligation. Thus, “[h]aving determined the question of construction, the contractual requirement of strict compliance is engaged and shown to be satisfied”.

Finally, the Judge found that, although rectification was unnecessary, an order for rectification was justifiable when considering the Contractor and Issuer’s shared intent in specifying the Beneficiary since it would allow consider evidence of shared intent even if subjective in nature.

"[T]he Court finds that the prerequisites for the making of an order for rectification are satisfied. If it were to be suggested that leaving the guarantees in an unrectified state would be a potential source of confusion or difficulty, then in the exercise of the Court’s discretion I would order the guarantees to be rectified."

Legal Analysis:

Comments:

  1. Decisions which “adjust” the terms of an independent undertaking to align it with “intent” are troublesome. To the extent that they rely on the intent of the applicant, they are even more troublesome. If independence means anything, it signifies that the letter of credit obligation is independent from the agreement between the issuer and the applicant. Thus, if the applicant allowed terms to be included in the LC that were not agreed between it and the counter party who is the beneficiary of the letter of credit, the issuer could not raise this error to excuse a facially complying presentation.

  1. If this point is true regarding the terms of the LC, it is even more true regarding the name of the beneficiary. If so-called “strict” compliance has any scope, it is with regard to the name of the beneficiary.

  1. The problem was explored in the Canadian decision in Piaggio [Piaggio & C.S.p.A. v. Bank of Nova Scotia, 2011 ONSC 2567, 2011 CarswellOnt 15964 (Can. Ont. Sup. Ct. J.); 2013 Ann. Rev. Banking L. & Prac. Rev. at 474]. There are other poignant cases on this same issue, namely Voest-Alpine Trading USA Corp. v. Bank of China, 2000 U.S. Dist. Lexis 8223 (S.D. Tex. 13 March 2000) [USA], summarized in 2001 Annual Survey of Letter of Credit Law & Practice at 273 and Shin-Etsu Chemical Co. v. ICICI Bank Ltd., 777 N.Y.S.2d 69 (N.Y. App. Div. 2004) [USA], summarized in 2005 Annual Survey of Letter of Credit Law & Practice at 376.

  1. The New South Wales judge’s answer makes sense in a practical way: what is the difference between “Department” and “Corporation”, after all? But the reasoning justifying the decision is inadequate.

  1. The decision is very troubling, however, in that its reference is the judge’s sense of what is practical with no reference or consideration of letter of credit practice. The real question should be how the difference should be treated under standard LC practice.

  1. To the extent that the judge referenced the law regarding the interpretation of bilateral contracts, the result is likely to be wrong. Although characterizing the guarantees as “unilateral contracts”, the result is hardly more comforting that the application of the canons of construction applicable to bilateral contracts. These canons are blind guesses of what the parties intended predicated on default rules and presumptions. While it may be necessary to use such tools in construing the terms of a LC, there is a very different twist in LC construction. For example, the rule of contra proferetum in LC construction would require that the terms be construed against the issuer or confirmer regardless of who proposed them or what they say in situations where the issuer seeks to refuse based on what was intended. Another way of stating this rule is that the presumption ought to be in favor of payment.

  1. A proper approach to the question would include the following considerations:
    1. Its impact on the beneficiary. Is the beneficiary prejudiced by the difference? To an extent, the weight of this factor is overshadowed if the name in the LC was due to error or negligence attributable to the beneficiary. To a much lesser extent, the court can take into account whether the beneficiary was aware of the mistake and what it did about it. This factor is not determinative.
    2. Will the beneficiary be forced to use a name that is not its own in order to draw?
    3. Was the letter of credit sent to the person drawing at the address at which it operates?
    4. Do other factors in the terms of the LC point to this entity as the beneficiary?
    5. Will requiring payment to be made affect the ability of the issuer to be reimbursed. To an extent, this factor is overshadowed if the issuer contributed to the error.

  1. It is doubtful that these factors can be formulated into a practice rule in UCP700 but it is possible that the revision could be oriented in the direction of sound interpretation and construction.

TEXT OF GUARANTEES INCLUDED:

“AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED

ABN 11 005 357 522

ORIGINAL - TO BE PROVIDED TO THE FAVOUREE

BANK GUARANTEE

Guarantee No: 108783

Favouree To: New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940 (The Principal)

Business name or trading name For: Nebax Constructions Australia Pty Ltd ACN 101054068 (The Customer)

Description of contract agreement Australia and New Zealand Banking Group Limited (‘ANZ’) asks the Principal to accept this bank guarantee (‘Undertaking’) in connection with a contract or agreement between the Principal and Customer for Job Number: P0409021, Bombaderry - Design & Construct 3-7 Karowa Street Contract Number BG2J8

Amount: In consideration of the Principal accepting this Undertaking and its terms, ANZ undertakes unconditionally to pay the Principal on written demand from time to time any sum or sums up to an aggregate amount not exceeding 73,482.53 AUD (‘Amount’)

ANZ will pay the Amount or any part of it to the Principal upon presentation of this original Undertaking (accompanied by a written demand) at any ANZ branch located within Australia without reference to the Customer and even if the Customer has given ANZ notice not to pay the money, and without regard to the performance or non-performance of the Customer or Principal under the terms of the contract or agreement.

By accepting this Undertaking, the Principal acknowledges and agrees that ANZ may rely entirely on any demand or notice as presented to it and has no responsibility or obligation to investigate the authenticity or correctness of the matters stated in a demand or notice, the signatures on the same, the positions of such signatories or the capacity or entitlement of the Principal to give and execute the demand or notice.

Any alterations to the terms of the contract or agreement or any extensions of time or any other forbearance by the Principal or Customer will not impair or discharge ANZ's liability under the Undertaking.

…

This Undertaking is personal to the Principal. The Principal cannot assign, transfer, charge or otherwise deal with its rights under this Undertaking and ANZ will not recognise any purported assignment, transfer, charge or other dealing

This Undertaking will be governed by the laws of New South Wales (‘Governing Jurisdiction’).

Dated this Friday, 16 April 2010

Executed by Adele Hanna, Relationship manager at Caringbah, New South Wales for and on behalf of Australia and New Zealand Banking Group Limited ABN 11 005 357 222.” [X4]

[TLA]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.