Bank Guarantees
Cases
Enka Insaat Ve Sanayi AS v Banca Popolare Dell’alto Adige SPA
[2009] EWHC 2410
Teare J
The Guarantees
The Advance Payment Guarantees given by BP provided for English law and exclusive jurisdiction. They provided as follows:
“We, the undersigned [BP] ………………..hereby unconditionally and irrevocably guarantee to pay without delay to [ENKA] within 5 (five) business days upon presentation by [ENKA] to us of the first and any subsequent written demands duly signed by [ENKA’s] authorised signatory (the Demand(s)) any sums specified in such a Demand up to an amount not exceeding ……………..(the “Guaranteed Amount”).
The Demand shall state that:
1. [F&R] has failed to fulfil its obligations to the Contractor under the Subcontract;
2. accordingly [ENKA] is entitled to receive payment of the Advance Payment.
Payment to [ENKA] of the amount contained in the Demand shall be without the need for proof or conditions, and irrespective of the validity, and effects of the abovementioned Subcontract and waiving all rights of objection and defence arising therefrom. The Demand(s)s shall be conclusive evidence of our liability and of the amount of the sum or sums which we are liable to pay to the Contractor, notwithstanding any objection made by the Subcontractor or any other person.
More than one demand may be made hereunder prior to the Expiry Date ….Our maximum aggregate liability under or connection with this Guarantee shall not exceed the Guaranteed Amount which amount shall be decreased by the amount as being recouped by way of deduction from the Subcontractor’s monthly invoices upon presentation to us of the relevant invoices duly signed and stamped by [ENKA].”
The Performance Guarantee provided by CRB also provided for English law and jurisdiction. It was in very similar terms save that the demand was to state:
“1. [F&R] has failed to fulfil its obligations to the Contractor under the Subcontract;
2. accordingly the Contractor is entitled to receive payment under this Guarantee.”
The clause providing that more than one demand may be made was in the same terms but ended by saying:
“……..….Our maximum aggregate liability under or in connection with this Guarantee shall not exceed the Guaranteed Amount which amount shall be reduced by any partial amounts already paid by us under this Guarantee. “
The material events
On 26 November 2008 the Owner gave ENKA 14 days notice of termination of the main contract and made demands on guarantees put in place under the main contract by ENKA.
On 2 December 2008 ENKA demanded payment from BP pursuant to the Advance Payment Guarantees in the following terms:
“We hereby state that,
1. [F&R] has failed to fulfil its obligations to us under the subcontract; and
2. Accordingly we as the Contractor are entitled to receive payment of the Advance Payment.
Therefore according to the terms and conditions of the guarantee we kindly request you to pay us, within five business days, the amount of USD 10,346,739 [or USD 3,448,913]……….”
On 2 December 2008 ENKA demanded payment from CRB in the following terms:
“We hereby state that,
1. [F&R] has failed to fulfil its obligations to us under the subcontract; and
2. Accordingly we as the Contractor are entitled to receive payment under this Guarantee.
Therefore according to the terms and conditions of the guarantee we kindly request you to pay us, within five business days, the amount of USD 1,815,218 ……….”
On 22 December 2008 ENKA gave notice to F&R terminating the sub-contract.
ENKA does not contend that as at 2 December 2008 F&R was liable to repay the Advance Payments or that, although it is said that F&R was in breach of the sub-contract in several respects, that such breaches had caused any measurable loss to ENKA. The demands were signed by Mr. Mehmet Gozen, the Deputy General Manager of ENKA. He has said in his witness statement as follows:
“On 2 December 2008 I decided that ENKA should make demands under the Banca Popolare guarantees. At that date I believed that the Banca Popolare guarantees were in effect, and that ENKA was entitled to make demand under those guarantees. ………….
I believed on 2 December 2008 that F&R had failed to fulfil its obligations under the subcontract, and that accordingly ENKA was entitled to receive payment under the guarantees…..That was my belief on 23 April 2009, and I continue to believe that that is the case. The guarantees were expressed to be payable on demand. The demand was required to state that F&R had failed to fulfil its obligations to ENKA under the subcontract, and that accordingly ENKA was entitled to receive payment of the amounts guaranteed. The demands made on 23 April 2009 (and 2 December 2008) made those statements. ……………I decided that those demands should be made by ENKA. When I made those decisions I believed that F&R was in breach of the subcontract, and that accordingly ENKA was entitled to receive payment of the performance guarantee and the amounts guaranteed under the advance payment guarantees.
I believed F&R was in breach of the subcontract for the reasons referred to by Mr. Bevan. Since it was in breach, ENKA was entitled to receive payment of the performance guarantee and of the amount of the advance payments net of any amounts already repaid by F&R by way of deduction from F&R’s monthly invoices (as stated in the advance payment guarantees). Since none of the advance payments had been repaid already, ENKA was entitled to receive the full amount of the advance payments. That was my belief at the time of the demands on 23 April 2009 (and 2 December 2008) and it remains my belief.
I do not understand the relevance of the assertions by Ms. Bachmann that the breaches by F&R were not “causative of any loss”. The guarantees did not require that the demand state that the breaches by F&R had caused any particular loss. …………………..”
