Article

Note: In granting a permit to Nebax Constructions Australia Pty Ltd (Contractor) to demolish and replace housing units, the New South Wales Land and Housing Corporation (Government Agency) required that a security of AUD 146,965.06 be posted in the form of a “Banker’s Certificate of Undertaking”. A draft of the requested banker’s certificate was included with the letter, stating the name of the beneficiary to which the amount was to be paid, as well as the trading name and Australian Business Number (ABN): “TO NEW SOUTH WALES LAND AND HOUSING CORPORATION (ABN 24 960 729 253) trading as Housing NSW (ABN 45 754 121 940)…”

To obtain the security, Daniel Simic, a director of Contractor (Director), went to a branch of ANZ Banking Group Limited (Issuer). While Director did not provide either the signed contract or the draft banker’s certificate, he gave instructions orally to make the guarantees out to “New South Wales Land and Housing Department” (emphasis added). The applications stated: “If I/we provide the guarantee to the named Favouree or Principal then by this act I/we acknowledge that the details on the guarantee are entirely to my/our satisfaction.” Director signed the forms and then gave the guarantees to Government Agency.

Two errors were made by Director which affected the information used by Issuer when issuing the guarantees. First, Director requested that the guarantees be made out to the “New South Wales Land and Housing Department,” rather than the “New South Wales Land and Housing Corporation” (emphasis added), the correct name. The correct name had been provided in both the 4 March 2010 letter and the signed contract. Second, the job numbers and contract numbers were incorrectly referenced on the guarantees, which was grounds for Issuer’s refusal to pay because “there was no contract or agreement ‘between the Principal and [Nebax] for Job Number: P0409021, Bomaderry – Design & Construct 3-7 Karowa Street. Contract No: BG2J8.’…The Construction Contract had a different job number and a different contract number…”

When Government Agency attempted to draw on the guarantees, it used its proper name and Issuer refused because the name of the named beneficiary on the guarantees was different from the entity making the drawing.

Government Agency sued Issuer in the Supreme Court of New South Wales to obtain a declaration that the description of the “Principal” on the guarantees be interpreted as Government Agency despite the errors, or that the guarantees be rectified by substituting Government Agency’s name for the “Principal.” Kunc, J., made such declaration, but added that the rectification was unnecessary, although if it was necessary he would have done so. The appellants appealed this decision, raising the questions (1) whether the trial court judge erred in ruling that the guarantees referred to the Government Agency; and (2) if so, whether the guarantees should be rectified by correcting the naming error. Emmett, A.J.A., along with Bathurst, C.J., and Ward, J.A., of the Court of Appeal of the Supreme Court of New South Wales, affirmed the appeal and ruled that the named party in the guarantees could only refer to the Government Agency, but did not address the question of rectification.

On further appeal, the High Court of Australia, in a joint judgment, Gageler, Nettle, and Gordon JJ., set aside both prior judgments and ruled that it was not possible to construe the guarantees as having been made out to the Government Agency, but that the guarantees should be rectified to refer to the Government Agency. French, C.J., and Kiefel, J., agreed with the joint judgment in concurring opinions.

The joint judgment observed that “no party contended that the Undertakings were to be construed otherwise than in accordance with ordinary principles of contract construction.” The joint judgment also invoked the principle of strict compliance, noting that “[t]he discrepancies and errors were not minor or merely typographical. At the time of compliance, consistent with the principle of strict compliance, it was not possible for ANZ to accept a demand from the Corporation.” In constructing the guarantees, the joint judgment took what it called an “objective” approach, referencing the “text, context and purpose” of the guarantee and standby with the actual text. The judgment stated that “[n]o party to either Undertaking was involved in any obligations or rights of suretyship.” It also recognized that the named beneficiary “did not exist.” The court relied on the independence principle to disregard any link to Government Agency, reinforced by the use of the wrong job numbers. It also invoked “commercial reality” and the possibility of breaching its contracts with the applicant.

While not prepared to interpret the guarantee in a manner that required payment to Government Agency, the joint judgment invoked the principle of rectification, asking “what was the actual or true common intention of the parties?” The opinion concluded that it “is apparent from the primary judge’s findings, all parties to the transaction intended that the Undertakings should enure to the benefit of the party with which Nebax entered into the Construction Contract.” “There can be no doubt that their actions were the result of a common mistake.” Consequently, the bank guarantees were rectified by changing the name of the beneficiary and contract number.

The court stated that rectification may be invoked as an equitable remedy when there was an agreement between the parties to a contract and a common intention for the written instrument to conform to that agreement. The trial court judge reasoned that if someone had pointed out the mistakes to Director and Issuer at the time, the mistakes would have been obvious and very easily corrected, so their proceeding with the guarantees was due to a common mistake. Objectively viewed, both Director and Issuer intended to make a security guarantee to Government Agency. Therefore, the Supreme Court ruled that rectification was appropriate in this case.

Texts: The joint opinion at ¶66 sets out the text of the guarantees.

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 [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, Bomaderry - Design & Construct 3-7 Karowa Street. Contract No: 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.

...

This Undertaking remains in force until the first to occur of:-:

* The Principal notifies ANZ in writing that the Undertaking is no longer required.

* This original Undertaking is returned to ANZ.

* ANZ has paid to the Principal the Amount or the balance outstanding of the Amount.

...

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") (emphasis in original)

[JLN]

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 the ICC or Coastline Solutions.