The High Court has allowed an appeal against a decision of the New South Wales Court of Appeal on the construction of a bank guarantee contract. The appellant is the guarantor of a building company that tendered for a building contract from the respondent housing corporation. As part of that contract, the appellant provided security in the form of a bank guarantee contract, authorising the transfer of approximately $140,000 to the respondent if requested by the respondent. The contract was prepared with multiple errors, including mistakes in the name of the respondent corporation and its ABN, causing the bank to refuse to pay the amount when the respondent made the request. The NSWCA held that while the principle of strict compliance with the terms of the contract was a requirement of performance rather than construction, the principle of autonomy (that letters of credit and guarantees should be construed independently from the underlying agreements that lead to their creation) must form part of the process of construction. The Court of Appeal distinguished between using a letter of credit to construe the terms of the underlying contract from merely identifying that contract, concluding that the underlying contract’s identifying features can be considered in construing the letter of credit, and thus the bank could not refuse to meet the respondent’s request.

The Court unanimously allowed the appeal, and allowed the respondents’ cross appeals. The joint judges (Gageler, Nettle and Gordon JJ) held that it was not possible to construe the unconditional promise to pay (the ‘undertaking’) in favour of the respondent corporation rather than the named ‘principal’, but that the promise should be rectified so that it referred to the respondent. Consequently, the bank was bound to pay on the respondent’s demand, and the appellants were obligated to pay the bank. The joint judges noted that the proper construction of each undertaking is determined objectively, by reference to text, context and purpose, with meanings determined by what reasonable businesspersons would understand terms to mean in the context of the transaction (see at [78]). Applied here, it was impossible to construe the mistaken non-existent ‘principal’ entity (the ‘New South Wales Land and Housing Department’) as the respondent corporation for several reasons: the corporation and the government department are legally distinct (at [84]); despite the reference to the ‘contract or agreement’ which links this instrument to the corporation (which is important for rectification) the principle of autonomy means these instruments ‘stand alone’ (at [85]–[86]); the commercial purposes and commercial reality surrounding the arrangement prevent treating the ‘principal’ as the corporation (at [87]–[92]); the corporation should have determined whether the undertakings satisfied the obligations under the contract by reviewing it and then identifying and fixing the errors (at [93]–[96]); and finally the principle of strict compliance (that issuers should only accept documents that strictly comply with the requirements of an instrument) supported the bank’s refusal to meet the payment call under each undertaking due to these serious discrepancies and errors. Having held that ‘principal’ could not be construed as referring to the corporation, the joint judges then held that in this matter it was appropriate to rectify the applications and the undertakings. Noting that rectification is an equitable remedy aimed at making a written instrument conform to the ‘true agreement’ of the parties where the instrument, due to a common mistake, fails to accurately express that true agreement (see [103]), the joint judges held that there was an actual or true common intention of the parties illustrated by their communications to the effect that each party intended that the undertakings would enure to the benefit of the party that entered into the construction contract (see at [105]ff, [109]). The various errors in the contractual arrangements were common mistakes because, had someone pointed them out, it would have been ‘plain and obvious’ to the parties’ agents (see at [107]–[108]).

French CJ and Kiefel J each agreed with the orders proposed by the joint judges. French CJ agreed with the joint judges that the undertakings cannot be construed to overcome the designation errors, but agreed with Kiefel J’s treatment of the rectification question, making further comments on both (at [2]ff and [12]ff). French CJ emphasised the undertakings as performance bonds, concluding that a ‘loose approach’ to contract construction which might support reading the corporation instead of the non-existent department would be ‘inconsistent with the commercial purposes of the Undertakings as performance bonds’ (at [11]). On the issue of rectification, French CJ noted that, in his opinion, the relevant intention here is that of the construction company and the bank (at [17]). Agreeing with the reasoning of the joint judges on the construction issue (at [31]), Kiefel J turned to the rectification question and focused on the mistakes made by the bank and construction company’s agents in preparing the undertakings, namely Simic and the bank employee Hanna: it is their intentions in identifying the principal in the undertakings that are relevant to the issue of common mistake, not any broader question of characterisation that might arise between the bank and the corporation (at [38]). Following a discussion of several authorities on the expression of intentions (see [41]ff), Kiefel J concluded that it was not correct to say Hanna had no intention regarding the identity of the principal: while she did not know who the entity was and relied on Simic for that information, she understood that it was to be the counterparty (at [50]). Had she been asked who the principal was (besides the name given) ‘she would have identified as Nebax’s counterparty to the Construction Contract, which was of course the Corporation’: at [50]. Consequently, in Kiefel J’s view the undertakings should be rectified so that the corporation is named as the principal (at [51]).