MALAYSIA HOTEL (AUSTRALIA) PTY LTD v SABEMO PTY LTD

Court of Appeal (NSW)|1992-12-04|Before: Hodgson J, Mahoney JA, Kirby P, Sheller JA

KIRBY P, MAHONEY and SHELLER JJA 27 November and 4 December 1992, 12 March 1993

GUARANTEE - banker's guarantee - provision of guarantee in relation to lump sum building contract - dispute arises between proprietor and builder - builder makes demand upon banker's guarantee and is paid in part - proceedings commenced in Equity Division to restrain further claim of payment on guarantee and to restrain use of guarantee moneys already paid - guarantee to remain effective until date of issue by the architect of final certificate - provision in contract for bank guarantee in lieu of retention fund otherwise provided for - provision in form of guarantee by which builder "unconditionally agreed that... payments will be made... forthwith without further reference... and notwithstanding any notice given by the Customer to the Bank not to pay same" - whether obligation to pay upon demand on guarantee is subject to an implied negative stipulation that guarantee is to remain in place and uncalled upon until the architect's final certificate is given - held: (reversing Hodgson J):

CONTRACT - meaning of - building contract in common form - whether "or" should be read as "and" - whether consistent with language and purpose of contract and commercial commonsense - "held: (reversing Hodgson J): It is not.

BUILDING CONTRACT - bank guarantee - right of proprietor to convert rights under contract into security offered by guarantee - purpose of guarantee - whether subject to negative stipulation, implied into the contract, that claim will only be made after architect's final certificate - held: (reversing Hodgson J): No such implied negative stipulation should be imported. It conflicted with the plain language of the contract and the guarantee and the commercial purposes of each.

(1) Such a negative stipulation was inconsistent with (a) the plain language of the guarantee; (b) its commercial purpose to protect the proprietor; and (c) the authority of the High Court in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liquidation) (1978) 141 CLR 335 concerning the purpose of such guarantees;

Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 applied.

(per Mahoney JA): The decision is limited to the particular contractual documents and the context in which they were made. WORD and PHRASES - "and" - "or".

In lieu thereof, order that the summons in the Equity Division be dismissed with costs;

Order that the first respondent pay the appellant's costs of the appeal but have, if otherwise so qualified, in respect thereof, a certificate under the Suitors' Fund Act 1951.

Mahoney JA This appeal concerns the rights of the Proprietor and the Builder in relation to the "security/retention guarantee" given in pursuance of the building contract made between them. The terms of the guarantee and the

circumstances in which the present dispute has arisen are detailed in the judgment of Sheller JA and I shall not repeat them.

The construction of a guarantee such as this depends, of course, upon the precise terms of the document and the context in which it has been given. However, having regard to the arguments which have been advanced in this appeal, it is I think proper to make clear the precise question that is at issue and the limits of it. It is proper that what is decided in this appeal should not be seen as determining in advance questions which may subsequently arise and to which the present proceeding does not extend. A guarantee of the present kind is to be understood having regard to the purpose which it was intended to serve in the relationship between the parties. In a building contract involving large expenditures by the builder, it is usual to provide for payments to the builder during the progress of the work. The builder is not expected to finance all of the costs of it. Various mechanisms are adopted to determine when progress payments are to be made and to quantify the amount to be paid in each instance. In many cases, the architect or engineer values or measures the work done at specified intervals and payments are made to the builder according to the value of the work done. In other cases, the builder receives a proportion of the contract price corresponding to the proportion of the work completed.

However, it is customary to provide that the builder be paid not the whole of the value or proportion of the work done at the particular time but something less. The reasons for this will vary with the particular case. However, two reasons have been referred to in the consideration of the matter: the fact that the valuation or assessment made may be erroneous; and the desire of the proprietor to have, as security, a fund (a Retention Fund) to be used to rectify defective workmanship by the builder or to provide for loss suffered by the proprietor because of the builder's failure to complete in accordance with the contract. It is the second factor, the security factor, which is mainly in question in this case.

It is, of course, to the disadvantage of the builder that he not receive the full payment for work done from time to time. He is, to that extent, required to finance the cost of the work. Accordingly, provision is sometimes made for a security/retention guarantee. The contract allows the builder to provide a guarantee for an amount sufficient to serve the security or other purposes which a Retention Fund would serve. A builder will, no doubt, provide such a guarantee

and so receive the full value or proportion of the work done by way of progress payment - if the cost to him of providing the guarantee is less than the advantage to him of receiving the full progress payments.