On 7 January 2009, after the sub-contract had been terminated, ENKA claimed that F&R no longer had a right to retain the advance payments and informed F&R that they had commenced proceedings to recover those sums (and those due under the performance guarantees) from the guarantor banks.
It was later discovered that a formal requirement of the advance payment guarantees had not been complied with as at 2 December 2008 and so it is accepted by ENKA that the demand made on 2 December 2008 under those guarantees was not valid. The formal requirement was later satisfied and a further demand in the same terms as that made on 2 December 2008 was made on 23 April 2009.
The rival contentions
Raymond Cox QC, counsel for ENKA, submitted that demands in the form required by both forms of guarantee have been made and that the banks are therefore liable to pay the sums demanded. He submitted that ENKA acted in good faith in making such demands.
Richard Salter QC, counsel for BP and CRB, submitted that in making the demand under the Performance Guarantee ENKA did not honestly believe that F&R was then liable to ENKA in the sum claimed of US$1,815,218, which demand was therefore fraudulent. CRB is not obliged to respond to a fraudulent demand. With regard to the Advanced Payment guarantees the argument is a little more complicated. It is not said that the demands made on 23 April 2009, after the sub-contract had been terminated, were made fraudulently. It is said that the demands made on 2 December 2008, before the sub-contract had been terminated, were made fraudulently in that when those demands were made ENKA had no honest belief that F&R was then liable to ENKA for the sums claimed of US$10,346,739 and US$3,448,913, which demands were therefore fraudulent. The making of such a demand is a breach of an implied condition (or a serious breach of an innominate term) in the Advance Payment Guarantees which, it was said in counsel’s Skeleton Argument, “had the effect of discharging BP from further liability under the Advance Payment Guarantees.” Accordingly, when the otherwise valid demands were made on 23 April 2009 BP was not obliged to respond to them because the Guarantees had by then been terminated.
The test on a summary judgment application
This is an application pursuant to CPR Part 24 which provides that the court may give summary judgment against a defendant if the defendant has no real prospect of successfully defending the claim and there is no other compelling reason why the case should be disposed of at trial.
The manner in which this rule should be applied where summary judgment is sought against a bank under a letter of credit or performance bond has been discussed by the Court of Appeal in at least three cases; Safa Ltd. v Banque du Caire [2000] 2 Lloyd’s Rep.600, Solo Industries UK Ltd. v Canara Bank [2001] 1 WLR 1800 and Banque Saudi Fransi v Lear Siegler Services Inc. [2007] 2 Lloyd’s Rep.47. The discussion in those three cases suggests that the manner in which CPR Part 24 should be applied where summary judgment is sought against a bank under a letter of credit or performance guarantee is not entirely clear.
In Safa Ltd. v Banque du Caire [2000] 2 Lloyd’s Rep.600 Waller LJ said at p.608:
“If a bank can establish a claim with a real prospect of success ……that the demand was fraudulent even it if had no clear evidence of fraud at the time of demand……it may also be unjust to enter summary judgment against the bank …. because the bank has a reasonable prospect of succeeding in a defence of set-off …………..”
Hale LJ agreed. Schiemann LJ did also, adding that the facts of that case were most unusual. That was a reference to the circumstance that the bank in that case was involved in the transaction in connection with which the letter of credit had been issued.
In Solo Industries UK Ltd. v Canara Bank [2001] 1 WLR 1800 Mance LJ discussed this statement of principle by Waller LJ. He said that a “real prospect” was a low test to satisfy. He did not consider that such a low test was appropriate as between a bank and the beneficiary of a letter of credit or performance guarantee. He said:
“The courts in the Harbottle[1] and Edward Owen[2] cases emphasised this, and, in my view, set a higher standard than “a real prospect of success” in relation to all these situations. Short of “established fraud”, a bank will not normally be allowed to raise any defence of set-off based on alleged impropriety affecting the demand.”
Mance LJ also had reservations about the test suggested in the United Trading case [1985] 2 Lloyd’s Rep. 554 (as reformulated to comply with CPR 24), namely, “whether there is a real prospect that, on the material available, the only realistic inference is that the beneficiary could not honestly have believed in the validity of its demands.” He observed that the courts in the Harbottle and Edward Owen cases made no reference to an “arguable case”. He agreed with the comment of Rix J in the Czarnikow-Rionda case [1999] 2 Lloyd’s Rep. 187, that “on any view ….the court should be careful not to allow too extensive a dilution of the presumption in favour of the fulfilment of independent banking commitments.” These comments of Mance LJ (with which Sir Martin Nourse and Potter LJ agreed) were obiter dicta because the actual decision in Solo concerned the test to be applied not when the defence raised by the bank was that the demand had been made fraudulently but when the defence raised by the bank was that the bank had been induced to issue the performance bond by a fraudulent conspiracy or representation.
In Banque Saudi Fransi v Lear Siegler Services Inc. [2007] 2 Lloyd’s Rep.47 Arden LJ reviewed Solo and said, at paragraph 16, that the test which found favour with the court in that case was a “heightened test” rather than that of a good arguable case. The actual decision in Banque Saudi Fransi concerned the test to be applied, not when the claim is against a bank under a performance bond, but when the claim is against a person who has given the bank a counter-indemnity, in which context Arden LJ said that the test was whether the defendant could show a real prospect that it will be able to prove the fraud exception at trial. Pill LJ agreed with Arden LJ and added some comments of his own. The third member of the court was Scott Baker LJ but his judgment does not appear to be reported.
