Bank guarantees are an important risk allocation device in construction projects and contracts.
In the recent decision of Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd [2025] SASCA 72, the South Australian Court of Appeal clarified that a beneficiary to a bank guarantee in a construction project (usually the Principal) will lose its right to have recourse to a bank guarantee after the date upon which the Principal was required to return or release the bank guarantees in accordance with the construction contract.
Background
Synergy Construct Australia Pty Ltd (Contractor) was engaged under an amended AS4902-2000 form of construction contract (Contract) to design and construct a 36-storey student accommodation tower for 352 apartments at North Terrace in Adelaide for GSA North Terrace Pty Ltd (Principal).
The Contract provided for the Contractor to provide security in the form of bank guarantees (Bank Guarantees) and included clauses that provided that:
The Contractor submitted three bank guarantees to a value of $1,999,038 which were held by the Principal. On 13 April 2022, the Superintendent certified that practical completion had been achieved on 31 March 2022 and that the defects liability period would end on 31 March 2023. During the defects liability period, the Superintendent directed the Contractor to rectify a defect described as blocked sewer stacks which became the subject of an extended defects liability period, further negotiations and a dispute between the parties.
On 5 December 2023 the Contractor submitted its final payment claim and on 22 December 2023 the Superintendent issued a final certificate.
The application at first instance
On 3 April 2024 the Contractor filed an application with the Supreme Court seeking an injunction restraining the Principal from making a written demand on the Bank Guarantees, including on the basis that the Principal was obliged to return the Bank Guarantees within 14 days after the Superintendent issued the final certificate.
In the first instance, following a detailed review of relevant authorities, the Supreme Court dismissed the Contractor's application for an injunction on the basis that:
The application on appeal
On appeal, the Court of Appeal allowed the appeal and granted the injunction on the basis that (inter alia):
Key Takeaways
This decision of the South Australian Court of Appeal puts a time limit on any risk allocation function of security under a construction contract and puts more weight to consideration of the balance of convenience test in circumstances where the right to call on security is a serious question to be tried.
Parties should consider this carefully when drafting and negotiating construction contracts.
For assistance please contact a member of our Construction team in your state.
Authors
Geoff Brennan | Partner | +61 8 8236 1301 | gbrennan@tglaw.com.au
Shannon Schwarz | Partner | +61 8 8236 1175 | sschwarz@tglaw.com.au