There were problems with the Undertakings.
The "Favouree" of each Undertaking, also defined as the "Principal", was expressed to be "New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940". That was an error. There was no, and never has been any, government department called the "New South Wales Land & Housing Department". As the document enclosed with the letter of 4 March 2010 showed, the party to be named as Favouree was "New South Wales Land and Housing Corporation". It was that corporation that was intended to be a party to and have the benefit of each Undertaking.
As a result of those errors, the applications that Nebax made to ANZ were not for an instrument in favour of the Corporation, and the instruments that ANZ issued were not in favour of the Corporation. The Undertakings were issued to a (non-existent) "Department" and the only ABN quoted was not the ABN of the Corporation. The Corporation's ABN was, at all relevant times, "24 960 729 253". The ABN referred to in the Undertakings was never the ABN of the Corporation itself. It was the ABN for the trading name "Housing NSW", although it is significant that the Corporation had traded as "Housing NSW" at least between October 2009 and April 2010. That ABN was cancelled on 1 July 2010.
The references to the Construction Contract were also wrong. The Undertakings stated that they related to "Job Number: P0409021". That reference does not appear in the Construction Contract. The "Job Number" in the Construction Contract was "BG2J8 C-71561". Equally, the "Contract Number" in the Undertakings (BG2J8) does not match the "Contract Number" in the Construction Contract (51384), although BG2J8 is part of the "Job Number". The location (Bomaderry) is misspelt in one of the Undertakings.
On 2 October 2013, the Corporation sought to make a demand on ANZ for payment under each Undertaking. ANZ disputed that the Corporation was entitled to claim the benefit of Undertakings issued in favour of another named entity and refused to accept that a call had been made.
On 5 February 2015, a solicitor for the Corporation presented the original Undertakings and a written demand at a branch of ANZ. ANZ did not pay out on the demand and the solicitor took the Undertakings away.
Decisions below
The Corporation issued proceedings in the Supreme Court of New South Wales seeking a declaration that the description of the "Principal" should be construed as referring to the Corporation or an order that each Undertaking be rectified by substituting the name of the Corporation for the named "Principal".
The primary judge made the declaration sought by the Corporation. His Honour added that, although it was unnecessary to deal with the rectification claim, he considered that the pre‑requisites for the making of an order for rectification were satisfied and that, if necessary, he would have ordered that the Undertakings be rectified. The primary judge directed the entry of judgment for the Corporation against ANZ in the sum of $146,965.06. His Honour declared that ANZ was entitled to be indemnified by Nebax for that amount and made further declarations that the appellants were liable to ANZ under various arrangements between the appellants and ANZ.
The appellants appealed to the Court of Appeal of the Supreme Court of New South Wales. The two questions raised by the appeal were whether the primary judge erred in construing the Undertakings as referring to the Corporation and, if so, whether the Undertakings should be rectified by correcting the name of the "Principal" to refer to the Corporation.
Emmett AJA (with whom Bathurst CJ and Ward JA agreed) concluded that, although carelessness or lack of diligence on the part of the Corporation led the Corporation to accept the Undertakings, there had not been and could not be any suggestion that the description of the "Principal" in the Undertakings was capable of referring to any entity other than the Corporation. On the proper construction of the Undertakings, the defined "Principal" meant the Corporation and, it followed, "once the Corporation had furnished to ANZ indisputable evidence that it was the entity that was a party, as 'Principal', to the contract or agreement with Nebax described in the Undertakings, there was no basis upon which ANZ would be entitled to refrain from meeting the demand". Emmett AJA did not deal with the question of rectification but expressed some reservations about the primary judge's conclusion.
Applicable construction principles
The Undertakings are in writing. ANZ accepts that it is bound to honour the Undertakings according to their terms. The Undertakings contain a contractual promise to pay, not under seal. They are contracts, although of a specific kind. When and how a contractual promise to pay, not under seal, in favour of a named principal establishes a binding contract has been the subject of debate and discussion since at least the first half of the 20th century. For present purposes, however, that debate and discussion may be put to one side. Consistent with established banking practice, no party contended that the Undertakings were to be construed otherwise than in accordance with ordinary principles of contract construction.