In my judgment the test to be applied must be that of a “real prospect” because that is the test set out in CPR Part 24. I do not consider that this court is bound to apply a “heightened test” because the courts in Solo and Banque Saudi Fransi were not considering a claim against a bank under a guarantee where the defence was that the demand was said to be fraudulent. I therefore consider that the test in the present context is whether there is a real prospect that the Banks will establish at trial that the only realistic inference is that the fraud exception applies, that is, that ENKA could not honestly have believed in the validity of its demands.
However, there is considerable support for the view, which I accept, that in applying that test the Court must be mindful of the principle that banks, when sued on a letter of credit or performance bond or guarantee, need particularly cogent evidence to establish the fraud exception. Thus:
(a) In Turkiye Is Bankasi AS v Bank of China [1996] 2 Lloyd’s Rep.611 at p.616 Waller J. said, having referred to the United Trading case:
“That passage identifies the difficulty that a plaintiff has in succeeding in stopping payment on a performance bond. He may show an arguable case that the demand is not honest, but that is not sufficient. He must also establish that “the only realistic inference is that the demands were fraudulent.” “
His approach and decision were upheld by the Court of Appeal; see [1998] 1 Lloyd’s Rep. 250.
(b) In Czarnikow-Rionda v Standard Bank [1999] 2 Lloyd’s Rep.187 at p.202 Rix J. said:
“However, the fact that the claimant gets the benefit of a lower standard of proof for the purposes of a pre-trial hearing, places on the Court, as I believe the cases demonstrate, an additional requirement to be careful in its discretion not to upset what is in effect a strong presumption in favour of the fulfilment of the independent banking commitments.”
(c) In Solo Industries v Canara Bank [2001] 1 WLR 1800 at p.1813 Mance LJ repeated that warning:
“…the court should be careful not to allow too extensive a dilution of the presumption in favour of the fulfilment of independent banking commitments.”
(d) In Banque Saudi Fransi [2007] 2 Lloyd’s Rep 47 at p. 55 Pill LJ, whilst accepting that the test in CPR Part 24.2 applied said, at paragraph 34, that the task of showing a real prospect of proving that the beneficiary could not honestly have believed in the validity of its demands was “a high hurdle, as the authorities in my judgment recognise.”
The suggested fraud
The demands made on BP and CRB were in the form required by the terms of the guarantees. BP and CRB can only resist those demands if they were made fraudulently. BP and CRB say that a demand which the maker of the demand does not honestly believe to be correct is a fraudulent demand. Their reasons for saying that Mr. Gozen did not honestly believe the demands he made on behalf of ENKA were correct may be summarised as follows:
(i) The demands of 2 December 2008 were made as a precipitate reaction to the termination of the main contract on 26 November 2008 with no thought being given by Mr. Gozen to whether ENKA had entitlement to the sums claimed.
(ii) Mr. Gozen has not attempted to assess whether any and if so how much damage has been caused by F&R’s alleged breaches of the subcontract but has simply asserted that he was and remains of the opinion that “F&R had failed to fulfil its obligations under the sub-contract and that accordingly ENKA was entitled to receive payment.”
(iii) The alleged breaches are a “series of technical or administrative complaints which do not, and did not, in real sense matter.”
(iv) Any assertion of a belief that Mr. Gozen had that such breaches had caused a loss of US$1,815,218 (the maximum amount of the Performance Guarantee) would be unreasonable and incredible such that it cannot have been entertained.
(v) But Mr. Gozen does not make any such assertion. He states that he did not understand the guarantees to require that the alleged breaches by F&R had caused any particular loss.
(vi) Thus he did not apply his mind at all to the question of what sum if any ENKA was entitled to claim under the Performance Guarantees.
(vii) Further, Mr. Gozen’s belief that the Performance Guarantee did not require ENKA to assert that the alleged breaches of F&R had caused any particular loss was “astounding” and so uncommercial that there was sufficient evidence that the alleged belief was not one which he honestly held.
(viii) He has asserted that he believed that ENKA was entitled as of 2 December 2008 to payment of the full amount of the Advance Payments but has given no credible explanation for such belief. His suggested belief is so unreasonable and incredible that it cannot have been entertained. It “beggars belief” that he could have held such a belief. The letter dated 7 January 2009 shows that ENKA believed it could only make a demand under the advance payment guarantees once F&R was obliged to repay the advance payments.
(ix) Thus he did not apply his mind at all to the question of what sum if any ENKA was entitled to claim under the Advance Payment Guarantees.
Construction of the guarantees
Central to the Banks’ defence to this application is their contention that Mr. Gozen’s alleged belief is so remarkable and uncommercial that he could not honestly have held it. Counsel submitted that although the guarantees are autonomous instruments their economic function is to guarantee liability of F&R to ENKA. In that context the word “accordingly” implied a requirement that there must be a causal connection between the alleged breach and the amount claimed. The causal connection required that the sums claimed from the Banks were payable by F&R to ENKA, or at least that ENKA said or had reason to believe that they were so payable. This construction was said to be supported by the fact that both guarantees expressly contemplated demands of sums up to an amount not exceeding the Guaranteed Amount and expressly permitted more than one demand.