The terms of the building contract will ordinarily specify the amount and nature of the guarantee and the circumstances in which it may be called upon.

Where the builder has elected to provide a guarantee of this kind, experience has shown that, inter alia, two questions are apt to arise: in what circumstances the proprietor may call upon the guarantee; and (when he does) what he may do with the money received from it. In a perfectly drawn building contract, such matters would be provided for in terms but in many cases they are not.

It was thought by some that the proprietor was ordinarily entitled to call up the guarantee only in circumstances in which he might have had access to a Retention Fund: normally, this would be on the builder's default or breach. Considerations of this kind were discussed in the judgments in this Court in Jamison and Anor v Mainline Constructions Pty Ltd (Court of Appeal, 27 June 1977, unreported).

URJ MALAYSIA HOTEL (AUSTRALIA) PTY LTD v SABEMO PTY LTD (Mahoney JA) 3

However, in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liquidation) (1978) 141 CLR 335 and in Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443, the High Court concluded that, in transactions of this general kind, the proprietor may call upon the guarantor at will and notwithstanding that in the circumstances the proprietor would not have been able to have had access to the Retention Fund. As I have said, each building contract is to be construed according to its own terms and in its own context. However, it is, I think, possible to discern in these cases a general preference for one approach to this question rather than the other: see the Wood Hall case at 445, 450 et seq, 458 et seq.

There are, in principle, two questions which arise when considering whether a proprietor may have access to a guarantee: first, whether, vis a vis the proprietor's relation to the guarantor and having regard simply to the terms of the guarantee, the proprietor is entitled to call upon the guarantor to pay the amount there provided for; and, second, whether, despite the position between the proprietor and the guarantor, the contract between the proprietor and the builder is such that the proprietor has impliedly undertaken not to call upon the guarantee except where the builder is in breach or for other reasons of this kind.

The court, in the cases to which I have referred, saw the nature of the building contract to be such that the proprietor could call upon the guarantor at will and without default by the builder. It concluded that (at least in the cases there in question) there was no term in the contract between the proprietor and the builder restricting the right of the proprietor to call up the guarantee.

The present appeal is concerned only with the first of the questions to which initially I have referred, namely, whether the Proprietor may call up the guarantee and whether there is in the contract between the Proprietor and the Builder anything restricting the Proprietor's right so to do. The evidence before the trial judge established that the Proprietor had called upon the guarantee and the guarantor, the Commonwealth Bank of Australia, had paid to the Proprietor the amount guaranteed. The relief sought was limited to a declaration that the Proprietor had breached the contract in calling upon the guarantee. At an interlocutory stage, the Builder sought interlocutory relief with a view to reinstating the guarantee, to the extent of payment of the amount received on it into a joint bank account as there specified. But the only matter in issue in the proceeding was the Proprietor's right to call upon the guarantee.

Accordingly, the present appeal is not concerned with what the Proprietor is entitled to do with the amount received upon the guarantee. It may be that the Proprietor must treat the amount so received merely as security for the purposes of the building contract. Whether this will involve that the Proprietor must in due course account for the amount received as such security but may otherwise use it for its own purposes, or whether the amount must be kept separate and segregated, to be used only for security purposes, is not a matter which is to be determined in this appeal.

I agree with the judgment of Sheller JA in relation to this first matter. It was argued that, because of the provisions to which his Honour has referred, the building contract contains, in terms or by implication, a promise by the Proprietor not to call up the guarantee except upon such a breach or default as has not occurred in the present case. Hodgson J came generally to such a conclusion. The matter is not free from doubt but I agree with the judgment of Sheller JA. I do not think that the contract should be construed so as to impose such a limitation upon the Proprietor's right to call up the guarantee.

I agree with the orders which his Honour has proposed.