There was also no dispute about those principles of construction. The proper construction of each Undertaking is to be determined objectively by reference to its text, context and purpose. As was stated in Electricity Generation Corporation v Woodside Energy Ltd:
"[T]he objective approach [is] to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. … [I]t will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd [[2009] EWCA Civ 636 at [28]], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'." (footnotes omitted)
Proper construction of the Undertakings
The starting point for the proper construction of the Undertakings is the language used in each Undertaking.
Each Undertaking was an unconditional obligation to pay a named beneficiary upon demand, in the nature of a performance bond. No party to either Undertaking was involved in any obligations or rights of suretyship.
The beneficiary was defined in each Undertaking as the "Principal". Each Undertaking expressly provided that, in consideration of the "Principal" accepting the Undertaking and its terms, ANZ unconditionally promised to pay that "Principal", on written demand, an amount not exceeding $73,482.53.
Each Undertaking recorded that ANZ asked the "Principal" to accept the Undertaking "in connection with" an identified "contract or agreement". But ANZ assumed a primary obligation, not a secondary obligation. ANZ was obliged to pay a stipulated amount without regard to the performance or non‑performance of any party to that "contract or agreement". Further, each Undertaking expressly stated that "[a]ny alterations to the terms of the contract or agreement or any extensions of time or any other forbearance by [either party to the contract or agreement] will not impair or discharge ANZ's liability under the Undertaking".
As has been explained, the "Principal", as defined in the opening paragraph of each Undertaking, did not exist; and for the reasons that follow, it is not open to construe "New South Wales Land & Housing Department" where it appears as the "Principal" in each Undertaking as referring to the Corporation.
First, the Corporation and a "department" of the New South Wales Government are legally distinct. The Corporation is a statutory corporation that can sue and be sued in its own name. By contrast, a department of the New South Wales Government is an emanation of the Crown in the right of the State of New South Wales, and thus an action to enforce a contract made in the name of a department of the New South Wales Government is governed by s 5 of the Crown Proceedings Act 1988 (NSW) and brought in the name of "State of New South Wales".
Second, although the "contract or agreement" referred to in the third paragraph of each Undertaking provides a link to the Corporation which, as will be seen, is significant for the purposes of rectification, it is either irrelevant or of no assistance for the purposes of construction. That is because, subject to fraud perpetrated by a beneficiary, an instrument of this nature (unconditional promise to pay on demand) is independent of any underlying transaction and any other contract. That principle - the principle of autonomy - reflects that those instruments, by their nature, stand alone. Not only are they equivalent to cash, but, by their terms, they also require that the obligations of the issuer are not determined by reference to the underlying contract. The principle of autonomy dictates that the surrounding circumstances and commercial purpose of the Construction Contract are different from those of the Undertakings.
Here, that conclusion is fortified by the fact that there was no contract or agreement "between the Principal and [Nebax] for Job Number: P0409021, Bomaderry - Design & Construct 3-7 Karowa Street. Contract No: BG2J8". That was another error. The Construction Contract had a different job number and a different contract number and, in one of the Undertakings, the location was misspelt.
Third, the inability to construe the "Principal" named in each Undertaking as the Corporation is impelled by the commercial purpose or objects of such an instrument. Although banking instruments are often not consistently described, for present purposes two categories are relevant - letters of credit or documentary credits, and performance bonds or guarantees. Both involve an undertaking, usually by a bank, to make payment on satisfaction of certain conditions. The difference lies in their commercial uses. The former category represents the method of payment of the price of goods. The latter category, of which each Undertaking is one, is generally given "for the purpose of providing compensation if work is not done, rather than as payment for the work actually done".
Under the latter form of security, the issuer (here, ANZ) is not required or intended to be concerned with the terms of the underlying contract (here, the Construction Contract) or, subsequently, with whether the construction contractor (here, Nebax) has sufficiently performed its obligations under that contract. The issuer's sole concern is to provide security in accordance with its contract with its customer (here, Nebax) and, when the security is issued, to see whether there has occurred the event stipulated in the instrument on which the issuer's obligation to pay arises. In effect, such securities "create a type of currency" and are treated as being "as good as cash". Instruments of this nature are essential to international commerce and, in the absence of fraud, should be allowed to be honoured free from interference by the courts.
Fourth, the inability to construe the named "Principal" as referring to the Corporation is necessitated by commercial reality. In issuing a banking instrument of this nature, the issuer relies upon, and acts in accordance with, the instructions of the applicant, and is contractually bound to do so.