Counsel for ENKA submitted that “accordingly” simply required ENKA to state that it was entitled to receive payment from the Banks because F&R had breached its obligations. This was Mr. Gozen’s belief. There was no express requirement in either guarantee that ENKA must state that the breaches relied upon have caused loss to ENKAin the sums demanded or, in the Advance Payment guarantee, that ENKA is entitled to repayment of the advance payments by F&R.
In response Counsel for the Banks said that if “accordingly” simply required ENKA to state that it was entitled to receive payment from the banks because F&R had breached its obligations such an obligation added nothing to the statement of breach.
Neither party suggested that this short question of construction should not be determined on this Part 24 application. The Court is in as good a position to determine it now as it would be at trial.
In construing the performance and advance payment guarantees, that is, identifying the meaning which the words used reasonably convey, it is necessary to bear in mind the nature of performance guarantees or bonds (and hence of advance payment guarantees, for neither party suggested their nature was any different from performance guarantees or bonds) as revealed by the authorities. That is part of the background reasonably available to the parties, ENKA, CRB and BP.
In Edward Owen Engineering Ltd. v Barclays Bank International Ltd. [1978] 1 QB 159 Lord Denning concluded that a performance guarantee stood on a similar footing to a letter of credit.
“A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions.” (p.171 B)
Lord Denning had earlier observed that a performance guarantee can be called upon not only where there are substantial breaches of contract but also when the breaches are insubstantial or trivial (p.170 E). Lord Denning observed that this was in the nature of the penalty but nevertheless considered that this was the manner in which a performance guarantee operated.
Geoffrey Lane LJ said:
“Although this agreement is expressed to be a guarantee, it is not in truth such a contract. It has much more of the characteristics of a promissory note than the characteristics of a guarantee.” (p.175 D)
In Cargill International v Bangladesh Sugar and Food Industries Corporation [1996] 2 Lloyd’s Rep. 524 Morison J. said at p.528:
“The Court will not grant an injunction …unless there has been a lack of good faith. The justification for this lies in the commercial purpose of the bond. Such a bond is, effectively, as valuable as a promissory note and is intended to affect the “tempo” of the parties’ obligations in the sense that when an allegation of breach of contract is made (in good faith), the beneficiary can call the bond and receive its value pending the resolution of the contractual disputes. He does not have to await the final determination of his rights before he receives some moneys.”
A little later, also on p. 528, he said:
“However, it seems to me to implicit in the nature of a bond, and in the approach of the Court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an “accounting” between the parties in the sense that their rights and obligations will be finally determined at some future date. The bond is not intended to represent an estimate of the amount of damages to which the beneficiary may be entitled for the breach alleged to give rise to the right to call.”
In that case particularly clear words were used; the bond was “liable to be forfeited…if the Seller fails to fulfil any of the terms and conditions of this contract…and also if any loss/damage occurs to the Buyer due to any fault of the Seller.”
Those authorities suggest that ENKA’s submission as to the meaning or effect of the word “accordingly” is at least consistent with the manner in which performance guarantees have been understood to operate.
In the light of those authorities it is appropriate to consider whether the words which oblige ENKA to state “accordingly ENKA is entitled to receive payment” impose on ENKA an obligation either to state (expressly or by implication) or to have reason to believe (in the case of the performance guarantee) that ENKA has suffered damage in the amount claimed or (in the case of the advance payment guarantees) is entitled to repayment by F&R of the price paid in advance. I do not consider that they do, for these reasons:
(i) Whilst “accordingly” implies a connection between the breach by F&R and the liability of the Banks there is such a connection on ENKA’s construction in that the liability of the Banks to pay arises on demand following what ENKA states to be a breach by F&R. Such a construction is consistent with the manner in which performance bonds and guarantees have been understood to operate.
(ii) The Banks’ argument based upon the economic function of the guarantees is misplaced. As Geoffrey Lane LJ pointed out in the Edward Owen case the guarantees with which this case is concerned have more of the characteristics of a promissory note than of a guarantee. Their economic function is more in the nature of a secure payment to ENKA by the Banks than of a guarantee of F&R’s obligations. That is so notwithstanding that as between ENKA and F&R the guarantees are intended to secure the performance of F&R’s obligations.
(iii) The provision that the demand may be up to the amount guaranteed is consistent with the submission made on behalf of the Banks but it does not clearly point to a requirement that ENKA must state or have reason to believe that the amount demanded is its estimate of the damages suffered by it or that it is entitled to repayment of the price. The provision may have effect where ENKA has exercised its right to deduct 5% from the current or monthly payments as security for due performance by F&R or its right to deduct a further percentage by way of repayment of price paid in advance.
(iv) The provision that there may be more than one demand is consistent with the submission made on behalf of the Banks but I do not consider that it clearly points to a requirement that ENKA must state that the amount demanded is its estimate of the damages suffered by it or that it is entitled to repayment of the price. There may be many reasons why more than one demand is made, as the facts of this case illustrate.