The appellant, Malaysia Hotel (Australia) Pty Ltd, as Proprietor, and the first respondent, Sabemo Pty Ltd, as Builder, were parties to a lump sum contract dated 11 September 1987 for the construction of a hotel at 30-34 Campbell Street and 431-439 Pitt Street Sydney. The contract was contained in part in the standard form contract of the Royal Australian Institute of Architects and the Master Builders' Federation of Australia Inc approved on 16 December 1970 and known as edition 5 (b) (the Agreement and Conditions) and in part in a document headed "CONSOLIDATED OFFER OF SABEMO PTY LTD". CL7 and CL13 of the Consolidated Offer were, so far as material to this appeal, in the following terms:

"7. The Builder agrees that prior to commencement of the work referred to herein, it shall furnish to the Proprietor a Banker's Guarantee with either The Hong Kong Bank or the Commonwealth Bank of Australia as security/retention guarantee for the amount of 10% of the contract price. This Bankers [sic] Guarantee shall remain effective until the date of issue, by the Architect, of the Final Certificate at the end of the Defects Liability period, provided that there shall be no monetary retention from any progress payments.

Precedence of Contract Documents On all matters relating to the administration of the contract, the order of precedence of contract documents and written instructions shall be as follows:

(a) The Consolidated Offer by Sabemo Pty Ltd. (b) The Agreement and Conditions....."

CL30 of the Agreement and Conditions provided in subCL(a) that an amount referred to as the Retention Fund should be retained by the Proprietor in accordance with subCL(b) as security "that the Builder shall carry out his obligations under this Contract. " Sub CL(b) provided that the amount certified by the architects for payment by the Proprietor to the Builder should be exclusive of a stated retainable percentage until the total retained reached the stated amount of the Limit of Retention Fund. Sub CL(c) provided as follows:

"Should the Proprietor so agree, the Builder may provide a bank guarantee, guarantee bond or other form of security acceptable to the Proprietor equivalent (unless otherwise agreed) to the amount stated in the Appendix to these Conditions as Limit of Retention Fund and in such event same shall be effective as security in lieu of the Retention Fund referred to in subCL(a) of this clause and the provisions of subCL(b) of this clause shall not apply."

SubCL(d) applied where the Limit of Retention Fund as stated in the Appendix was $4,000 or greater. The Limit of Retention Fund in the Appendix was stated to be "Bankers Guarantee for 10% of the Contract Price". The amounts retained progressively pursuant to subCL(b) were to be paid by the Proprietor to the credit of an interest bearing deposit in the joint names of the Proprietor and the Builder at a nominated and approved bank. "The amount to be held in the aforesaid joint deposit shall be upon trust for the Proprietor subject to the provisions of subCL(e) and subCL(f) of this clause except that in the event of the Builder determining his employment pursuant to CL23 of these Conditions, the rights and interests of the Proprietor in respect of such amount shall be and are hereby transferred to the benefit of the Builder".

URJ MALAYSIA HOTEL (AUSTRALIA) PTY LTD v SABEMO PTY LTD (Sheller JA) 5

SubCL(e) provided that within seven days of the issue of the Notice of Practical Completion the architect should issue a progress certificate to the Builder for one half of the amount held in the Retention Fund with consequent payment to the Builder of that amount. SubCL(f) provided for the balance following the operation of subCL(e) to be taken into account by the architect in determining the amount of the Final Certificate to be issued to the Builder pursuant to CL31 (b). SubCL(g) applied where the Limit of the Retention Fund was less than $4,000. SubCL(h) dealt with the situation where the Builder provided a security pursuant to subCL(c) and was in the following terms:

"Where the Builder with the Proprietor's agreement provides a security pursuant to subCL(c) of this clause thus rendering the Retention Fund provisions of this clause not applicable such security shall be maintained effective until the issue by the Architect of the Notice of Practical Completion pursuant to CL25 of these Conditions or until the date the Works are deemed to be practically completed pursuant to that clause and thereafter upon the Builder providing a further security equal to one half of the first provided security, such first provided security shall be released. The second security shall be released in accordance with subCL(j) of CL31 of these Conditions. The provisions of this subclause are subject to the Proprietor's right to have recourse to any security provided by the Builder in the event of any of the circumstances described in CL22 of these Conditions arising or if the employment of the Builder is determined thereunder. If any of the circumstances described in CL23 of these Conditions arise, and if the Builder determines his employment pursuant to that clause, the Proprietor shall release his interest in any such security immediately upon written notice from the Builder to do so."

This subclause was overridden by CL7 of the Consolidated Offer to the extent that the Guarantee in the amount as originally furnished by the Builder was to remain effective until the date of issue of the Final Certificate.

CL31 of the Agreement and Conditions, so far as material to this appeal, was in the following terms:

"Final payment under this Contract shall be made as provided in this clause.

