L.U. Simon Builders Pty Ltd v Cardigan Commercial Pty Ltd (No 2) [2026] VSC 33

Chris Hey  |  Michael Lo  |  Andre Liacos

Key takeout

The Victorian Supreme Court held that a construction contract contained an implied term entitling the contractor to pay the principal the full cash value of the outstanding bank guarantees in exchange for their return. The decision has implications for both contractors and principals when considering the return of bank guarantees in exchange for cash.

Facts

Cardigan Commercial Pty Ltd (principal) engaged L.U. Simon Builders Pty Ltd (contractor) to construct a mixed-use building in Carlton, Victoria. Pursuant to the terms of the contract, the contractor provided the principal with two bank guarantees as security.

Various disputes arose between the parties, including a claim against the contractor for liquidated damages, and the principal intended to call upon the bank guarantees.

The contractor unsuccessfully sought injunctive relief restraining the principal from having recourse to the bank guarantees. Following that decision, the contractor offered to pay the principal the full cash value of the bank guarantees in exchange for their return. The principal refused, stating that it wished to retain the bank guarantees as ‘leverage’ over the contractor.

The contractor commenced the current proceedings seeking orders allowing it to pay the principal the cash value of the bank guarantees, unconditionally, in exchange for their return. At the outset of the hearing, the parties agreed to the release of the first bank guarantee in exchange for cash. The live dispute therefore concerned only the second bank guarantee.

Decision

The court held that the construction contract contained an implied term of fact to the effect that the contractor may pay the principal the full value of the bank guarantees (less any parts already paid) in cash at any time, following which the principal is to release the bank guarantees to the contractor, who shall have no obligation to provide replacement or other security.

The court applied the established criteria for the implication of a term in fact from BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, as restated by the Victorian Court of Appeal in Feeney v Southstar Homes Pty Ltd [2024] VSCA 153, being that the term must be reasonable and equitable, necessary to give business efficacy to the contract, so obvious that it ‘goes without saying’, capable of clear expression, and must not contradict any express term of the contract.

The court found that the approved form of unconditional undertaking described in the contract expressly permitted the financial institution which issued the bank guarantees to, at any time, pay the principal the sum equating to the value of the bank guarantees, whereupon its liability would immediately cease. Delany J reasoned that it would be an odd result if the financial institution had this ability, but the contractor could not itself directly pay out the same sum to the principal, as both courses result in the same contractual consequences. On this basis, the court held that the contract would be commercially ineffective without the implied term, and that its implication was necessary to give business efficacy to the contract.

The court held that the implied term was reasonable and equitable, having regard to the established nature of a bank guarantee being ‘as good as cash’. Delany J further held that the term was so obvious that it ‘goes without saying’, noting that authorities dealing with injunctive relief to restrain calls on bank guarantees have recognised that it is open to a contractor to pay the amount of the guarantee to avoid reputational damage arising from a call. The court rejected the principal’s submission that the bank guarantees were intended to provide it with commercial leverage, holding that the purpose of the security was to ensure the due and proper performance of the contract, not to compel performance by threat of reputational harm.

Finally, the court confirmed that the implied term did not contradict any express term of the contract. In particular, the court distinguished the contractor’s unconditional cash payment from a substitution of security under clause 5.3 of the contract. Unlike a substitution, which requires the principal’s consent in its absolute discretion, the cash payment left the principal free to deal with the funds as it wished, with no terms or conditions of the contract attaching to the use of the cash once paid.