Wood Hall Ltd v Pipeline Authority

[1979] HCA 21

HIGH COURT OF AUSTRALIA

Barwick C.J., Gibbs, Stephen, Mason and Murphy JJ.

WOOD HALL LTD. v. PIPELINE AUTHORITY

(1979) 141 CLR 443

24 May 1979

Building Contracts

Building Contracts—Pipeline construction—Security in lieu of cash and retention fund—Bank guarantee—Entitlement of owner to demand and be paid security moneys—Due and faithful performance of work.

Decisions

May 24.
The following written judgments were delivered:-
BARWICK C.J. In this matter I have had the advantage of reading the reasons for judgment prepared by my brother Gibbs. I agree with them and the conclusion they support. (at p445)

2. I wish to add an observation on my own account. The description "guarantee" commercially applied to the bank documents in this case is, in my opinion, a complete misnomer. The relationship of the bank to the owner or to the contractor has, in my opinion, none of the elements of suretyship. The circumstance that the purpose of the cash deposit or its documentary substitute is as a security for the due performance of the contract or the contract work does not, in my opinion, involve either the Bank or the owner in any of the obligations or rights of suretyship. The presence of cl. 3, for example, in the deed of 11th June 1976, sensibly included as a precaution, does not, in my opinion, import any of those rights or obligations. The bank documents are really in the nature of an unconditional bond to pay money on demand up to a stated maximum amount, the resolutive condition of the bond, other than payment, being expressed, for example, in cl. 2 of the said deed. (at p445)

3. In my opinion, there is no basis whatever upon which the unconditional nature of the Bank's promise to pay on demand can be qualified by reference to the terms of the contract between the contractor and the owner. Equally, there is no basis on which the owner's unqualified right at any time to demand payment by the Bank can be qualified by reference to the terms or purpose of that contract. The alternative provided the builder by condition G4.2 of that contract to the immediate deposit of cash is intended to place the owner in a position at any time to obtain such a deposit, i.e. a cash deposit of the stated amount, by a payment of that amount by a bank under a document which binds the bank unconditionally to make such a payment on demand. (at p445)

4. Apart from the application of the legal principles to which reference is made in my brother's reasons, every commercial reason exists for reaching the conclusion to which he has arrived. (at p445)

5. I would dismiss the appeal. (at p445)

GIBBS J. On 10th February 1977 the appellant, Wood Hall Ltd. ("the contractor") brought proceedings in the Supreme Court of New South Wales against The Pipeline Authority ("the Authority") and Australia and New Zealand Banking Group Ltd ("the Bank") seeking declarations and orders whose substantial purpose was to restrain the Bank from making payment to the Authority under four instruments, described on their face as bank guarantees, given by the Bank to the Authority. Rath J. made declarations and orders in favour of the contractor, but his decision was reversed by the Court of Appeal. The contractor now appeals to this Court. (at p446)

2. The bank guarantees (as it is convenient to continue to call them) were given by the Bank at the request of the contractor and in relation to a contract dated 5th November 1974 to which the contractor and the Authority were parties. By that contract the contractor agreed to construct two sections (ss. 2B and 3) of a pipeline designed to carry natural gas from Moomba to Sydney. Annexed to the contract was a programme of works which divided the work into sections and specified in relation to each section the date by which the contractor was bound to carry out the work. (at p446)

3. By condition G4 of the contract it was provided as follows:

"G4.1 Contractor shall, on or before the execution of the Agreement, pay to Owner as security for Contractor's due and faithful performance of the Work, the sum of $1,500,000.00. G4.2 Contractor shall be entitled to provide by way of alternative to a cash security a bank guarantee or performance bond for the said sum of $1,500,000.00, having such terms and conditions and being from a bank or insurance or bonding company as Owner shall approve. G4.3 It shall be a condition of the Contract that Contractor shall maintain throughout the period of the Contract, concluding on the date of the Certificate of Acceptance, any such bank guarantee or performance bond.

