Daniel Matthew Simic and Others(Appellants) v New South Wales Land and Housing Corporation and Others

• Jurisdiction: Australia Federal only
• Court: High Court (Australia)
• Judge: French CJ,Kiefel J,Gageler,Nettle,Gordon JJ
• Judgment Date: 07 December 2016
• Neutral Citation: [2016] HCA 47
• Docket Number: S136/2016
• Date: 07 December 2016

[2016] HCA 47

HIGH COURT OF AUSTRALIA

French CJ, Kiefel, Gageler, Nettle AND Gordon JJ

S136/2016

Daniel Matthew Simic & Ors

Appellants

and

New South Wales Land and Housing Corporation & Ors

Respondents

Representation

M A Ashhurst SC with A F Fernon for the appellants (instructed by O'Neill McDonald Lawyers)

G Curtin SC with D I Talintyre for the first respondent (instructed by Sparke Helmore Lawyers)

D F Jackson QC with S B Docker for the second respondent (instructed by Kemp Strang Lawyers)

No appearance for the third respondent

Contract — Construction of terms — Performance bonds — Where unconditional undertakings by financial institution to pay on demand (‘Undertakings’) required as security under construction contract — Where Undertakings and underlying finance applications erroneously referred to non-existent entity as payee because incorrect information provided by applicant for security — Principle of autonomy — Principle of strict compliance — Whether possible to construe references to non-existent entity in Undertakings and applications as references to counterparty to construction contract.

Contract — Rectification — Actual or true common intention of parties — Where references to non-existent entity in Undertakings and applications result of common mistake — Whether rectification available to correct references to non-existent entity.

Words and phrases — ‘actual or true common intention’, ‘bank guarantee’, ‘common mistake’, ‘letter of credit’, ‘performance bond’, ‘principle of autonomy’, ‘principle of strict compliance’, ‘rectification’, ‘subjective intention of the parties’.

ORDER

• 1. Appeal allowed.

• 2. Special leave be granted to the first respondent to cross-appeal.

• 3. The cross-appeal by the first respondent be treated as instituted and heard instanter and allowed.

• 4. Special leave be granted to the second respondent to cross-appeal.

• 5. The cross-appeal by the second respondent be treated as instituted and heard instanter and allowed.

• 6. Set aside the order of the Court of Appeal of the Supreme Court of New South Wales made on 18 December 2015, and in its place order that:

  • (a) the appeal be allowed in part;

  • (b) the cross-appeal by the first respondent be allowed;

  • (c) the second respondent be granted leave pursuant to s 500(2) of the Corporations Act 2001 (Cth) to commence and proceed with its cross-appeal against the third respondent;

  • (d) the second respondent be granted leave to file its amended notice of cross-appeal;

  • (e) the cross-appeal by the second respondent be treated as instituted and heard instanter and allowed;

  • (f) orders 1 and 4 of the Supreme Court of New South Wales made on 24 March 2015 be set aside, and in their place it be ordered that:

    • (i) the bank guarantees issued by the defendant/cross-claimant dated 16 April 2010 and numbered 108781 and 108783 be rectified by substituting the words ‘New South Wales Land and Housing Corporation ABN 24 960 729 253’ for the words ‘New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940’; and

    • (ii) the forms of indemnity and application for guarantee from the first cross-defendant to the defendant/cross-claimant dated 16 April 2010 with serial numbers 108781 and 108783 be rectified by substituting the words ‘New South Wales Land and Housing Corporation ABN 24 960 729 253’ for the words ‘New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940’; and

  • (g) the appellants pay the first and second respondents' costs in the Court of Appeal.

• 7. The appellants pay the first and second respondents' costs in this Court.

French CJ

Introductions

1 This appeal concerns a claim for payment on performance bonds issued in relation to a construction contract. It raises a general question about the proper approach to their interpretation where the erroneously named beneficiary is a non-existent entity. It also raises a particular question in the circumstances of this case about the availability of rectification to substitute the intended beneficiary. For the reasons given in the joint judgment, I agree that the bonds cannot be construed to overcome the erroneous designation of the beneficiary. However, I also agree, for the reasons given by Kiefel J, that they should be rectified to reflect the common intention of the issuing bank and the contracting party requesting the issue of the bonds that the beneficiary be the principal in the construction contract in relation to which the bonds were issued. I wish to add some observations to my concurrence.

