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Note: Swanhill Enterprises Pty Ltd (Beneficiary No. 1) and 176 Adelaide Terrace Perth Pty Ltd (Beneficiary No. 2) contracted with Diploma Construction (WA) Pty Ltd (Applicant/Contractor) to develop property. To secure its performance, Applicant/Contractor requested that QBE Insurance (Australia) Ltd (Issuer) issue a performance bond and a maintenance bond in favor of Beneficiary No. 1 each for AUD 273,889, and a performance bond and maintenance bond in favor of Beneficiary No. 2 each for AUD 530,277.

Beneficiary No. 1 and Beneficiary No. 2 presented documents to Issuer that certified that the Applicant/Contractor had breached its performance obligations each demanding payment under their two performance bonds and the two maintenance bonds, respectively. Issuer refused all four presentations on the basis that the Applicant/Contractor was not in breach of the contract. Subsequently, Beneficiary No. 1 and Beneficiary No. 2 sued Issuer for wrongful dishonor, seeking summary judgment to enforce the performance and maintenance bonds. The Supreme Court of Western Australia, Sanderson, J., granted Beneficiary No. 1 and Beneficiary No. 2’s motions for summary judgment.

The Judge observed that the performance bonds are “a species” of irrevocable letters of credit. While noting that “it is arguable circumstances had not arisen as between [Applicant/Contractor] and [Beneficiary No. 1 and Beneficiary No. 2] justifying a call upon the bonds”, the Judge observed that “it cannot possibly be unconscionable for [Beneficiary No. 1] and [Beneficiary No. 2] to make demand when the defendant was aware there could, at the time the demand was made, be disputes as between [Applicant/Contractor] and [Beneficiary No. 1 and Beneficiary No. 2].”

Issuer further argued that a bank paying on an LC has an obligation to do so only if presented documents strictly comply with the terms and conditions of the LC. Issuer argued that: (1) the demands were issued to QBE Insurance (International) Ltd and not QBE Insurance (Australia) Ltd. The Judge concluded that “the discrepancy was minor and typographical. It had no material effect on the entitlement to be paid under the bonds. Further, there is no issue that the defendant received the demands and understood them to relate to the relevant bonds.” (2) Beneficiary No. 1 incorrectly transcribed Issuer’s address. The Judge ruled that “although [Issuer’s] address was incorrectly described on the [Beneficiary No. 1] demands the demand was served by hand at the correct address. The error is inconsequential.” (3) Beneficiary No. 2 referenced the same serial number for each of the two bonds. The Judge ruled that “copies of both bonds were attached to the email from [Beneficiary No. 2]’s solicitors which also included the letter of demand.” And (4) the demands referred to documents described as “bank guarantees” or “unconditional bank guarantees” instead of maintenance bonds or performance bonds. The Judge did not even address this argument.

In conclusion, the Judge stated “in reality all of the alleged deficiencies were minor. The main requirement of the bond if it was a conditional bond was first the claimant had to certify the contractor had breached its performance obligations. That was done in each of the demands. Second, it was necessary for the claimant to specify the amount of loss. That too was done. I am satisfied there was strict compliance with the requirements of the demands.”

Legal Analysis:

Text: The opinion provided excerpts of the bonds which stated:

“This undertaking is to continue until:

  • notification has been received from the Principal that the Sum is no longer required by the Principal; or
  • this undertaking is returned to the Financial Institution; or
  • payment to the Principal by the Financial Institution of the whole of the Sum or such part as the Principal may require.

Should the Financial Institution be notified in writing, purporting to be signed by for and on behalf of the Principal that the Principal desires payment to be made of the whole or any part or parts of the Sum, it is unconditionally agreed that the Financial Institution will make the payment or payments to the Principal forthwith without reference to the Contractor and notwithstanding any notice given by the Contractor not to pay same.

A demand for payment delivered pursuant to this undertaking must include certification by or on behalf of the Principal that:

  1. the Contractor has breached its performance obligations under the Contract and the breach has not been remedied; and
  2. the amount demanded represents an amount or amounts of loss, cost or expense actually incurred by the Principal as a result of the breach.

The Financial Institution has no obligation to investigate the authenticity of any statement made in connection with a demand for payment delivered pursuant to this undertaking.

Provided always that the Financial Institution may at any time without being required so to do pay to the Principal:

  • 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 Principal

and thereupon the liability of the Financial Institution hereunder shall immediately cease.”

[ACA]

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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.