In fact no sum was paid by the Authority under condition G4.1, but a guarantee given by the Bank pursuant to an earlier contract was deemed to have been provided by the contractor under condition G4.2: see cl. 11 of the contract. Subsequently the Authority requested that a new guarantee be substituted, and on 11th June 1976 the Bank executed under seal a document headed "Bank Guarantee" which, omitting formal parts, read as follows:

"WHEREAS A. Wood Hall Limited carrying on business as Australian Pipelines Construction a Company duly incorporated in the State of New South Wales and having its registered office situated at 223 Pacific Highway, North Sydney, N.S.W. 2060 (hereinafter called "Contractor") has entered into a contract dated 5th November, 1974 with Owner for the execution of Sections 2B and 3 and appurtenant works of the Moomba to Sydney Natural Gas Pipeline Mainline Construction. B. Contractor is required by the said Contract to provide to Owner a cash security, a bank guarantee or a performance bond as security for Contractor's due and faithful performance of the work. C. The Bank has agreed to enter into this Deed in order to satisfy Contractor's obligations as required by the said Contract. NOW THIS DEED WITNESSETH as follows: 1. The Bank unconditionally undertakes and covenants to pay on demand any sum or sums which may from time to time be demanded in writing by Owner up to a maximum aggregate sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000.00) to be held by Owner as security for and until the performance and completion by Contractor of all of the conditions of the said Contract in all respects. 2. The Bank's liability under this Deed shall be a continuing liability and shall continue until notification has been received from Owner that Contractor's liability is released, until payment is made under this Deed of the said maximum aggregate sum or until the date of the Certificate of Acceptance given by Owner to Contractor in accordance with the provisions of the said Contract whichever event occurs soonest. 3. The liability of the Bank under this Deed shall not be discharged or impaired by reason of any variation or variations (with or without the knowledge or consent of the Bank) in any of the stipulations or provisions of the said Contract or the works acts or things to be executed performed and done under the Contract or by reason of any breach or breaches of the said Contract by Contractor. 4. This Deed shall be governed by and construed in accordance with the laws for the time being of the State of New South Wales."

In December 1976 the Authority agreed to pay the contractor for work which, although done, had not been certified under the contract, but required that an additional guarantee be given. Accordingly, on 23rd December 1976, the Bank gave to the Authority an additional bank guarantee in the sum of $100,000. This document recited that the contractor had agreed to provide to the Authroity a bank guarantee in the sum of $100,000 in addition to the guarantee dated 11th June 1976, and that this additional guarantee was provided "as security for Contractor's due and faithful performance of the Work". The recital continued:

"Without prejudice to the generality of the foregoing this additional guarantee is given in accordance with the provisions of Clause G4.1 of the Conditions of Contract."

The operative provisions of this bank guarantee were identical (except as to the amount) with those of the earlier guarantee. Those two bank guarantees have been described as the "performance guarantees" and it is convenient to adhere to that description. (at p448)

4. The other two bank guarantees the subject of these proceedings were given, not under any provision of the contract, but pursuant to a fresh agreement made between the contractor and the Authority. By condition G24 provision was made for the making of progress payments to the contractor during the performance of the work. The contractor was entitled twice each month to submit an invoice requesting a progressive payment and when this was certified by the engineer to receive payment of ninety per cent of the amount payable under it: condition G24.2- G24.4. The owner was entitled to retain the balance of ten per cent until the work had been fully performed by the contractor and accepted by the Authority in accordance with condition G30, which provided for the issue of a certificate of acceptance: condition G24.5. By condition G24.8 it was provided that these retentions should continue to be made until the contractor had become entitled to be paid the sum of $10 million, that thereafter the Authority should pay to the contractor 100 per cent of the amount payable under any certified invoice until the contractor had completed to the reasonable satisfaction of the Authority section 2B of the work, and that thereupon the Authority should pay to the contractor the amount of such retentions in excess of $250,000. Thereafter no further retentions were to be made except such amounts as might from time to time be found to be necessary to ensure that the total sum retained was not less than $250,000. (at p448)

5. When the retentions had in fact reached a total of $1,000,000, the contractor requested the Authority to accept bank guarantees as a substitute for the moneys retained. The Authority agreed, and the engineer stated, by letter dated 10th April 1975, that the bank guarantees would be "released at the same time and under the same conditions specified in the Contract for the retention moneys". The Bank then executed two instruments, each of which was headed "Bank Guarantee" and dated 15th April 1975, one for the sum of $750,000 and the other for the sum of $250,000. Apart from the amounts mentioned these instruments were in identical terms and that for $750,000 (omitting formal parts) read as follows:

"At the request of the abovenamed Contractor and in consideration of your, at the request of this Bank, agreeing not to withhold cash retention money from payments due to the said Contractor under the abovementioned Contract, the Australia and New Zealand Banking Group Limited, unconditionally undertakes to pay on demand any sum that may from time to time be determined by you to a maximum of Seven Hundred and Fifty Thousand Dollars ($750,000.00). For this amount the Bank will be held responsible until notification has been received from you that such sum is no longer required or until payment is made to you by this Bank of the whole of the said sum of Seven Hundred and Fifty Thousand Dollars ($750,000.00). Should you notify us that you desire payment to be made to you of the whole or any part or parts of the said sum such payment or payments will be made to you without further reference to the Contractor notwithstanding any notice given by Wood Hall Ltd. trading as Australian Pipelines Construction to the Bank not to pay same. The Bank reserves the right to terminate its liability hereunder by payment to you of the said sum of Seven Hundred and Fifty Thousand Dollars ($750,000.00) or such lesser amounts as may be required and specified by you."

On receipt of these bank guarantees the Authority paid the contractor the sum of $1,000,000. These instruments have been referred to as the "retention guarantees". (at p449)

6. On 8th February 1977 the Authority made demand upon the Bank for payment in full of the sum payable under each of the four bank guarantees. By that date the contractor's work on both sections of the pipeline was nearing completion - indeed the work on section 2B was virtually completed: only some cleaning up, fencing work and some minor items of an isolated nature remained to be done. Gas had actually flowed through the pipeline in December 1976. However, a certificate of acceptance had not been issued. Moreover, by that time the parties to the contract were seriously in dispute. The Authority claimed that some of the work done was defective, and that the contractor was in breach of the conditions of the contract requiring the work to be carried out by particular dates, even allowing for some extensions of time that had been granted under the contract. The contractor, for its part, denied that the work which it had done was defective and alleged that defective material had been supplied by the Authority; it further claimed that it was entitled to additional extensions of time. The dispute between the parties involved many millions of dollars. (at p449)

7. The Authority made the demands upon the Bank without prior notice to the contractor. Indeed it took deliberate steps to conceal from the contractor its intention to make the demands and it knew that its action would give the contractor no real chance to marshal funds quickly to meet the inevitable requirement of the Bank. There is evidence that suggests that the Authority, in making the demands, was acting pursuant to what it described as a "strategy" to put pressure on the contractor in the hope that the dispute between the parties might be settled more advantageously to the Authority. (at p450)

8. The Bank has not yet made payment under the guarantees. Before it could do so, an interim injunction was obtained by the contractor and that injunction was continued until Rath J. gave judgment and granted a perpetual injunction. The fact that the Bank has not made payment since the orders made by Rath J. were set aside by the Court of Appeal is no doubt explained by the fact that an appeal has been brought to this Court. (at p450)

9. Before the Court of Appeal evidence was tendered as to certain events that occurred after Rath J. had given judgment. Since that time the contractor has received a certificate of acceptance dated 5th September 1977 but expressed to take effect as on 17th May 1977. Further, three of the four guarantees were on 7th July 1977 returned by the Bank to the contractor and marked "cancelled". This evidence was rejected by the Court of Appeal and it does not form part of the material upon which our decision must be reached. (at p450)

10. The ultimate question for our decision is whether the Bank is bound to make payment to the Authority under the guarantees. In the argument advanced on behalf of the contractor it was submitted that this question depends on the further question whether the Authrity had the right, as against the contractor, to demand payment from the Bank, or, to put the matter in another way, whether the action of the Authority in making the demands constituted a breach of its contract with the contractor. The argument advanced on behalf of the contractor, shortly stated, was that the bank guarantees must be construed in the light of the contract between the Authority and the contractor in relation to which they were given and that when so construed they create obligations accessory to those imposed upon the contractor by that contract. The effect of the guarantees, so construed, was said to be that the obligation of the Bank to make payment was conditional upon the making of a demand by the Authority in circumstances in which the Authority had a right under the contract to make such a demand, i.e., after the contractor had committed a breach of its primary obligations under the contract. In the circumstances of the present case, it was submitted, the Authority had no right to make any demand on the Bank because the contractor was not in default under the contract but had substantially performed the work the subject of the contract, there was no outstanding defective work under the contract and the purpose of the Authority in having recourse to the bank guarantees was to put financial pressure upon the contractor to settle its claims on terms favourable to the Authority. It was not submitted that if the Authority had been actuated by an improper or impermissible motive when it made its demands that would have meant that its actions constituted breaches of contract, but rather that the existence of such a motive tended to support the view that the Authority had made the demands when it was not entitled to do so. (at p451)

