The Principal’s right of recourse to performance security

Background

The well-known Ivy complex in Sydney has recently caught the attention of those in the construction industry in the context of a Contractor's attempt to restrain a Principal from converting an unconditional insurance bond. It has raised concerns in the market as to whether certain forms of performance security are more bankable than others. Although the matter was heard by both the Supreme Court (Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited [2010] NSWSC 1101) and the Court of Appeal, neither Court expressed any concern as to the integrity of insurance bonds. Any misgivings about types of security are misplaced in the result of this case, as the case has greater implications for the drafting of contractual regimes for recourse to security to rectify defects. The case shows that any precondition to recourse to security, particularly material non-compliance with the contract, can create a high bar on calls to security. Despite the significance of