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THE HIGH COURT ON PERFORMANCE BONDS: SIMIC V NEW SOUTH WALES LAND AND HOUSING CORPORATION [2016] HCA 47
In Simic v New South Wales Land and Housing Corporation, the High Court had to consider circumstances in which a bank had taken the unusual step of not paying an amount due under a performance bond. The position was that the bank had issued, at the request of its customer, two instruments each in the form of unconditional undertakings to pay in favour of a named Principal that did not exist (i.e. NSW Land and Housing Department trading as Housing NSW). It should have been NSW Land and Housing Corporation. The Corporation made demand on the bank for payment under the undertakings. The bank declined to pay. The Corporation commenced proceedings in order to compel payment.
In reviewing the undertakings the Court held that it was not open to construe “the Department” where it appeared as the Principal in each undertaking as referring to the Corporation. Therefore, the bank had adopted the correct approach when it declined to pay the Corporation the amount “secured” by the undertakings. However, the matter did not end there as the Corporation had sought amendment of the undertakings to correct the error that had been made when they were issued. On this point the Corporation had success.
The Court held that evidence before the primary judge disclosed that all parties to the transactions intended that the undertakings were to be for the benefit of the party which the bank’s customer had contracted with, and that was the Corporation. The undertakings did not reflect the agreement between the parties because of a common mistake. In the result the Court would not interpret the undertakings as having been made in favour of the Corporation but it was prepared to make orders rectifying the error contained in the undertakings by replacing the reference to the Department as Principal to a reference to the Corporation.
Financiers will always be reluctant not to honour their undertakings but this case demonstrates that in rare cases it is appropriate to do so.
This article was written by David Richardson, Partner.