Lecture by:Laina Chan, Barrister Nine Wentworth Chambers,

SydneyFor: University of Melbourne

Security

for Performance

Security for Performance

Retention

Bank Guarantee

Letter of Credit

Performance Bond

Forms of Security

Interests of the Developer

VS

Interests of the Contractor

What is an unconditional

bank guarantee?

Woodhall Limited v The Pipeline Authority & Anor (1979) 141 CLR 443

• The Autonomy Principle

• Commercial currency of a bank guarantee

• “As good as cash”

In Wood Hall Limited v The Pipeline Authority & Anor, the High Court considered a bank guarantee which contained the following term:

“The bank unconditionally undertakes and covenants to pay on demand any sum or sums which may from time to time be demanded in writing by Owner up to a maximum aggregate sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000.00) to be held by Owner as security for and until the performance and completion by Contractor of all of the conditions of the said Contract in all respects.”

An unconditional bank guarantee

Injunctions

(1) Against Bank/Surety

(2) Against Beneficiary of Security

What are the relevant principles?

Exceptions to the Autonomy Principle: (1) Fraud

Sztejn v J Henry Schroeder Banking 31 NYS 2d 631

Inflatable Toy Company Pty Limited v State Bank of New South Wales & Ors (1994) 34 NSWLR 243

Quiktrak Networks Pty Ltd v Housely Technology Ltd [2007] NSWSC 4

Bank of Newport, A California Banking Corporation, Appellant v The First National Bank and Trust Company of Bismarck, A North Dakota Corporation, Appellee (1982) 687 F. 2d 1257 (8th Circ)

Exceptions to the Autonomy Principle:

Olex Focas Pty Limited & Anor v Skoda Export Company Limited [1998] 3 VR 380 from unconscionability falling short of fraud is not a ground for an injunction (per Batt J at 400).

See also Boral Formwork v Action Makers Limited [2003] NSWSC 713

(2) s51AA of the Trade Practices Act

Exceptions to the Autonomy Principle:

• Express or implied negative stipulation Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd (for Sovereign Garden Pty Ltd [2002] VSC 579; (2003) 19 BCL 451. Application of obiter comment by Stephen J at Woodhall Ltd v Pipeline Authority (1979) 141 CLR 443.

(3) Contractual Exclusion

• See also John Holland Pty Limited v Roads and Traffic Authority of New South Wales [2007] NSWCA 140; Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (2007) ATPR 42-166; (2008) 24 BCL 35; [2007] FCA 2082; (2008) 249 ALR 458

Relevant clauses in Rejan Constructions

1. Clause 5.6 of the AS4300-1995 contract provided that:

A party may have recourse to security, retention moneys or both and may convert into money security that does not exist of money where –

(a) the party has become entitled to exercise a right under the Contract in respect of the security, retention monies or both;

(b) the party has given the other party notice in writing, for the period stated in Annexure Pt A or, if no period is stated, of the party’s intention to have recourse to the security, retention monies or both; and

(c) the period stated in Annexure Pt A, or if no period is stated, 5 days, has or have elapsed since the notice was given.

Relevant clauses in Rejan Constructions

2. Clause 42.8 provided that:

The Principal may deduct from monies due to the Contractor any money due from the Contractor to the Principal otherwise then under the Contract and if those monies are insufficient, the Principal may, subject to Cl 5.6, have recourse to retention monies and, if they are insufficient, then to security under the Contract.

3. Clause 42.9 provided that:

There, within the time provided by the Contract a party fails to pay the other party an amount due and payable under the Contract, the other party may, subject to clause 5.6, have recourse to retention monies, if any, and, if those monies are insufficient, then to security under the Contract and any deficiency remaining may be recovered by the other party as a debt due and payable.

Security for Performance

The Contracts

AS 4000-1995

Clause 5.1 – 5.4

PC1

Clause 4.1 – 4.3