Key Takeaways

The Supreme Court of Victoria implied a contractual term allowing a contractor to pay out a bank guarantee in cash at any time, requiring the principal to release the guarantee and prohibiting any demand for replacement security. In doing so, the Court held that a bank guarantee is “as good as cash” and not a mechanism for commercial leverage.

Facts

L.U. Simon Builders Pty Ltd (Contractor) provided two bank guarantees as performance security under a D&C contract (Contract). The Contract contained a Principal-friendly allocation of risk for security which was consistent with market. After Practical Completion, the parties agreed to release the first guarantee for cash, but Cardigan Commercial Pty Ltd (Cardigan) refused to release the second bank guarantee despite the Contractor’s unconditional offer to pay its full value in cash. The contract was silent on this scenario.

Decision

His Honour Delany J held, among other things, that:

1. The Contractor’s proposal was not a substitution of security under the contract. The Contractor was not seeking to replace the bank guarantee with another form of security requiring the Principal’s consent under clause 5.3, but rather to make an unconditional cash payment equivalent to an immediate call on the guarantee, leaving Cardigan free to deal with the cash as it wished
2. An implied term existed entitling the Contractor to discharge the guarantee by paying cash at its discretion, requiring the Principal to release the guarantee and preventing any demand for replacement security. The term was necessary for business efficacy, obvious in light of the guarantee terms permitting bank payout at any time, and consistent with the commercial understanding of a bank guarantee “as good as cash”.

Orders were made requiring payment of cash by the Contractor to the Principal, and release of the second guarantee to the Contractor.

Conclusion

Principals cannot insist on retaining bank guarantees where the contractor offers unconditional cash payment. The decision reinforces that bank guarantees secure performance but do not confer ongoing leverage, and contractors may seek to neutralise reputational risk by paying out the secured amount directly (where the right of the Principal to have recourse is uncontested).

This approach depends on the contractor having notice of the principal’s intention to have recourse. While notice provisions are becoming more common, many Victorian construction contracts still lack them.

That position will change with the incoming Building Legislation Amendment (Fairer Payments on Jobsites and Other Matters) Act 2025 which will require five business days’ notice of a party’s intention to have recourse. With notice of an impending call, astute contractors may rely on this decision to ensure that the financial harm caused by cashing a bank guarantee is minimised. Conversely, principals may be exposed if they refuse to accept a cash payment, instead preferring to proceed with the call.

In both cases, parties should seek legal advice to best manage any rights and obligations that are affected by this decision.

Further information / assistance regarding the issues raised in this article is available from the authors, Bill Papastergiadis OAM, Melbourne Managing Partner, Partners Phillip Vassiliadis and Nathan Cutts or your usual contact at Moray & Agnew.