11. With all respect to the careful argument of counsel, I am unable to accept this argument at either of its two crucial points. I cannot agree either that the guarantees, upon their proper construction, make the obligation of the Bank dependent upon the existence of circumstances which give the Authority, as against the contractor, a right to have recourse to the bank guarantees or that in the circumstances existing in the present case the Authority was acting in breach of its contract with the contractor in making the demands. (at p451)

12. By each of the bank guarantees, the Bank "unconditionally" undertakes "to pay on demand" the sum demanded up to the limit specified in the bank guarantee. To hold that the bank guarantees are conditional upon the making of a demand that conforms to the requirements of the contract between the Authority and the contractor would of course be quite inconsistent with the express statement in the bank guarantees that the undertaking of the Bank is unconditional. To hold that the Bank should not pay on receiving a demand, but should be bound to enquire into the rights of the Authority and the contractor under a contract to which the Bank was not a party would be to depart from the ordinary meaning of the undertaking that the Bank is to pay on demand. It would be contrary to the settled rules governing the implication of terms in contracts to imply provisions that would contradict the ordinary meaning of the words of the bank guarantees in this way. (at p451)

13. The contractor sought to find assistance for its argument in the decision of this Court in Australasian Conference Association Ltd. v. Mainline Constructions Pty. Ltd. (In liq.) (1978) 141 CLR at p 335 . That case is however quite distinguishable from the present. There a builder had, as permitted by the building contract, provided a bank guarantee in lieu of a retention fund. The building owner had demanded payment under the guarantee and the bank had made payment in compliance with the demand. The question was not whether the bank was bound to pay but how the moneys in fact paid by the bank should be applied. It was held that since the guarantee was given for the purposes of a provision of the building contract it was right to conclude that the parties to the guarantee mutually contemplated and agreed that the moneys when provided by the bank would be dealt with as the building contract required. There was a difference of opinion between the members of the Court as to the effect of the building contract in the circumstances of the case, but that has no bearing on the present question. The decision in that case is of no assistance in deciding whether the Bank is liable to make payment to the Authority in the present case. (at p452)

14. For the reasons I have given, it seems to me clear that the Bank was obliged to the Authority to make payment when demand was made. It is unnecessary to consider whether it would be possible to grant to the contractor any relief against the Bank if it were established that the making of a demand by the Authority was a breach of its duty to the contractor, because, for the reasons which I am about to state, I consider that the Authority was entitled, as between itself and the contractor, to make the demands when it did. (at p452)

15. The right of the Authority to make demands under the two sorts of bank guarantee must be considered separately, and I turn first to the performance guarantees. (at p452)