(a) As soon as it is practicable so to do the Builder shall submit to the Architect a detailed statement of the amount claimed as the final payment under this Contract.

(b) The Architect shall issue a Final Certificate to the Builder and a copy thereof to the Proprietor and a statement to the Builder showing the difference (if any) between the amount of the claim submitted by the Builder pursuant to subCL(a) of this clause and the amount of the Final Certificate within [a time stated in the subclause]

(f) Should any amount included in the Final Certificate be held in any joint deposit as referred to in subCL(d) of CL30 of these Conditions and be payable to the Builder, the Proprietor shall release his interest in such amount to the Builder within 7 days of the presentation of the Final Certificate to him by the Builder.

(g) Should any amount included in the Final Certificate be held in any joint deposit as referred to in subCL(d) of CL30 of these Conditions and be payable to the Proprietor, the Builder shall release his interest in such amount to the Proprietor within 14 days of the issue of the Final Certificate to the Builder.

(j) If the Builder has provided security to the Proprietor for the purposes of this Contract then within 7 days of the presentation of the Final Certificate

(i) if the final balance is nil or shows an amount due by the Proprietor to the Builder, the Proprietor shall do all things necessary to secure release of the said security to the Builder, and

(ii) if the final balance shows an amount due by the Builder to the Proprietor the Proprietor upon receiving payment of the amount due by the Builder shall do all things necessary to secure release of the said security to the Builder."

CL22 of the Agreement and Conditions, so far as material to this appeal, was in the following terms:

" (a) If the Builder shall make default in any one or more of the following respects, that is to say:

(i) if he, without reasonable cause, wholly suspends the carrying out of the Works before practical completion thereof, or

(ii) if he fails to proceed with the Works with reasonable diligence or in a competent manner, or

(iii) if he refuses or persistently neglects to comply with written notice from the Architect requiring him to remove defective work or improper materials or goods and by such refusal or neglect the Works are materially affected,

then in any such case the Architect may send to him by certified mail, a written notice specifying the default and stating the intention of the Proprietor to determine the employment of the Builder and if the Builder fails to remedy such default in a bona fide manner within 14 days after receipt of such notice then the Proprietor without prejudice to any other rights or remedies may within 14 days after such continuance of default on the part of the Builder, by written notice delivered by certified mail to the Builder, forthwith determine the employment of the Builder under this Contract provided that such notice shall not be given unreasonably or vexatiously, if the Proprietor is at the time of such notice himself in breach of this Contract, then the said notice of determination of the employment of the Builder shall be deemed to be void and of no effect.

(b) In the event of the Builder having an execution levied against him or becoming bankrupt or entering or attempting to enter into any composition or arrangement with his creditors or being a company having an execution levied against it or a winding up order made or (except for the purposes of reconstruction) passing or attempting to pass a Resolution for winding up or being a party to the appointment of or having an Official Manager appointed or on the appointment of a Receiver of the whole or any part of its property or undertaking or being a party to or attempting to enter into any composition or Scheme of Arrangement then the Proprietor may forthwith without prejudice to any other rights or remedies by written notice delivered by certified mail to the Builder determine the employment of the Builder under this Contract.

(c) In the event of the employment of the Builder being determined pursuant to this clause the following shall be the respective rights and liabilities of the Proprietor and the Builder:

(ii) The Builder shall if so required by the Proprietor or Architect within 14 days of the date of determination assign to the Proprietor without payment the benefit of any agreement for the supply of materials or goods and/or for the execution of any work for the purposes of this Contract but on the terms that a supplier or subcontractor shall be entitled to make any reasonable objection to any further assignment thereof by the Proprietor. In any case the Proprietor may pay any supplier or subcontractor for any materials or goods delivered or works

URJ MALAYSIA HOTEL (AUSTRALIA) PTY LTD v SABEMO PTY LTD (Sheller JA) 7

executed for the purposes of this Contract (whether before or after the date of determination) in so far as the price therefor has not already been paid by the Builder. The Proprietor's rights under this paragraph are in addition to his rights to pay nominated subcontractors as provided in these Conditions and payments made under this paragraph may be deducted from any sum due or to become due to the Builder.