Some reliance was placed by counsel for the Banks upon an observation in Balfour Beatty Civil Enegineering v Technical and General Guarantee Co. Ltd. (1999) 68 Con LR 180 at p.191 that the question was whether, when the demand was made by a contractor upon the guarantor, the persons acting on behalf of the contractor knew that the sum claimed was not due from the sub-contractor. That observation was relied upon by David Steel J. in Uzinterimpex JSC v Standard Bank plc[2007] 2 Lloyd’s Rep 187 at para. 107 in support of the proposition that a demand which the maker does not honestly believe to be correct as to its amount is a fraudulent demand. However, the terms of the guarantee in Balfour Beatty expressly required a statement that the sum demanded was due and payable; see p.182. The amount which a person is entitled to demand under a guarantee depends upon the true construction of the guarantee in question.
I therefore consider that the meaning which the word “accordingly” in both the Performance and Advance Payment Guarantees would convey to the reasonable commercial man familiar with the nature of performance guarantees and bonds is that the entitlement to the sum demanded from the Banks arises under the guarantees in circumstances where, and because, a demand has been made under the guarantees stating that F&R has failed to fulfil its obligations under the sub-contract. That is consistent with the manner in which such guarantees have been understood to operate and is, on that account, not unreasonable. If it had been intended that, when claiming upon the performance guarantee, ENKA could only demand such sum as it estimated represented the loss and damage caused by F&R’s breaches of contract the guarantee could easily have said so in clear terms. Similarly, if it had been intended that, when claiming upon the advance payment guarantees, ENKA could only demand such part of the advance payment as it claimed was at that time repayable the guarantees could easily have said so in clear terms. On the contrary “the demand shall be conclusive evidence of [BP’s] liability and of the amount of the sum or sums which [BP is] liable to pay to [ENKA], notwithstanding any objection made by [F&R] or any other person.” That ENKA does not need to assert an entitlement to repayment from F&R does not appear to me to be so unreasonable that it cannot be the meaning which the words of the guarantees reasonably convey. An ability to call upon the advance payment guarantees in the event of breach is consistent with ENKA being kept out of pocket in the amount of the advance payments (less any deductions from the monthly progress payments) only so long as F&R is not in breach.
Mr. Gozen’s alleged belief
Mr. Gozen’s alleged belief therefore reflects the true construction of the guarantees. It follows that I am unable to accept that his alleged belief is astounding and uncommercial or that it beggars belief. The basis for suggesting that his alleged belief was not honestly held therefore falls away, notwithstanding that the chronology certainly suggests that the demands of 2 December 2008 were a reaction to the termination of the main contract on 26 November 2008.
It was suggested that the terms of the letter dated 7 January 2008 assist BP because they show ENKA giving notice to F&R of a claim against the banks after F&R had become bound to repay the advance payments following the termination notice on 22 December 2008. But ENKA gave notice of proceedings which they had issued on 17 December 2008 prior to the termination notice dated 22 December 2008. I do not consider that the terms of the letter are so clear that they give rise to a real prospect that the Banks will establish at trial that the only realistic inference is that Mr. Gozen could not have honestly believed in the validity of the demands made on 2 December 2008.
Conclusion as to the performance guarantee
I have concluded that CRB (who provided the performance guarantee) has not shown a real prospect that it will establish at trial that the only realistic inference is that ENKAcould not honestly have believed in the validity of its demand of 2 December 2008. Since it is not suggested that there is any other compelling reason for trial I consider that ENKA is entitled to summary judgment against CRB. Whether ENKA can retain the amount of the guarantee will no doubt be decided in the arbitration in Moscow between ENKAand F&R.
Conclusion as to the advance payment guarantees
I have also concluded that BP (who provided the advance payment guarantees) has not shown a real prospect that it will establish at trial that the only realistic inference is that ENKA could not honestly have believed in the validity of its demands of 2 December 2008. Since there is no other compelling reason for trial ENKA is entitled to summary judgment against BP. Whether ENKA can retain the amount of the guarantees will no doubt be decided in the arbitration in Moscow between ENKA and F&R.
If, contrary to my view, BP can show a real prospect that it will establish at trial that the only realistic inference is that ENKA could not honestly have believed in the validity of the demands of 2 December 2008 BP must then show a real prospect that the guarantees had been terminated before the demands of 23 April 2009, which were not said to be fraudulent, had been made. This requires BP to show a real prospect that the demands of 2 December 2008 were a breach of a condition which BP accepted as terminating the guarantee before 23 April 2009. It is arguable that a fraudulent demand is a breach of an implied condition (see Jack, Documentary Credits paragraph 9.14) but I do not consider that the guarantees can be terminated in this way. They were unconditional and irrevocable guarantees. I do not consider that an irrevocable guarantee can be terminated by the guarantor in the manner suggested. The guarantor’s only defence to a claim on the guarantee arises when the demand is made fraudulently.
For the reasons which I have endeavoured to express I shall give judgment to ENKA on its claims against BP and CRB.
Note 1 [1978] 1 QB 146 [Back]
Note 2 [1978] 1 QB 159 [Back]
Lukoil Mid-East Ltd v Barclays Bank Plc
[2016] EWHC 166 (TCC)
Mr Justice Stuart-Smith :
Introduction
This is an application for summary judgment made by the Claimant [“Lukoil”] against the Defendant [“Barclays”] in the sum of US$7,115,034 plus interest, pursuant to a call it made on an on demand guarantee issued by the Defendant [“Barclays”] by letter dated 26 October 2015. By a counter-application Barclays applies for summary judgment against Lukoil on the basis that Lukoil’s demand was defective and that no obligation to make payment under the bond has arisen.
