Ability to call upon a bank guarantee
Landlords accepting a bank guarantee as security should be aware of the recent NSW Supreme Court decision FMT Aircraft Gate Support Systems v Sydney Ports Corporation  which narrowed the test for the entitlement to claim upon a guarantee.
Landlords seeking recourse to a bank guarantee will now have to demonstrate that they have an arguable claim rather than satisfying the more subjective test of establishing a bona fides belief in a claim.
FMT and its joint venture partner were engaged by Sydney Ports Corporation to design, manufacture and supervise the construction of a gangway at the Overseas Passenger Terminal in Circular Quay, Sydney.
On 20 June 2007, the parties entered into a Contract for the works in the form of AS4910-2002.
FMT provided a bank guarantee in the amount of $390,000 pursuant to the Contract which was expressed to expire on 31 July 2010. On 9 July 2010, Sydney Ports call upon the bank guarantee for liquidated damages and damages for defective workmanship it claimed were due under the Contract.
Clause 5.2 of the Contract provides as follows:
‘The Purchaser [Sydney Ports] may have recourse to security where the Purchaser has any claim or entitlement to payment of damages, costs or an amount of debt due by the Contractor [FMT] to it under this contract’.
Justice Pembroke held that although it is ‘tempting’ to make generalised statements about the interpretation of clauses entitling a party to claim upon a guarantee, it is important that each clause be interpreted on its own construction. To this end, the Court carefully examined clause 5.2 of the Contract and determined that the word ‘entitlement’ was used specifically to broaden the circumstances in which Sydney Ports would have recourse to the security.
Courts have previously interpreted the use of the word ‘claim’ in clauses such as 5.2 of the Contract as requiring only a ‘mere honest or bonafide belief in a claim’ to be able to call upon the performance guarantee . However, Justice Pembroke held that this test was too subjective and that more was required despite having already established that the phrase ‘claim or entitlement’ was specifically used to broaden the circumstances in which Sydney Ports would have recourse to the guarantee.
The more appropriate test was found to be whether Sydney Ports had ‘an arguable claim – one that is not specious, fanciful or untenable’.
As an aside, Justice Pembroke also observed that it is not necessary to quantify a claim for damages in order to be entitled to have recourse to the security. This is a matter for determination at a later stage.
This case highlights the importance of carefully worded guarantee provisions in all Contracts where a performance guarantee is required. In particular, parties should consider whether the guarantee provisions in otherwise ‘standard’ form Contracts is suitable to their requirements.
Landlords should now think twice before claiming upon a bank guarantee. They should ensure that they have an ‘arguable claim’ to do so, rather than a ‘mere honest belief’ in a claim.
  NSWSC 1108
  FCAFC 136
Penny Evans, Partner