(iv) Until completion of the Works pursuant to paragraph (i) of this subclause, the Proprietor shall not be bound by any provision of this Contract to make any further payment to the Builder but as soon as is reasonable thereafter, having regard to the rights of the Proprietor under the said paragraph, the Architect shall ascertain the amount of costs properly incurred by the Proprietor pursuant to the said paragraph and the amount of any direct loss and/or damage caused to the Proprietor by the determination and any other liability of the Builder to the Proprietor under this Contract and shall certify all of the same and if such aforesaid amounts when added to the moneys paid to the Builder before the day of determination result in a total amount in excess of that which would have been otherwise payable under this Contract the difference shall be a debt payable to the Proprietor by the Builder; and if the said amounts when added to the said moneys result in a lesser total than that which the Proprietor would otherwise have been required to pay under this Contract, then the difference shall be a debt payable by the Proprietor to the Builder."

The Builder procured from the Commonwealth Bank of Australia a bank guarantee to the Proprietor dated 23 September 1987 in an amount of $1,403,667, expressed in terms that the bank unconditionally undertook to pay on demand any sum which might from time to time be demanded by the Favouree, the Proprietor, to that maximum aggregate sum. The undertaking was to continue until the notification had been received from the Favouree that the Security Deposit was no longer required or until payment to the Favouree by the bank of the whole of the said sum or such lesser sum as might be required by the Favouree.

"Should the Favouree notify the bank that it desires payment to be made to it of the whole or any part or parts of the said Security Deposit, it is unconditionally agreed that such payment or payments will be made to the Favouree forthwith without further reference to the Customer and notwithstanding any notice given by the Customer to the Bank not to pay same. Provided always that the bank may at any time without being required to do so pay to the Favouree the Security Deposit less any amount it may have already paid hereunder and thereupon the bank's liability under this undertaking shall immediately cease and determine."

On 18 September 1989 the architects wrote to the Builder enclosing their certificate of practical completion, noting that certain works were outstanding and still in the process of construction. In January 1990 the Builder commenced arbitration proceedings against the Proprietor to recover an amount said to be due in respect of additional work and variations. On 18 June 1990 the Proprietor served a defence to the Builder's points of claim and a cross claim against the Builder. The cross claim included liquidated damages for delay amounting to about $1,400,000, alternatively a claim for unliquidated damages amounting to about $4,300,000, a further claim (itself relating to delay) for about $450,000 and a claim in respect of uncompleted works amounting to about $23,000. On the

same day that it served its defence and cross claim the Proprietor, by letter to the bank, demanded immediate payment of $1,403,667 pursuant to the Security Deposit and the bank paid that amount to the Proprietor. On the following day $800,000 of this was transferred to bank accounts in the name of the second respondent Chew Kong Chian and Sons Holdings Pty Ltd, the holding company of the Proprietor.

On 19 June 1990 the Builder commenced proceedings in the Equity Division by summons for a declaration that upon the true construction of the contract and the events which had happened the Proprietor had breached the contract in calling upon the bank guarantee and an order that the Proprietor pay the amount to the Builder. Interlocutory relief was also sought restraining the Proprietor from dealing with the money pending the resolution of the dispute between the parties. The summons came on for hearing before Hodgson J on 21 and 22 June 1990, when his Honour delivered a judgment in which he ordered, inter alia, that:

"1. Upon tender by the Plaintiff to the First Defendant of a bank guarantee equivalent to that previously provided under the subject contract, the Defendants discharge the liability of the Plaintiff to the Commonwealth Bank of Australia arising from the calling up of the previous guarantee on or about 18 June 1990.

The First Defendant not call up such substitute guarantee without first giving two days' notice in writing to the Plaintiff of its intention to do so.

Provided that the Defendants within fourteen days file and serve a Notice of Appeal from these Orders, and an application for expedition of such appeal, and provided they diligently pursue such application and appeal, O.1 and O.2 are stayed until the determination of such an appeal."

The Proprietor appeals from the decision of Hodgson J.