The applications raise a short point of construction. The material facts are not in dispute.
The Factual Background
Lukoil is an oil and gas company registered in Cyprus. It is the Operator of the West Qurna (Phase 2) oil field in South East Iraq. Barclays is a bank registered in England. Its business includes issuing (to contractual counterparties of its clients) on demand bank guarantees upon the provision by its clients of counter-indemnities (or other securities) and the payment of its charges.
In 2011 Lukoil engaged Baker Hughes Asia Pacific Limited (a company registered in the Cayman Islands) [“BH”] under a suitably detailed written contract known as Contract No. CY-11-8015-0060 to drill and complete 23 production wells in the Mishrif formation in the West Qurna (Phase 2) oil field on a turnkey basis (the “Contract”). The estimated Contract Price was US$142,300,680.
The Contract included the following relevant provisions:
i) Article 6.18 provided:
“Bank Guarantee
Within 10 days from the Effective Date of this Contract [BH] shall deliver to [Lukoil], as security for [BH’s] performance of its obligations under this Contract and its insolvency, an irrevocable, unconditional, on demand bank guarantee issued by an international bank rated not lower than B+ by international ratings agencies Fitch, Moodys or Standard and Poors and being in the form acceptable to [Lukoil], for 5% (five percent) of the estimated Contract Price… Such bank guarantee shall provide that, and [BH] shall ensure that, the bank guarantee remains valid until the 90th (ninetieth) day following handover, in accordance with Article 6.17, of the last well to be drilled and Completed under this Contract or earlier termination of this Contract. [BH] shall bear all costs and charges related to the issue and maintenance of the said bank guarantee.”
ii) Article 22 provided for Variations and for extensions of time to be given where reasonable and appropriate:
a) Article 22.1
“The scheduled Completion Dates established pursuant to this Contract and Key Dates shall be subject to adjustment only in accordance with the provisions of this Article 22 (Variations). Any Variation shall be governed by all the provisions of the Contract.
Any Variation is effective only when it is made in writing and agreed or determined in accordance with this Article 22.”
b) Article 22.2
“At any time during the term of validity of the Contract, the Company shall be entitled to initiate the introduction of changes in the Work, including:
(a) changes to any Detailed Drilling Program once it has been approved by the Company in accordance with Article 5.1.2;
(b) omission of any Work, cancellation of the supply of any equipment;
(c) change in the nature, quality or kind of any Work or equipment to be supplied as part of the Work;
(d) execution of Additional Work or supply of additional equipment.
For the purposes of the Contract the matters described in this Article 22.2, including items (a) to (d) inclusive, shall be referred to as a “Variation”. Any changes made through Variation shall be in a written form and shall be signed by the authorized representatives of the Parties.”
c) Article 22.11
“If the Contractor considers himself to be entitled to any extension of time under the Contract, the Contractor shall give notice to the Company, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable.
Subject to the foregoing paragraphs of this Article 22.11, the Contractor shall be entitled to an extension of the Key Dates as shall be reasonable in all the circumstances if and to the extent that completion of Work is or will be delayed by any of the following causes:
(a) a Variation (unless an adjustment to the Completion Date or Key Date has already been agreed under Articles 22.1 to 22.10);
(b) any delay, impediment or prevention caused by or attributable to the Company or the Company’s personnel (including as a result of breach of this Contract); or
(c) force majeure (as such term is defined in Article 19),
in each case whether occurring before or after the relevant Completion Date or relevant Key Date has expired, but, in any event, excluding delay which is due to any breach, neglect, or default of the Contractor or any person for whom the Contractor is responsible in accordance with the Contract.”
iii) Article 23 provided for BH to pay Lukoil liquidated damages for BH’s delay in achieving any of the Key Milestones by the Key Dates set out in Appendix No. 12.
iv) Article 24.7 was an entire agreement clause, which included the provision that: “No changes or amendments to this Contract shall be binding on either Party, unless executed in written form, duly signed and sealed by both Parties, unless otherwise set forth herein.” As we have seen already, Variations did not require to be sealed, having their own detailed contractual machinery;
v) Appendix No. 12 to the Contract, #1.10, provided for Key Milestones and Key Dates for achieving them, including “End of Completion of the last well (#23)” on 1 January 2013.
On or about 2 November 2011 BH delivered to Lukoil an irrevocable, unconditional, on demand bank guarantee issued by Barclays dated 2 November 2011 (the “Bank Guarantee”). It provided (with paragraph numbering added):
“OUR GUARANTEE REFERENCE: MRGI55024596
To: [Lukoil]
[1.] Whereas [BH] … has undertaken obligations under Contract No. CY-11-8015-0600. For Drilling and Completion of Production Wells Mishrif Formation in West Qurna (Phase 2) (hereinafter referred to as “the Contract”), and whereas the mentioned Contract states that [BH] shall provide a bank guarantee for the amount defined therein to secure the fulfilment of [BH’s] obligations under the Contract, and whereas we Barclays … agreed to provide [BH] with such a bank guarantee, we hereby unconditionally and irrevocably declare that we are the Guarantor and on behalf of [BH] we bear responsibility and obligations to you for the total amount of USD 7,115,034.00 … and this amount shall be paid in the same currencies and proportions as the Contract price. We undertake to pay you, at your first written request, without any disputes or objections, any amount or amounts within the limit of USD 7,115,034.00 … as stated above, not requiring from you to provide any proof or justification of your request for the amount defined in this document.