Here, Mr Simic provided the information for Ms Hanna to complete the applications and he instructed ANZ to issue the Undertakings in the form in which they were issued. The fact that the applications were completed based on incorrect instructions did not alter ANZ's contractual relationship with Nebax. ANZ was asked to provide security in the form of the Undertakings that it in fact issued consistent with its contractual arrangements with Nebax. ANZ followed the incorrect instructions provided by Nebax and the Undertakings recorded those incorrect instructions. Unless and until it is rectified, ANZ would be at risk of acting in breach of contract if, contrary to Nebax's express instructions, it were to treat the instrument as referring to the Corporation.
Each Undertaking was personal to the "Principal". The "Principal" could not assign, transfer, charge or otherwise deal with its rights under the Undertaking. Nor was it possible for the "Principal" to do what was required under each instrument - accept the Undertaking. As the Undertaking expressly stated, by accepting the Undertaking, the "Principal" acknowledged and agreed that ANZ could rely entirely on any demand or notice as presented to it and had no responsibility or obligation to investigate the matters stated in the demand or notice. As the facts of this case illustrate, the "Principal" could not accept the Undertaking and make it personal to it as the "Principal" did not exist.
Under the terms of the Undertaking, ANZ was only required to pay the amount to the "Principal" upon presentation of two documents - the original Undertaking and a written demand - at any branch of ANZ within Australia. The "Principal" could not provide a written demand to ANZ because it did not exist.
Fifth, after the Undertakings were issued, Mr Simic took them to the Corporation. Upon receipt of the Undertakings, the Corporation should have been able to determine whether each Undertaking satisfied the requirement that Nebax provide security under the Construction Contract and, if it did not, to take appropriate steps under the Construction Contract at that point.
If the Corporation had properly reviewed the Undertakings and identified that the named "Principal" was wrong, as well as the other errors or discrepancies, the Corporation could at that point have refused to accept the Undertakings as satisfying the security requirement under Standard Special Condition 39 of the Construction Contract and requested Nebax to provide security that complied or conformed with the Construction Contract.
That was not the only available step either. The Construction Contract provided that if Nebax did not provide security in accordance with Standard Special Condition 39 of the Construction Contract, the Corporation could have given Nebax notice to show cause for a breach of the Construction Contract (Standard Special Condition 51). Nebax would have then been required to show cause why the Corporation should not remove Nebax as contractor or terminate the Construction Contract (General Condition 39.3) and, if Nebax failed to show "reasonable cause", the Corporation could have removed Nebax as contractor or terminated the Construction Contract (General Condition 39.4).
The evidence in this matter did not disclose what occurred when the Corporation received the Undertakings. It is therefore not possible to address the legal consequences of the apparent failure of Nebax to provide security in accordance with its obligations under the Construction Contract or the "carelessness or lack of diligence on the part of the Corporation" in reviewing the Undertakings. But nor is it necessary to do so. What is important for present purposes is, as Dolan states, to recognise that, from a commercial and banking perspective, it is more efficient to require the Principal to conduct the review of the security before performance than after it and if the Principal acts without seeing or examining the security, the Principal should bear the costs.
Finally on this aspect of the matter, it is necessary to say something about the principle of strict compliance - that an issuer (like a bank) should only accept documents that comply strictly with the requirements stipulated in an instrument of this nature. The principle is fundamental to the efficacy and dependability of banking instruments such as the Undertakings. As Viscount Sumner said in Equitable Trust Company of New York v Dawson Partners Ltd:
"It is both common ground and common sense that in such a transaction the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are … strictly observed. There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines."
The commercial realities of the principle are apparent. In this matter, each Undertaking was able to be presented at any ANZ branch. In Equitable Trust Company, where the instrument was able to be presented abroad, Viscount Sumner explained the commercial realities (and practicalities) in these terms:
"The bank's branch abroad, which knows nothing officially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs from the conditions laid down, it acts at its own risk."
As the primary judge and Emmett AJA correctly concluded, the principle of strict compliance applies after the instrument has been construed, and it is not a rigid rule. It must be applied intelligently, not mechanically; the issuer must exercise its own judgment about whether the requirements stipulated in the instrument have been satisfied.