The relief sought by the Builder depended on the proposition that the Proprietor was, in the circumstances, in breach of the contract in demanding payment on the Guarantee. The Builder submitted that the Proprietor was expressly obliged by CL7 of the Consolidated Offer and CL30 (h) of the Agreement and Conditions to ensure that the Guarantee remained effective until the issue of the Final Certificate. Accordingly, it was not open to the Proprietor to demand payment on the Guarantee when it did. Further it was argued that the occasion for demanding payment was limited to the circumstances described in clause 30 (h). The sentence particularly referred to was: "The provisions of this subclause are subject to the Proprietor's right to have recourse to any security provided by the Builder in the event of any of the circumstances described in CL22 of these Conditions arising or if the employment of the Builder is determined thereunder. " These submissions found favour with Hodgson J. He considered that there was an implied negative stipulation that the security guarantee was to remain in place and uncalled upon until the architect's Final Certificate subject to the Proprietor's right to have recourse to the security "in the event of any of the circumstances described in CL22 of these Conditions arising." This he considered was the only right to have recourse to the security prior to the issue of the architect's Final Certificate.

Moreover he concluded that the circumstances must be such as gave rise to a right in the Proprietor to rescind the contract. The Builder sought to uphold Hodgson J's conclusion but in a notice of contention went further and argued that in the second last sentence of CL30 (h) in the expression "in the event of any of

URJ MALAYSIA HOTEL (AUSTRALIA) PTY LTD v SABEMO PTY LTD (Sheller JA) 9

the circumstances described in CL22 of these Conditions arising or if the employment of the Builder is determined thereunder" the word "or" should be read and construed as "and". In consequence it was submitted that the Proprietor had no right to demand payment on the Guarantee unless it had validly determined the employment of the Builder under CL22.

It is convenient to deal first with that part of the Builder's submission which says that the Proprietor was in some way obliged to ensure that the Guarantee remained effective or to maintain it effective until the issue of the Final Certificate. With respect, I do not agree. Pursuant to CL7 of the Consolidated Offer the Builder agrees to furnish the Banker's Guarantee and properly understood I regard it as plain that this agreement obliges the Builder to ensure that the Guarantee remains effective until the issue of the Final Certificate. If for some reason the party furnishing the Banker's Guarantee sought to cancel it or withdraw from it, the Builder would be obliged to take steps to prevent this. I can think of no commercial reason why the Proprietor, which is the beneficiary of the Guarantee, should also undertake an obligation that the Guarantee remain effective. The Builder is the one in a contractual relationship with the party which gives the Guarantee. Accordingly the Builder is the one able to ensure that it remains effective. To read the provision as imposing such an obligation upon the Proprietor and thereby as limiting in an indirect way the unconditional right to be paid on demand contained in the Guarantee strikes me as extraordinary and unlikely. CL7 and for that matter CL38 impose the obligation to keep the Guarantee on foot upon the Builder which provides the Guarantee. The clauses impose no such obligation on the Proprietor.

The Agreement and Conditions are in a form which has been in existence since the beginning of 1971. In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liquidation) (1978) 141 CLR 335 the High Court considered CL22, CL30 and CL31 in the context of a Bank Guarantee given under CL30 (c). The judgment of the majority was given by Gibbs ACJ (as he then was). In Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 the High Court was concerned with guarantees given in lieu of moneys retained under a retention clause in a contract in different but analogous terms.

By reference to the analysis of the clauses and the principles stated and explained in those cases the following relevant propositions can be derived. The retention fund is retained by the Proprietor as security that the Builder shall carry out its obligations under the contract (CL30 (a)). A bank guarantee, guarantee bond or other form of security provided in accordance with CL30 (c) is to be effective as security in lieu of the retention fund. The Proprietor was accordingly entitled to resort to it to ensure the Builder carried out its obligations under the contract; see per Gibbs ACJ in the Australasian Conference Association case at 351. Whether a guarantee is provided pursuant to a clause such as CL7 of the consolidated offer or upon the Proprietor's agreement in the form acceptable to the Proprietor pursuant to CL30 (c), the form represents the intention of the parties. Otherwise it would not be proffered or accepted. The form is that of an unconditional undertaking by the bank to pay on demand. No doubt the parties could expressly have contracted to limit the occasions upon which the Proprietor could make demand in accordance with the guarantee. Yeldham J in Pearson Bridge (NSW) Pty Ltd v The State Rail Authority of New South Wales (1982) 1 ACLR 81, regarded the contract there under consideration as containing such a

term. "If the Principal becomes entitled to exercise all or any of his rights under the Contract in respect of the security the Principal may convert into money the security that does not consist of money."