16. It is clear that the bank guarantee for $1,500,000 was provided by way of alternative security under condition G4.2, and there is no reason to doubt that the bank guarantee for $100,000 was intended by the parties also to be governed by the provisions of condition G4. Both those bank guarantees were therefore provided "as security for Contractor's due and faithful performance of the Work": condition G4.1. The submission made on behalf of the contractor was that "the Work" had been duly and faithfully performed and that therefore the Authority had no right to resort to the security. The basis of this submission was that "performance of the Work" in condition G4.1 means performance of the physical work, and not performance of the contractual obligations of the contractor. In support of this argument reference was made to the definition of "the Work" in condition G1.12 which, it was said, refers to work of a physical kind, and to the provisions of condition G30.1, under which the contractor is entitled to a certificate of acceptance "upon completion by Contractor of the Work so that the pipeline shall have been constructed to the point which is shown on the alignment sheets as marking the end of the pipeline and so that all of the Works shall have been performed by Contractor in accordance with all of the covenants, terms and conditions of the Contract . . . ." If "the Work", in this condition, meant "the contractual obligations", the consequences would be inconvenient in a way which the parties to the contract cannot have intended. The date on which the contractor obtains, or becomes entitled to obtain, a certificate of acceptance is vitally important for a number of purposes under the contract. It marks the time when the Authority can no longer retain the balance of ten per cent of the moneys deducted from progress payments (condition G24.5), the time up to which liquidated damages are payable in the event of delay in completion (condition G26), the time after which payment is to be made to the contractor (condition G30.5) and the time of commencement of the defects liability period (condition G35.1). The contract cannot possibly mean that if the contractor has been guilty of delay in performance he can never become entitled to a certificate of acceptance. It is apparent that when condition G30.1 uses the words "completion . . . of the Work", or "all of the Work shall have been performed", it refers to completion and performance of the physical work, whether or not there has been a compliance with the provisions of the contract as to time, but this does not assist the contractor in the construction which it seeks to place on condition G4.1. That clause uses the words "due and faithful performance of the Work" and in this case the word "due" appears to imply that there has been a proper compliance by the contractor with its contractual engagements, including those as to time. However, I need not rest my decision on that ground. There is nothin in the words of condition G4 that suggests that the Authority can only demand payment under an alternative security provided under condition G4.2 if there has been a failure by the contractor to perform the work. The primary security, to be provided under condition G4.1, is of course cash, to be paid on or before the execution of the contract. The Authority is not required to prove that there has been a want of "due and faithful performance of the Work" as a condition of receiving payment under condition G4.1. The payment is to be made on or before the execution of the contract, and when paid is held as security. There seems to me nothing incongruous in holding that the Authority may resort to the alternative security in accordance with its own terms, and, having demanded and received payment under it, must hold the money received as if it were the sum provided under condition G4.1. It was submitted on behalf of the contractor that it was intended by condition G4.2 that the contractor should have the right to provide a security that was a true "alternative" to the payment of cash, and that a security would not answer that description if it could be converted to cash at the will of the Authority. It is unnecessary to consider whether condition G4.2 gave the contractor a right to require the Authority to accept any alternative security that contained terms and conditions which objectively could be regarded as reasonable, or whether it embodied no more than an agreement to agree, because in fact the contractor provided, without objection, the performance guarantees. Condition G4.2 says nothing as to the circumstances in which the Authority can demand payment under an alternative security. That question must be governed by the terms and conditions of the alternative security itself. If the terms of the bank guarantee or performance bond entitle the Authority to payment on demand, there is nothing in condition G4 to suggest that such a demand can only be made if there has been a want of due and faithful performance of the work. However, once demand has been made, and the money has been paid, the money must be held as security for the contractor's due and faithful performance of the work, as though it had been paid under condition G4.1. (at p454)

17. The retention guarantees were provided as a substitute for the retention of moneys under condition G24, and the submission on behalf of the contractor was that the Authority could only demand payment under those guarantees in the circumstances in which it might have had recourse to the retention moneys themselves. However, under the contract the Authority simply retains the moneys; it does not part with them until the events specified in condition G24 occur. The arrangement made between the Authority and the contractor entitled the latter to have the retention guarantees released at the same time and under the same conditions as were specified in the contract with respect to the retention moneys, but it did not prevent the Authority from resorting to the retention guarantees in accordance with their own terms. There was nothing in the arrangement that prevented the Authority from making the demands under the retention guarantees, although once having received payment by the Bank the Authority was bound to release the moneys to the contractor at the time when the moneys that would have been retained if the retentions had been made would have been released. That time had not arrived when the present proceedings were commenced. The occasion on which the retentions in excess of $250,000 (i.e., $750,000) were to be paid to the contractor - the completion to the reasonable satisfaction of the Authority of section 2B of the work (condition G24.8) - was not far off when proceedings were commenced, but it had not then arrived. (at p455)

18. It follows from what I have said that the Authority was entitled to demand payment when it did under both the performance guarantees and the retention guarantees. The contractor was not entitled to the relief which it sought and obtained from Rath J. It is not possible, in the circumstances, to consider whether the situation has been materially altered by the events that allegedly occurred after Rath J. had given judgment. I therefore express no view, one way or another, on the position that appears to have arisen in the present case, where the demands were made at a time when the Bank's obligation under the guarantees was still subsisting, but had not been met before the certificate of acceptance was issued. Similarly I express no opinion as to the effect of the alleged cancellation of the guarantees. (at p455)