[2.] We hereby relieve you of the need to collect the debt from [BH] before presenting a request to us.
[3.] [Barclays] is bound with this obligation in its own name.
[4.] From the date of the issuance of the Guarantee [Barclays] shall be responsible for the payment of the total above mentioned amount in full at [Lukoil’s] first written request submitted to [Barclays] before the expiry date if [BH] fails to fulfil the Contract provisions, on the condition that no amendment has been made to the Contract concluded between [Lukoil] and [BH] impacting the timely performance of the Works under the Contract.
[5.] We hereby agree that no amendments nor addenda to the Contract, nor any contractual documents made by you and [BH] shall relieve us from our responsibilities under this Guarantee, and we hereby waive the right to be notified of such amendments or addenda.
[6.] The conditions of this Guarantee are as follows:
[7.] The GUARANTEE shall be valid until April 30, 2014 (the “Expiry Date”)
[8.] This guarantee shall be governed by English law.
Yours faithfully…”
Various steps were taken thereafter either to amend or reissue the Bank Guarantee as follows:
i) On or about 15 November 2011, as evidenced by a letter from Barclays to Lukoil of that date amending the Contract number in #1. from “CY-11-8015-0600” to “CY-11-8015-0060”;
ii) On or about 29 April 2014, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7 from 30 April 2014 to 28 February 2015;
iii) On or about 23 December 2014, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7 from 28 February 2015 to 30 April 2015;
iv) On or about 20 April 2015, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7. from 30 April 2015 to 31 July 2015;
v) On or about 23 July 2015, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7 from 31 July 2015 to 31 October 2015.
On 22 April 2015 and 26 July 2015 BH wrote to Lukoil enclosing, respectively, the letters from Barclays dated 20 April 2015 and 23 July 2015 referred to at paragraphs 7(iv) and 7(v) above and each time stating:
“[BH] undertakes that: (i) it will not challenge or take any steps to cancel or invalidate the Bank Guarantee at any time during the period for which it has been extended i.e. to [31 July 2015 / 31 October 2015]; and (ii) it has not made any such challenge or taken any such steps as at the date of this letter. [BH] hereby waives any right to restrain or challenge the Bank Guarantee based upon or related in any way to the extension of the expiry date to [31 July 2015 / 31 October 2015].”
By a letter from Lukoil to Barclays dated 26 October 2015, Lukoil made a written request for Barclays to pay Lukoil the sum of US$7,115,034. The original guarantee was attached to the demand. So far as may be material, the terms of the demand were:
“In accordance with the terms of the GUARANTEE NO. MRGI55024596 issued by Barclays Bank PLC (“Guarantor”) on 2 November 2011, as amended and extended (“Guarantee”), LUKOIL MID-EAST LIMITED (“Beneficiary”) hereby PRESENTS and DEMANDS that the Guarantor makes payment of USD 7,115,034.00 (United States dollars seven million one hundred and fifteen thousand and thirty four only).
In compliance with the Guarantee, upon receipt of this DEMAND the Guarantor is required to pay “…without any disputes or objections, any amount or amounts within the limit of USD 7,115,034.00 … not requiring from you to provide any proof or justification of your request for the amount defined in this document…”
…
The Guarantor should treat this PRESENTATION and DEMAND as COMPLETE.
Notwithstanding and without prejudice to the fact that the Beneficiary is not required to prove or justify any amount under the Guarantee, the Beneficiary makes this DEMAND as Baker Hughes Asia Pacific LTD (“Contractor”) is in breach of its obligations under the Contract referenced CY-11-8015-0060 signed on the 14 August 2011 between the Beneficiary and Contractor for the drilling and completion of production wells in the Mishrif formation in West Qurna (Phase 2) Contract Area (Iraq) on a Turn-key Basis (“Contract”).
Specifically, Contractor has failed to achieve any of the Key Milestones on or before the corresponding Key Dates set out in Appendix No. 12 of the Contract. Accordingly, Beneficiary notified and demanded Liquidated Damages due from Contractor in the amount of USD 14,230,068 by way of notices issued on 22 February 2015 and 2 March 2015. Contractor has failed to make payment of these Liquidated Damages and the Beneficiary hereby exercises its right under the Guarantee for the due performance of Contractor’s obligations by the Guarantor by reference to the following provisions of the Guarantee:
“[Guarantor] relieve[s] you of the need to collect the debt from Contractor before presenting a request to [Guarantor]”; and
“[Guarantor] is bound with this obligation in its own name”; and
“[Guarantor] hereby agree[s] that no amendments or addenda to the Contract, nor any contractual documents made by [Beneficiary] and the Contractor shall relieve [Guarantor] from our responsibilities under this Guarantee, and [Guarantor] hereby waive[s] the right to be notified of such amendment or addenda”.
We look forward to receiving Guarantor’s confirmation of remittance by return.”