The document provided by the Commonwealth Bank, although described as a bank guarantee on its face, is of the same nature as that which Barwick CJ in the Wood Hall case at 445 described as "really in the nature of an unconditional bond to pay money on demand up to a stated maximum amount." His Honour was of the view that there was no basis on which the owner's unqualified right at any time to demand payment by the bank could be qualified by reference to the terms or purposes of the contract. In the same case at 457 Stephen J, referring to the decision of this Court, said:

"Their Honours were, with respect, entirely correct in their conclusion that none of the four guarantees is, by any process of implication or construction, to be deprived of the unqualified operation which its express words dictate. Not only does the clear, indeed empathic [sic], language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is 'as good as cash' can it fulfil its useful purpose of according to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being 'as good as cash' in the eyes of those to whom it is issued is essential to its function. In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 at 171 Lord Denning recently described the performance guarantee as standing 'on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms.... [It] must pay according to its guarantee, on demand, if so stipulated, without proof or conditions'. That their constant equivalence to cash, awaiting only a demand before materializing as cash, was precisely the purpose of the guarantees in the present case clearly appears from the terms of the construction contract which here gave rise to two of them and from the dealings between contractor and Authority which brought the other two into existence."

Even if the occasion for the Proprietor to have recourse to the security has not yet arrived, no process of implication or construction of the contract, in my opinion, deprives the Proprietor of the right it has exercised to demand payment under the Guarantee. The cash paid on demand to the Proprietor is not held by it beneficially but as security and consistent with CL30 must be placed to the credit of an interest bearing deposit in the joint names of the Proprietor and the Builder at a bank nominated by the Builder and approved by the Proprietor. Recourse may be had to it in accordance with the terms of the contract. As Gibbs ACJ, speaking of CL30 (h) in the 1970 standard form of contract, said in the Australasian Conference Association case at 351: "One has 'recourse' to a security by resorting to it for the purpose of gaining some benefit from it.. ". Otherwise it must be accounted for in accordance with CL31 (f) and (g). In short it remains open to the Proprietor under this arrangement to change from security by way of a bank document to a cash security. By calling upon the Guarantee the Proprietor does not have recourse to the security but changes its form. The contract permits the Proprietor to do this.

URJ MALAYSIA HOTEL (AUSTRALIA) PTY LTD v SABEMO PTY LTD (Sheller JA) 114

As I have said I do not think that provisions calling for the guarantee to remain effective until the date of issue of the Final Certificate circumscribed the unconditional nature of the guarantee. Nor do I think this right is limited by the circumstances in which the Proprietor can have recourse to "any security provided by the Builder'. Considerable argument was directed to Hodgson J and to this Court about the meaning of the phrase "in the event of any of the circumstances described in CL22 of these Conditions arising or if the employment of the Builder is determined thereunder". The argument that "or" should be read as "and" is without foundation. I can see no reason why, contrary to the language used, a Proprietor would agree to go to the extreme of determining the employment of a Builder before he can have recourse to the security. With respect I regard this argument as not only contrary to the plain meaning of the language used but contrary to commercial common sense. Nor do I think that recourse is limited to the circumstances described in CL22. Gibbs ACJ in the Australasian Conference Association case stressed that the guarantee is provided as security that the Builder shall carry out his obligations under the contract, whatever those obligations may be. In any event and with respect, I disagree with Hodgson J that the phrase "the circumstances described in CL22" should be restricted to circumstances giving rise to a right to rescind.

However this may be the Proprietor has not had recourse to the security but has demanded payment in terms of the unconditional bank guarantee. In my opinion its doing so involved no breach of contract and accordingly this appeal should be upheld, the orders of Hodgson J set aside and in lieu thereof the summons dismissed with costs. The first respondent should pay the appellant's costs of this appeal but should have, if otherwise so qualified, in respect thereof, a certificate under the Suitors' Fund Act 1951.

In lieu thereof, order that the summons in the Equity Division be dismissed with costs;

Order that the first respondent pay the appellant's costs of the appeal but have, if otherwise so qualified, in respect thereof, a certificate under the Suitors' Fund Act 1951.

Counsel for the 1st Respondent: JM Stowe QC/IH Bailey Solicitors for the 1st Respondent: Cowley Hearne

Counsel for the 2nd and 3rd Respondents: No separate appearance

Solicitors for the 2nd and 3rd Respondents: Yee and Company

At a glance

Court

Decision date

Before

Source

Judgment (86 paragraphs)

Parties

Cases Cited (2)