19. It remains to notice a final argument of a different kind advanced on behalf of the contractor. It appears that from time to time the contractor asked the Authority for early payment of claims and that the Authority acceded to some of those requests without notifying or consulting the Bank. It was argued on behalf of the contractor that the prepayment by the Authority in those circumstances constituted a variation of the contract whose performance was guaranteed by the bank guarantees and that the Bank was accordingly discharged from its liability under the guarantees, in accordance with the principle discussed in such cases as Ward v. National Bank of New Zealand (1883) 8 App Cas 755, at p 763 . For the purpose of disposing of this argument, it is unnecessary to decide whether the bank guarantees were contracts of suretyship to which this principle applies. In each of the performance guarantees there was an express provision that the liability of the Bank should not be discharged or impaired by reason of any variation or variations in any of the stipulations or provisions of the contract or things to be done under it: cl. 3 of the performance guarantees. In any case, the contractor could have no right to claim that the early payments, made at its request and for its benefit, had the effect of avoiding the securities which it had furnished. If there was any right to treat the bank guarantees as discharged, it vested solely in the Bank but the Bank has made no objection on this ground to making payment. (at p455)

20. For these reasons, in my opinion, the appeal should be dismissed. (at p455)

STEPHEN J. This appeal concerns four documents which the appellant, a pipe-laying contractor, caused its bankers, Australia and New Zealand Banking Group Ltd., to issue to The Pipeline Authority. Their form, the circumstances in which they came to be given and the events which have subsequently led to this appeal appear in the judgment of Gibbs J. (at p456)

2. By each of the four documents (which for convenience I shall refer to as guarantees, the name the parties gave them) the Bank "unconditionally undertakes" to pay on demand whatever amount, up to a specified amount, the Authority may demand. Consistently with their description as unconditional, these guarantees are, in themselves, entirely unqualified save only for express limitations as to their amount and duration. (at p456)

3. The Authority made demand under each document, whereupon the contractor, in an action in the New South Wales Supreme Court against the Authority and the Bank, sought and obtained a declaration that these demands were void and injunctions restraining the Bank from "honouring" the guarantees and from paying the Authority pursuant to the demands. It also obtained other declarations and orders in its favour, including an injunction restraining the Authority from making any further demands upon the Bank otherwise than in specified events. On appeal the Court of Appeal set aside all these orders and declarations and it is from its order that the contractor now appeals to this Court. (at p456)

4. The contractor had no prior warning of the making of demands by the Authority on the Bank. Consequently it could only institute proceedings after those demands had already been served upon the Bank although before the Bank had complied with them by paying over to the Authority the moneys demanded. Faced with that situation and with the unqualified nature of the Bank's so-called guarantees, which were on their face unqualified promises to pay on demand, only two possible contentions appear to have been open to the Contractor if it were to prevent payment being made to the Authority, with a consequential liability to the Bank being incurred by the contractor. It could seek to have implied into the Bank's guarantees some qualifications, as, for instance, a condition that the Bank should only pay upon a demand given in some circumstance which, under the terms of the construction contract, had not yet in fact arisen. It could, in the alternative, look rather towards relief directed primarily against the Authority, alleging that it was in breach of contract in making demands upon the Bank and seeking orders which would prevent effect being given to those demands. (at p456)

5. It was upon the second of these two bases that the contractor succeeded at first instance. As to the other basis, his Honour, in the case of two of the guarantees, the performance guarantees, left open the question whether the Bank's obligation to the Authority was unqualified once a demand for payment was made. Of the other two guarantees, the retention guarantees, his Honour said that, on demand being made, an unqualified obligation to pay arose as between the Bank and the Authority. The relief which his Honour gave the contractor was, accordingly, not based upon any qualification of the Bank's absolute obligation to the Authority under the guarantees. It depended, rather, upon the view that the Authority was in breach of contract with the contractor in making the demands when it did. (at p457)

