Calling Upon Contractual Security: The New Notice Requirement and the Option to Pay Cash to Avoid Reputational Risk

Unconditional bank guarantees, payable on demand, are a common form of security provided by contractors under administered construction contracts. A dispute over whether the principal is entitled to call on the guarantee will not usually prevent the bank from honouring it.

The usual remedy for a contractor aggrieved by a potentially wrongful call is to seek urgent interlocutory injunctive relief before the guarantee is presented to the bank. That requires the contractor to have received notice of the proposed call before it is made.

Not all contracts contain clauses requiring the principal to give such notice. However, the newly inserted section 17H of the Building and Construction Industry Security of Payment Act 2002 (which came into effect on 15 April 2026) now requires in Victoria that a minimum of five days’ written notice must be given before any recourse is had to a bank guarantee or other form of performance security.[1] The notice must specify the contractual provisions relied upon by the principal and describe the circumstances said to entitle the principal to have recourse.

But even where notice is given, injunctive relief remains difficult to obtain absent fraud or unconscionability. It is now market standard for contracts to be drafted so that the contractor bears the risk of any wrongful call by the principal.

In L.U. Simon Builders Pty Ltd v Cardigan Commercial Pty Ltd [2025] VSC 655, the contractor sought an injunction to restrain the principal from calling on a bank guarantee issued by the ANZ Bank. The contractor acknowledged that the principal had a contractual right to call upon the security but argued that the right was vitiated by misleading and deceptive and unconscionable conduct in breach of the Australian Consumer Law. Sloss J refused the injunction, not being satisfied that there was a serious question to be tried on the contractor’s case.

After receiving the Court’s ruling but before the principal presented the guarantee to the bank, the contractor offered to pay the principal the full cash equivalent of the bank guarantees in exchange for their return. In doing so, the contractor sought to avoid the detrimental effect that the cashing of the guarantees might have on its commercial reputation with the ANZ. The principal refused.

That refusal led to a further urgent application, determined by Delany J in L.U. Simon Builders v Cardigan Commercial (No 2) [2026] VSC 33. The contractor argued that a term should be implied into the contract to the effect that the security could be exchanged for cash. The principal contended that such a term should not be implied, as it would fundamentally subvert the parties’ bargain by depriving the principal of its right to decide when and how to realise its contractual security.

Delany J found in favour of the contractor, implying the following term into the contract:

“The Contractor may pay out the Security at any time without being required to do so by paying to the Principal the amount of the Security in cash, less any part or parts that previously have been paid following which the Principal is to release the Bank Guarantee/s to the Contractor and the Contractor shall have no obligation to provide replacement or other security.”

His Honour found that the implication of the term satisfied the well-known test set out by the Privy Council in B.P. Refinery (1994) 180 CLR 266 — namely, that it was consistent with and did not contradict the express terms of the contract, was necessary to give the contract business efficacy, was reasonable and equitable, and was capable of clear expression.

The critical point for practitioners is that principals cannot insist upon retaining bank guarantees where a contractor has made an unconditional cash payment in exchange for the release of those guarantees. Contractors may elect to do so in order to avoid the potential reputational harm to their relationship with their bank that may follow from a cashed guarantee. However, a principal could avoid the implication of such a term by including an express provision in the contract that precludes the contractor from substituting cash for the security.

Martin Scott KC and Fabian Brimfield