Nevertheless, as each Undertaking expressly stated, ANZ was not required to make inquiries or investigate further. And it did not. An officer of ANZ inspected the documents tendered, looked at the named "Principal" in each Undertaking, looked at the demand and refused to meet the call for payment under each Undertaking. The demand did not comply with the Undertaking. The discrepancies and errors were not minor or merely typographical. At the time of compliance, consistent with the principle of strict compliance, it was not possible for ANZ to accept a demand from the Corporation.
For those reasons, the definition of "Principal" in each Undertaking should not be construed as referring to the Corporation.
Rectification
Although it is not possible to construe the definition of "Principal" as referring to the Corporation, in the unusual circumstances of this case it is appropriate to rectify the applications completed by Nebax and the Undertakings that were then issued by ANZ.
Rectification is an equitable remedy, the purpose of which is to make a written instrument "conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately". For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an "agreement" between the parties in the sense that the parties had a "common intention", and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the "agreement" because of a common mistake. Unless those elements are established, the "hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties" cannot be displaced.
The issue may be approached by asking - what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties' actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party.
However, here there was such communication, and as is apparent from the primary judge's findings, all parties to the transaction intended that the Undertakings should enure to the benefit of the party with which Nebax entered into the Construction Contract. It was Mr Simic's intention, and, therefore, Nebax's intention, that the Undertakings should operate in favour of Nebax's counterparty to the Construction Contract. Similarly, it was Ms Hanna's understanding, and, therefore, ANZ's understanding, that the Undertakings were to be entered into in relation to the Construction Contract.
Granted, Mr Simic misdescribed the Construction Contract to Ms Hanna as "Job Number: P0409021, Bomaderry - Design & Construct 3-7 Karowa Street. Contract No: BG2J8". But, despite Mr Simic's misdescription of the Construction Contract, it is not suggested that there was ever more than one contract for the Design and Construct of 3-7 Karowa Street or that the contract for the Design and Construct of 3-7 Karowa Street was ever anything other than the Construction Contract.
As the primary judge found, Mr Simic, and, therefore, Nebax, made a further mistake in informing Ms Hanna of the name of Nebax's counterparty to the Construction Contract. Mr Simic erroneously stated that the name of the counterparty was "New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940". That error was repeated in the applications prepared by Ms Hanna and signed by Mr Simic. Ms Hanna, and therefore ANZ, then unwittingly perpetuated the mistake by including the name "New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940" as the name of the counterparty in the Undertakings produced pursuant to the applications. However, Nebax told ANZ, and therefore ANZ knew, that Nebax obtained a contract with the entity trading as "Housing NSW" and that the applications and the resulting Undertakings were required under that contract. At the time the applications were completed and given to ANZ, and the Undertakings were issued by ANZ, the Corporation was trading as "Housing NSW" and the ABN referred to in both the applications and the Undertakings was, at that time, used by and associated with "Housing NSW".
Therefore, as the primary judge said, if someone had pointed out at the time to Mr Simic and Ms Hanna that the name of the counterparty was wrong, that would have been plain and obvious to both of them. There can be no doubt that their actions were the result of a common mistake.
Rectification of the applications and the Undertakings to refer to the Corporation gives effect to what Nebax required, as well as the stated intention of ANZ to provide the security to the entity with which Nebax had contracted to provide the building and construction services. That intention (to provide security to the entity with which Nebax had contracted) was the actual or true common intention of Nebax and ANZ. And that was the actual intention of each party, viewed objectively. The fact that the "Principal" was wrongly identified in the applications and the Undertakings was, in the particular circumstances of this case, a matter that could be and should be rectified.
It was contended on behalf of ANZ that this was a case of mutual mistake or, in other words, the parties being at cross‑purposes, rather than of common mistake. Counsel for ANZ submitted that, on a correct view of the facts, Mr Simic made a mistake by conveying the incorrect name of the Corporation to Ms Hanna and, as a result, Ms Hanna made a corresponding but different mistake which had the effect that the Undertakings were intended to operate in favour of an entity other than the Corporation. It must follow from that submission that the parties were bound by the objective effect of the words of the instrument or, alternatively, that it was wholly ineffective.
