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Note: PHHH Investments No. 2 Pty Ltd. (Owner/Beneficiary) engaged United Commercial Projects Pty Ltd. (Contractor/Applicant) whereby Contractor/Applicant would perform construction and alteration work to Owner/Beneficiary’s childcare building (the Agreement). Pursuant to the Agreement, Contractor/Applicant was required to secure its performance through practical completion and for a 12 month defects liability period thereafter. Clause C3 of the Agreement provided that if Contractor/Applicant opted to post unconditional guarantees as security, they must be of a type “approved” by Owner/Beneficiary. Accordingly, Contractor/Applicant caused its bank to issue two AUD 87,128.75 bank guarantees in favor of Owner/Beneficiary with the second expiring 12 months after the first to account for the defects liability period. Following some confusion between the parties, two amended guarantees were issued to correct the beneficiary name but otherwise providing identical terms and expiry dates.

Contractor/Applicant received progress payments through practical completion and expiration of the first guarantee. Before the defect period lapsed, however, Owner/Beneficiary sued seeking an order requiring Contractor/Applicant to obtain two unconditional bank guarantees in Owner/Beneficiary’s favor. The Supreme Court of Victoria, Riordan, J., dismissed the application.

Owner/Beneficiary argued that Contractor/Applicant failed to provide the contractually required security since neither of the guarantees had been “approved” by Owner/Beneficiary nor were the guarantees “unconditional” due to their expiry dates. Contractor/Applicant argued that the presence of the expiry dates did not render the guarantees conditional and that, despite the contract calling for “approved” guarantees, Owner/Beneficiary did so by its conduct, particularly in its unqualified acceptance of the amended guarantees.

The Judge noted that “whether [Owner/Beneficiary]’s approval of the revised guarantees can be inferred from [Owner/Beneficiary]’s conduct in the circumstances” would have to be “objectively assessed”, analogizing the process to “the approach of courts to acceptance of offers [and terms] in formation of contracts”. The undisputed circumstances were (1) Contractor/Applicant obtained guarantees pursuant to the Agreement in favor of Owner/Beneficiary; (2) Owner/Beneficiary objected to the designated beneficiary under the guarantees, but not to the expiry dates or other terms; (3) Contractor/Applicant obtained and proffered the amended guarantees containing otherwise identical terms; (4) Owner/Beneficiary thereafter paid an outstanding progress claim to Contractor/Applicant; and (5) each party continued their respective performances for several months before Owner/Beneficiary complained that the guarantees were not in accordance with the Agreement. The Judge reasoned that it “would not reflect the practice of commercial persons to find that an objective bystander would not have concluded that [Owner/Beneficiary] had approved the revised guarantees”.

[MJK]

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