1. Key message
Last week, the Supreme Court of Queensland handed down a decision that reinforces the importance of carefully considering the drafting of contractual terms relating to the provision of bank guarantees as performance security. It also serves as an important message to builders that expiry dates on bank guarantees will not always successfully circumvent a requirement to provide replacement security or otherwise extinguish any liability the builder has under the security provided.
The Court’s decision has implications for principals and contractors nationally.
2. The decision
In the decision of CCIG (Australia) Pty Ltd v Amicus Hospitality Group Pty Ltd  QSC 232, CCIG (Australia) Pty Ltd (CCIG) was the owner and operator of Daydream Island Resort and Spa and entered into a contract in 2017 with Amicus Hospitality Group Pty Ltd (Amicus) to carry out a refurbishment valued at $51.8 million. The contract required, as is typical, the provision of two unconditional bank guarantees to be provided by Amicus in favour of CCIG as security for Amicus’ performance of the contract, one of which was returnable after practical completion, and the other after the expiration of the defects liability period and the issuing of a final certificate.
The bank guarantees provided by Amicus contained expiry dates. CCIG made no written or verbal objection to or acceptance of the bank guarantees provided by Amicus. Due to a delay in construction the parties agreed to an extension of time for completion of part of the works and subsequently the expiry date of the latest bank guarantee came and went before the adjusted date for final completion. After practical completion occurred, the first bank guarantee was returned to Amicus and the remaining bank guarantee expired shortly thereafter. Upon its expiry, CCIG requested that Amicus provide further security until final completion, and when Amicus refused to do so, the matter came before the Supreme Court.
Amicus argued that CCIG had implicitly approved the guarantees with expiry dates because CCIG had paid Amicus’ payment claims under the contract, which it was only contractually obliged to do if approved security had been provided.
In finding that no such implication could be drawn, Justice Mullins drew attention to clause 20.5(iii) of the contract, which provided that payments under the contract by CCIG to Amicus were not to be considered as approval of performance (and rather were on account only). Her Honour also pointed to the fact that CCIG had done nothing to approve or disapprove of the provided guarantees and that silence in the context of the terms of the contract was equivocal. This could be distinguished from a previous case whereby an implied approval was found when the principal initially rejected the provided guarantees and on receipt of updated guarantees they did not raise issue with the inclusion of an expiry date. Amicus was therefore ordered to provide CCIG further security.
- Check any provided ‘unconditional’ bank guarantees to ensure they do not contain an expiry date. This is especially important if an initially provided bank guarantee has been rejected. Whilst the principal in this case was successful in attaining a replacement guarantee, it would have been more expedient and potentially more conducive to the working relationship between the parties if the principal had objected to the inclusion of expiry dates and requested a replacement guarantee from the outset.
- Ensure your contracts contain no-waiver provisions that eliminate or reduce the likelihood that making payments under the contract could constitute an implied approval.
- Include a clause in the contract providing that security is to be maintained by the contractor until at least the issuing of the final certificate.
- It will be difficult to rely on expiry dates included on unconditional bank guarantees unless there is some conduct by the principal to reject or accept the guarantees and/or the contractual terms are such that implications from the making of payments might be more readily drawn.
For further information on this decision and its implications, please contact:
Tom McKillop | Senior Associate | +61 7 338 7530 | email@example.com