6. On appeal, the Full Court held that the Authority was not in breach of contract and that, even if it had been, that would not entitle the contractor to a declaration that the demands were void, nor, the demands having been given, to any order restraining the Bank from satisfying the obligation to the Authority which the demands had created. Their Honours expressly rejected the notion that any qualification of the absolute obligation of the Bank to the Authority could arise either by the implication of a qualifying term or as a matter of construction. (at p457)

7. Their Honours were, with respect, entirely correct in their conclusion that none of the four guarantees is, by any process of implication or construction, to be deprived of the unqualified operation which its express words dictate. Not only does the clear, indeed empathic, language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. Once a document of this character ceases to be equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is "as good as cash" can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being "as good as cash" in the eyes of those to whom it is issued is essential to its function. In Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1978) QB 159, at p 171 Lord Denning recently described the performance guarantee as standing "on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. . . . (It) must pay according to its guarantee, on demand, if so stipulated, without proof or conditions". That their constant equivalence to cash, awaiting only a demand before materializing as cash, was precisely the purpose of the guarantees in the present case clearly appears from the terms of the construction contract which here gave rise to two of them and from the dealings between contractor and Authority which brought the other two into existence. (at p458)

8. Accordingly the Bank was, in my view, obliged to pay in accordance with the Authority's demands made under the guarantees issued to it by the Bank; it was irrelevant to the existence of this obligation on the part of the Bank whether the giving of any of those demands involved the Authority in breach of contract with the contractor. (at p458)

9. There remains the basis upon which the trial judge did accede to the contractor's claim for relief, a basis which necessarily involves two propositions each of which was rejected in the Full Court: first, that the Authority was in fact in breach of contract as against the contractor in making those demands and, secondly, that in that event the contractor, notwithstanding demands having been made on the Bank which were effective as between it and the Authority, was entitled to such relief from the Court as would prevent the amount of the demands from passing from the Bank to the Authority. (at p458)

10. It will be unnecessary to determine the correctness of the second proposition if the contractor fails on the first, and as to the two performance guarantees it must fail because of the terms of the guarantees themselves. These two guarantees were procured by the contractor and accepted by the Authority "by way of alternative to a cash security" pursuant to cl. G4 of the construction contract. They stood in place of cash securities and once they were tendered and accepted the relevant rights of the Authority depended upon their terms. Since their terms provided for an unqualified right to demand payment at any time, this must be taken to have represented the intention of the parties when agreeing to the substitution of these guarantees in place of payments of cash. By the arrangement as so understood the interests of both parties were advanced: the contractor deferred for the time being, and perhaps altogether, the need to make any payment of security moneys, the Authority, while thus assisting the contractor so far as the latter's liquidity was concerned, at the same time preserved to itself the right at any time, by making a demand, immediately to obtain payment of the full amount of the security moneys. (at p458)

11. It is, then the very nature of the performance guarantees which in their case renders unacceptable the contractor's first proposition. Had the construction contract itself contained some qualification upon the Authority's power to make a demand under a performance guarantee, the position might well have been different. In fact the contract is silent on the matter. (at p459)

12. It is instructive to recall that had the parties adhered to the concept of security in the form of a cash payment, which is what cl. G4 primarily contemplates, there would be no doubt as to the position: once paid, that cash would thereafter be held by the Authority as security and it would perform that function from the mement that it was paid. It would, I think, be curious were the substitution of a guarantee for such a cash payment to affect detrimentally the secured position of the Authority. Yet this is a necessary consequence of the acceptance of the contractor's submission, since it is said that the Authority must first establish some want of due and faithful performance on the contractor's part before it may, be making a demand, place itself in as favourable a position as it would have occupied had the security originally been provided in cash. To regard this as the consequence of the giving by the contractor of the present performance guarantees, unqualified as they are in form, appears to me to be more curious still. (at p459)