That contention is opposed to the primary judge's findings of fact. It was not suggested below that Mr Simic believed that Nebax entered into the Construction Contract with a party other than the Corporation. As the primary judge found, Mr Simic's mistake was that he did not convey the correct name of the Corporation and the correct contract numbers to Ms Hanna. Nor is there a basis to suppose that Ms Hanna and therefore ANZ might have had a belief as to the identity (as opposed to the name) of the intended Favouree of the Undertakings, other than that the intended Favouree was to be the counterparty to the Construction Contract. To the contrary, Ms Hanna believed that the Undertakings related to a contract to which Nebax was a party and understood that the words "Job Number: P0409021, Bomaderry - Design & Construct 3‑7 Karowa Street. Contract No: BG2J8" were intended to refer to that contract. One of Ms Hanna's mistakes, which was the result of Mr Simic's error and which, therefore, Ms Hanna shared with Mr Simic, was that the name of the counterparty was "New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940".
Counsel for ANZ further contended that this Court should adopt the reasoning of the United States Court of Appeals for the Fifth Circuit in Tradax Petroleum American Inc v Coral Petroleum Inc that rectification is not available in a case of this kind.
That contention should be rejected. In Tradax, the Court of Appeals held that a letter of credit could not be "reformed" because there was no "mutual mistake". The Court concluded that:
"We agree with the district court's determination that there was no mutual mistake here. Any mistake made was made by Tradax and Coral only - not by FABC [the financier]. FABC, without knowledge of the meanings of the technical designations included, prepared the letter of credit precisely in compliance with Coral's request. Tradax then failed to recognize that the letter of credit's terms did not reflect its agreement with Coral. In addition, there is no prior agreement between FABC and Tradax to which this letter of credit could be conformed."
Earlier, the Court had quoted with approval the following statement of Harfield:
"The right to enforce express terms, without reference to equities, has long been recognized in letter-of-credit law, and is essential to the proper functioning of the letter-of-credit device."
As is apparent from that reasoning, there are several bases on which Tradax stands to be distinguished.
First, in contradistinction to FABC's lack of mistake, in this case ANZ made a mistake. As a result of Mr Simic's error in conveying the correct name of the Corporation to Ms Hanna, ANZ mistakenly believed that the correct name of Nebax's counterparty to the Construction Contract was "New South Wales Land & Housing Department Trading As Housing NSW ABN 45754121940", and, therefore, that the Undertakings should be drawn in favour of that name rather than the name of the Corporation.
Second, the reasoning in Tradax set out above implies that the Court of Appeals considered that it was not open under United States law to order that an instrument be "reformed" for "mutual mistake" unless there were a prior agreement to which the instrument could be "conformed". By contrast, in Australia, it has long been recognised that an antecedent agreement is not essential to an order for rectification. Rectification may be ordered of an instrument that does not reflect the parties' true intention even though the instrument constitutes the only agreement between the parties.
Third, it is also apparent from the reasoning in Tradax set out above that a further reason for the Court of Appeals' refusal to reform the letter of credit was that it considered that, under United States law, "equities" are excluded in relation to letters of credit. By contrast, in this case, we are not concerned with a letter of credit or with any particular doctrine of law especially applicable to letters of credit. The Undertakings are not letters of credit and, even if they were, in Australia there is no special doctrine of law precluding rectification of a letter of credit on the basis of a common mistake. Subject to the facts and circumstances of each case, the principles that apply to the rectification of letters of credit and cognate securities such as the Undertakings are the same as for the rectification of any other form of contractual instrument.
Conclusion and orders
For those reasons, the appeal should be allowed, special leave to cross‑appeal granted and the cross-appeal by the Corporation allowed, and special leave to cross-appeal granted and the cross-appeal by ANZ allowed. The appellants are to pay the costs of ANZ and the Corporation.
The orders made by the Court of Appeal on 18 December 2015 should be set aside and, in lieu thereof, it be ordered that:
(1) ANZ is granted leave nunc pro tunc pursuant to s 500(2) of the Corporations Act 2001 (Cth) to commence and proceed with its cross-appeal against Nebax.
(2) ANZ has leave to file its amended notice of cross-appeal in the first cross-appeal.
(3) Appeal allowed in part.
(4) Second cross-appeal by the Corporation allowed.
(5) First cross-appeal by ANZ allowed.
(6) Orders 1 and 4 made by the Supreme Court of New South Wales on 24 March 2015 are set aside and in lieu thereof:
(a) The bank guarantees issued by ANZ 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".
(b) The forms of indemnity and application for guarantee from Nebax to ANZ 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".
(7) The appellants are to pay the costs of the Corporation and ANZ in the Court of Appeal.