In L.U. Simon Builders Pty Ltd v Cardigan Commercial Pty Ltd (No 2) [2026] VSC 33, the Supreme Court of Victoria ordered a principal to release a bank guarantee where the contractor offered to pay the secured amount in unconditional cash.

Pursuant to the terms of a design and construct contract between L.U. Simon (‘Contractor’) and Cardigan Commercial (‘Principal’), the Contractor provided the Principal with two bank guarantees as security for due and proper performance of the contract.

The bank guarantees were the subject of various disputes between the parties, including a failed injunction application by the Contractor seeking orders restraining the Principal from having recourse to the guarantees. Following Sloss J’s judgment, the Contractor offered to pay the Principal the full value of the guarantees in exchange for their return. The Principal refused the Contractor’s offer, which in turn led to the Contractor seeking urgent relief.

At the hearing, the Contractor sought an order allowing it to pay the Principal, unconditionally, the amount of the second guarantee to secure performance of the defect rectification works in cash, following which the Principal would return the guarantee to the Contractor. The Contractor’s argument was advanced on the basis that the cash payment would leave the Principal in the same position as it would be if it had made a call on the guarantee, rather than on the basis of the cash payment being a substitute for the security as provided for under the contract. The Principal opposed the application and sought to retain the guarantee.

One of the issues before the Court was whether the contract included an implied term that the Contractor could exchange the guarantee for cash at its discretion. Ultimately, the Court agreed to imply a term of fact into the contract which:

• permitted the Contractor, at its discretion, to pay the secured amount in cash to the Principal;
• upon such payment, required the Principal to release the bank guarantee; and
• did not require the Contractor to provide replacement or alternative security.

In reaching this conclusion, the Court reasoned that:

• implying the term was reasonable and equitable, and consistent with the established nature of bank guarantees being “as good as cash”;
• the financial institution that issued the guarantee could discharge its liability at any time by paying the guaranteed sum in cash and it would be inconsistent if the Contractor could not directly make the cash payment;
• as payment in cash by the Contractor had the same contractual outcome as the guarantee being paid, the implied term was necessary to provide commercial efficacy to the contract; and
• the bank guarantee was not intended to provide the Principal with commercial leverage to compel performance of contractual obligations.

As this case was decided on the specific facts, it will be interesting to see how the judgment is applied in subsequent cases concerning recourse to a bank guarantee.

The decision can be found here.