13. The retention guarantees, unlike the performance guarantees, do not depend upon cl. G4 of the contract but are related to cl. G24, concerned with retention moneys. That clause provides for no alternative, such as the furnishing of a guarantee, to the actual holding back by the Authority of portion of the moneys, described as retentions, otherwise due to the contractor; it was only by subsequent agreement of the parties that retention guarantees were substituted for cash retentions. That agreement contains no express terms restricting the making of demands. Once again, then, although in different circumstances, the contract of the parties is silent concerning the making of demand under the guarantees. Considerations not very different from those to which I have referred in connexion with the performance guarantees seem to me to make it clear that, as between contractor and Authority, demands may be made under the retention guarantees at any time and without any condition precedent being satisfied. The entirely unconditional form of the guarantees agreed upon, including their express reference to payment by the Bank "without further reference to the Contractor"; the original right of the Authority to retentions, which was only altered when, after retentions had accumulated in the Authority's hands, the contractor asked to be allowed to provide guarantees instead; the contemplation of the parties that the ultimate release of these guarantees would occur at the same time and upon the same conditions as would have applied to retentions: all this points clearly enough to this conclusion and there appear to me to be no indications to the contrary. (at p460)

14. The Authority was, I think, entitled as against the contractor to revert at any time to the position as it originally existed by making demand under the retention guarantees. If it should do so it would, of course, then hold the moneys received from the Bank upon the same terms as if they were retentions which had been retained under cl. G24 and with which it had never parted. (at p460)

15. It follows that in my view the Authority was entitled as against the contractor to make the demands it did; they involved no breach of contract. Accordingly I would conclude that the Full Court was correct in setting aside the order of the learned primary judge. I need, in conclusion, only add that I agree with all that Gibbs J. has said in his reasons for judgment concerning three matters: the events which are said to have arisen since the hearing at first instance, the contractor's contention that the Bank was discharged from liability by reason of the Authority having acceded to certain requests by the contractor for early payment of claims and the reasons why the recent decision of this Court in Australasian Conference Association Ltd. v. Mainline Constructions Pty. Ltd. (In liq.) (1978) 141 CLR at p 335 has no direct application to the present case. (at p460)

16. I would dismiss this appeal. (at p460)

MASON J. I would dismiss this appeal for the reasons given by Gibbs J. (at p460)

MURPHY J. This appeal concerns the obligation of the Australia and New Zealand Banking Group Ltd. to pay moneys on demand to the respondent, The Pipeline Authority, in accordance with undertakings contained in documents described as "performance guarantees" and "retention guarantees" made by the Bank in favour of the Authority. The undertakings in the performance guarantees, one for $1,500,000 and another for $100,000, were in the form:
"The Bank unconditionally undertakes and covenants to pay on demand any sum or sums which may from time to time be demanded in writing by Owner up to a maximum aggregate sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000-00) to be held by Owner as security for and until the performance and completion by Contractor of all of the conditions of the said Contract in all respects." (at p461)

2. The description, "Owner", is a reference to the Pipeline Authority, and the description, "Contractor", is a reference to the appellant, Wood Hall Limited, which had contracted to build a pipeline for the Authority. The undertakings in the retention guarantees were in the form:
"At the request of the abovenamed Contractor and in consideration of your, at the request of this Bank, agreeing not to withhold cash retention money from payments due to the said Contractor under the abovementioned Contract, the Australia and New Zealand Banking Group Limited, unconditionally undertakes to pay on demand any sum that may from time to time be determined by you to a maximum of Seven Hundred and Fifty Thousand Dollars ($750,000-00)." (at p461)

3. The appellant's contention that some implied condition qualified the undertakings has no merit; the undertakings were made "unconditionally". The documents created unconditional obligations to pay the sums on demand. The appellant relied on Australasian Conference Association Ltd. v. Mainline Constructions Pty. Ltd. (In liq.) but that dealt with disposition by the recipient of moneys paid by a Bank under a similar document and, is not in point. (at p461)

4. The undertakings operate in the manner expressly stated. In determining the rights inter se of the Authority and the Bank under the documents, regard should not be had to any condition contained in any contract or any arrangement between the Authority and the contractor. On demand by the Authority the Bank was obliged to pay in accordance with the express terms of the undertakings. (at p461)

5. If undertakings in this form were construed so that a Bank must or might have regard to rights and liabilities arising from the performance of a contract between an owner and a contractor before it was required or entitled to pay an owner, then the commercial effectiveness of such undertakings would be destroyed: all the legal and factual complexities of a building dispute would be injected into an otherwise straightforward unconditional undertaking. (at p461)

6. The appeal should be dismissed. (at p461)

Orders

Appeal dismissed with costs.