The construction question

2 Performance bonds, sometimes misleadingly called ‘bank guarantees’ 1, are typically issued by a financial institution at the request of one party to a contract in favour of another party pursuant to a requirement of the contract. They are frequently used in relation to construction contracts 2. They take the form of a promise by the issuing institution that it will pay, to the beneficiary named in the bond, an amount up to the limit set out in the bond unconditionally or on specified conditions and without reference to the terms of the contract between the parties 3. The present case concerns the contested refusal by Australia and New Zealand Banking Group Ltd (‘ANZ’) to make payments demanded by the New South Wales Land and Housing Corporation (ABN 24 960 729 253) (‘the Corporation’) under performance bonds issued at the request of a construction company, Nebax Constructions Australia Pty Ltd (‘Nebax’), which, because of a mistake made by the first appellant, Daniel Simic, acting on behalf of Nebax, named their beneficiary as the non-existent ‘New South Wales Land & Housing Department trading as Housing NSW

ABN 45754121940’. The bonds were sought by Nebax in accordance with a requirement contained in a special condition of a construction contract between it and the Corporation. Nebax had provided an indemnity to ANZ in respect of each of the bonds and the appellants were guarantors whose liabilities under their guarantees depended upon Nebax's liability, which in turn depended upon the efficacy of the bonds.

3 Following ANZ's refusal to pay the Corporation the amount of $146,965.06 pursuant to the bonds, which were referred to as ‘Undertakings’, the Corporation instituted proceedings in the Supreme Court of New South Wales. The primary judge, Kunc J, made a declaration that the term ‘New South Wales Land & Housing Department trading as Housing NSW ABN 45754121940’ in the description of the principal in the Undertakings meant the Corporation. That conclusion was reached as a matter of the construction of that term. It was therefore not necessary for his Honour to deal with a claim for the rectification of the Undertakings although he expressed views on that issue which would have favoured the grant of such relief had it not been for the constructional resolution 4.

4 The Court of Appeal held that the primary judge had not erred in his construction of the Undertakings 5. It followed as a matter of common ground that the indemnity in favour of ANZ provided by Nebax was to be construed in the same way and that the present appellants, as guarantors of Nebax's obligations under that indemnity, were liable to ANZ 6.

5 The principles governing the legal effect and operation of performance bonds are similar to those applicable to letters of credit. A letter of credit represents payment for the performance of an obligation. A performance bond represents payment on default or in lieu of performance 7. The commercial purpose of performance bonds, as described in Wood Hall Ltd v Pipeline Authority, is to provide an equivalent to cash 8.

6 Two complementary principles apply to letters of credit and performance bonds alike — the principle of strict compliance and the principle of autonomy or independence. According to the principle of strict compliance, a bank paying on a letter of credit or performance bond only has an obligation to do so and only has an entitlement to claim indemnity for the performance of that obligation if the conditions on which it is authorised and required to make payment are strictly observed. A demand for payment cannot be accepted on the basis that near enough is good enough 9. The principle of autonomy requires that the letter of credit or performance bond be treated as independent of the underlying commercial contract 10. The principles of strict compliance and autonomy serve the immediate commercial purpose of such instruments of providing an equivalent to cash and the further purpose of performance bonds of allocating risk between the parties to the underlying contract until their dispute, if there be one, is resolved 11.

7 The strict compliance principle requires that the party making demand on a performance bond be the party named in the bond as the beneficiary and that any conditions on payment set out in the bond are satisfied 12. It does not describe an obligation imposed on the issuing or accepting institution. Rather, it delimits the issuing institution's obligation to make payment and, correspondingly, its right to claim on an indemnity promise by the party requesting the issue of the bond 13. Where a performance bond is expressed, as in the present case, to be unconditional, strict compliance at least requires that the beneficiary making demand for payment be the beneficiary named in the bond. Unlike the autonomy principle, it is not a rule of construction of the bond.

8 The autonomy principle requires that the obligations of the issuing or accepting bank under the bond not be read as qualified by reference to the terms of the underlying contract 14. That said, it does not prevent a party to a contract who procures the issue of a performance bond claiming as against the beneficiary that the beneficiary's action in...