Executive summary

When a principal calls a contractor’s bank guarantee, the consequences can be severe: immediate loss of working capital, reduced credit facilities, increased finance costs, and potential insolvency.

In a decision handed down on 10 February 2026, the Supreme Court of Victoria in L.U. Simon Builders Pty Ltd v Cardigan Commercial Pty Ltd (No 2)¹ held that the wording of the bank guarantee provided under an AS 4902 contract (in standard form) was such that a term could be implied permitting a contractor, when threatened with a call on security, to discharge the guarantee by paying the cash equivalent directly to the principal.

For contractors, the decision represents an opportunity; for principals, a material risk. Principals who rely on the leverage afforded by the threat of calling security will need to consider amendments to their contracts and bank guarantees to avoid this outcome.

Factual background

Cardigan Commercial Pty Ltd (Principal) and L.U. Simon Builders Pty Ltd (Contractor) entered into an AS 4902 contract for the construction of a mixed-use development at 121–131 Cardigan Street, Carlton (Contract).

The parties entered into a ‘Builder’s Side Deed’ with a ‘Security Trustee and Agent’.

Under clause 5.1, the Contractor provided two unconditional bank guarantees as security for performance, the first to be released at Practical Completion and the second after a 12‑month defects liability period (DLP).

Under clause 5.3, the Contractor could request permission from the Principal to substitute the form of security. The Principal had absolute discretion to accept or reject the request.

The parties agreed that the first guarantee could be released upon exchange of cash. The Principal wished to retain the second bank guarantee during the DLP as security to alleged defects. The Principal refused the Contractor’s offer to pay the Principal the full cash value in exchange for its return.

Was the Contractor’s offer to pay cash permitted under clause 5.3?

The parties accepted that it did not fall within clause 5.3.

That clause concerned the substitution of one form of security for another, which could be declined by the Principal in its absolute discretion. The Contractor’s offer was something different altogether. It was an offer to effectively discharge or ‘pay it out’.

Was it an implied term of the Contract that the Contractor was entitled to pay out the security as cash?

The Contractor contended that a term could be implied to the effect that security provided under the Contract was discharged upon the Contractor paying the Principal its cash value.

The Principal submitted that such term:

• fundamentally subverted the parties’ bargain by depriving the Principal of its right to decide when and how to cash the security;
• was a “backdoor or sideways attempt” to avoid the risk contemplated under the Contract of a call on security;
• undermined the purpose of clause 5.3 which entitled the Principal to refuse, in its absolute discretion, a request to swap the guarantee for cash as a form of security;
• compromised the ‘leverage or pressure’ the Principal had been afforded under the Contract to ensure the proper and timely performance of ongoing defect rectification works; and
• was invalid in that it required consent of the Security Trustee and Agent under the Builder’s Side Deed, which had not been given.

Drawing on the criteria for an implied term as set out in BP Refinery,² the Court disagreed as follows.

Consistency with express terms

The implied term was consistent with the approved form of unconditional undertaking in Annexure Part B of the Contract, which expressly permitted the Financial Institution to, at any time, pay the value of security to the Principal without being required to do so.

Did not contradict an express term or subvert the parties’ bargain

It is not a purpose of the guarantees to assert leverage or pressure on a contractor to perform its contractual obligations. The Contract deals with the performance of those contractual obligations.

It is not the case that the Contract always intended that the defect rectification works were to be performed ‘with the risk of a potential call on the bank guarantee’ hanging over the Contractor. The Contractor could require or compel the issuer of security to pay out the security. The implied term mirrors this entitlement.

The implied term was not prohibited by the Builder’s Side Deed arises in this case. Clause 4.3 of the Builder’s Side Deed provided that the Agent’s prior consent is only required for a modification or amendment other than a ‘Permitted Variation’.  The implied term would reasonably be considered to satisfy the definition of a Permitted Variation.

Business efficacy

The Contract would be commercially ineffective and lack efficacy if the Financial Institution, but not the Contractor, could pay out and discharge the security at any time. It would also be ‘an odd result‘. Both courses result in the same contractual consequences.

Reasonable and equitable

It did not detract from the nature of a bank guarantee as being ‘as good as cash’. Once paid, the cash effectively belongs to the Principal, subject only to claims for a refund and interest if at the end of the dispute it is finally determined that sums are owed to the Contractor.

Capable of clear expression

There was no difficulty on formulating a clear term that the Contractor may pay out the security at any time without being required to do so by paying to the Principal the cash amount following which the Principal is to release the security and the Contractor shall have no obligation to provide replacement or other security.

Goes without saying

An implied term to avoid obvious reputational damage ‘goes without saying’.

The Court otherwise found that it had no power to order that the Contractor be permitted to obtain the release of the guarantee upon the payment of cash in the circumstances on the basis of:

• section 47(1) of the Civil Procedure Act 2010 (Vic);³ or
• the Court’s equitable jurisdiction (including under Section 21 of the ACL).

Discussion

Respectfully, the Court’s proposition that the purpose of a guarantee is not to assert leverage or pressure on a builder to comply with its contractual obligations may be a surprising one for principals, head contractors, and their financiers. Indeed, some may say that this is its only purpose.

As observed by the Court,⁵ Rees J in Martinus Rail Pty Ltd v Qube RE Services (No 2) Pty Ltd⁵ held that the ‘prejudice suffered when a bank guarantee is called on is the nature of the contractual bargain’. It is submitted that so too is the leverage or pressure on a contractor, which would be undermined by the implied term.

Until the implied term is the subject of an intermediate appellate court decision, contractors should regard the Court’s decision as an opportunity and principals should regard it as a risk.

Key takeaways

Contractors who have provided security in the form set out in Australian Standard contracts, may, subject to other terms of the contract, pay cash to a principal to discharge and release a bank guarantee, thereby avoiding financial and reputational damage.

Principals wishing to maintain the commercial leverage of that reputational damage should consider wording to expressly exclude the implied term and limiting all the rights to exchange security that are set out in clause 5.3 (change of the form of security at the principal’s absolute discretion).

This article was written by Brian Rom, Partner, Fin Neaves, Senior Associate and Angus Sholl, Solicitor.

¹ [2026] VSC 33.

² BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 and, more recently, Feeney v Southstar Homes Pty Ltd [2024] VSCA

³ Permits a court to make any order it considers appropriate in the interests of the administration of justice.

⁴ At [69].

⁵ [2023] NSWSC 1550, [127]