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  • Performance bonds are regularly employed by parties in a vast range of commercial enterprises including, most notably, in international commerce and in property transactions.
  • They are to be construed in accordance with the usual principles of contractual interpretation.
  • However, the dual principles of strict performance and autonomy which are generic to performance bonds means that unlike ordinary contracts, no resort can be had to the underlying contract (ie the agreement pursuant to which a performance bond has been issued) in construing the obligations under the bond.

Performance bonds, sometimes called bank guarantees, are typically issued by a financial institution at the request of a party to a contract. Performance bonds are often issued pursuant to an obligation contained in a construction contract. They take the form of a promise by the issuing institution that it will pay to the beneficiary named in the bond, an amount up to the limit set out in the bond unconditionally or on specified conditions and without reference to the terms of the contract between the parties.

The primary question in Simic v New South Wales Land and Housing Corporation [2016] HCA 47, determined by the High Court on 7 December 2016, was whether the second respondent (ANZ) as the issuer of a performance bond, had an obligation to pay on demand of the New South Wales Land and Housing Corporation (Corporation), a party claiming to be the beneficiary which, due to an error on the part of the requesting party, was not the beneficiary actually named in the bond.

That case turned on the following issues:

  • Whether, as a matter of construction, it is possible to regard the Undertakings as being in favour of the Corporation, instead of a named ‘Principal’ that did not exist; and
  • If not, should the Undertakings be rectified so that each is in favour of the Corporation?

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