By a letter from Barclays to Lukoil dated 29 October 2015, Barclays wrote:
“Dear Sir(s)
We refer to your recent letter and advise that we do not consider your claim on our Performance Guarantee to be valid due to the following reason(s)
1. The Condition of “no amendment has been made to the Contract Concluded between [Lukoil] and [BH] impacting the Timely performance of the Works under the Contract” is not mentioned in the demand.
If you have any questions please call our Customer Service Team on above mentioned telephone number.
Yours faithfully…”
By the time that Lukoil received Barclays’ rejection the guarantee had expired, making it impossible for Lukoil to submit another demand that met the objection raised by Barclays’ rejection letter.
After a brief passage of correspondence, Lukoil issued proceedings on 2 December 2015 and issued its application for summary judgment on 16 December 2015. Barclays served a Defence on 22 December 2015. A consent order for directions was made on 5 January 2016. On 12 January 2016 Barclays issued its cross-application for summary judgment. Evidence was filed on both sides and the case came on for hearing on 27 January 2016.
The Issue
By its Defence, Barclays restated and slightly amplified the grounds for rejection that it had set out in its rejection letter on 29 October 2015. By paragraph 6 of the Defence it pleaded:
“On the proper construction of the Bank Guarantee (or by virtue of an implied term to such effect), Barclays was only obliged to pay upon Lukoil’s first written request on the condition that (among other things) such request expressly stated or informed Barclays that no amendment had been made to the Contract impacting the timely performance of the Works under the Contract (the “Condition”)”
Paragraph 6 of the Defence is and remains the basis upon which Barclays defends the application for summary judgment. It is common ground that, if Lukoil’s first written request was required expressly to state or inform Barclays that no amendment had been made to the Contract impacting the timely performance of the Works under the Contract, Lukoil’srequest did not satisfy that requirement.
Barclays’ Submissions
Barclays’ starting point is that when construing demand guarantees or performance bonds, there “is a bias or presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than facts.” I.E. Contractors v Lloyds [1990] 2 Lloyd’s 496, 500 Col 1 per Staughton LJ. That is a correct but partial citation from Staughton LJ’s judgment, which is immediately followed by the words “But I would not hold the presumption to be irrebuttable, if the meaning is plain.” Read in context, Staughton LJ was contrasting (a) the likelihood that a demand under a performance bond would be conditioned upon the presentation of documents alleging failure by a contracting party to perform with (b) the unlikelihood that the demand would be conditioned upon proving the fact of the failure to perform that the documents allege. This appears from the immediately preceding citation from the judgment of Ackner LJ in Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd’s Rep 546, where the relevant terms of bond were “We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance …” The Court of Appeal in I. E. Contractors said that there were three possible meanings for the Esal wording: (i) that no more than a written demand was required, (ii) that the demand must assert a failure to perform the contract, or (iii) that there must in fact have been a failure to perform. The Court of Appeal in Esal itself had directly considered the second and third possible meanings because they were the potential interpretations proposed by Counsel in that case. The Court of Appeal unanimously rejected the third possibility in a passage that led directly to Staughton LJ’s reference cited above and to the (partial) citation to which I have referred.
The presumption to which Staughton LJ referred and upon which Barclays places great reliance in this case is of limited assistance in interpreting the Bank Guarantee because neither party has at any stage contended that Lukoil must not merely state that no amendment has been made to the Contract impacting the timely performance of the Works under the Contract but must also prove the stated fact. The main, if not the only, relevance of the presumption lies in the observations underpinning it, namely that the demand must at least enable the Bank to determine from the demand that its obligation is triggered; or, as Teare J expressed a similar but not identical point in Sea Cargo Skips AS v State Bank of India [2013] 2 Lloyd’s Rep 477 at [27]:
“In the field of performance bonds … the banks who provide the bonds deal with documents. Banks must honour their obligation to pay if documents which conform with the requirements of the bond are tendered. Thus the banks must determine, on the basis of the presentation alone, whether it appears on its face to be a complying presentation…”
What appears from I. E. Contractors, Esal, Sea-Cargo Skips AS and many other authorities is that it is the terms of the guarantee itself that will determine the formal requirements, if any, with which a demand must comply in order to be valid. This is shown by the facts of I. E. Contractors where a number of different instruments were held to give rise to different formal requirements for the making of a demand, including one instrument where no document was required to be produced with the demand: see 500 at Col 2. As Staughton LJ there said, citing Goddard LJ in Rayner (JH) & Co Ltd v Hambros Bank Ltd [1943] KB 37:
“The question is “What was the promise which the bank made to the beneficiary under the credit and did the beneficiary avail himself of that promise?”
The degree of compliance required by a performance bond may be strict, or not so strict. It is a question of construction of the bond. If that view of the law is unattractive to banks, the remedy lies in their own hands.”
And, at 503, Col 1, Buckley LJ expressed the same principle, which is beyond doubt:
“I am in entire agreement with the proposition that to discover what the parties intended should trigger the indemnity under the bond involves a straightforward exercise of construction, or interpretation of the bond to discover the intention of the parties in that respect.”
Because different authorities typically discuss different wordings, they are likely to be of limited assistance as aids to interpretation except to the extent that they state general principles of construction. That said, the general principles for the construction of commercial documents in general and on demand guarantees in particular are well known and do not need restatement here.
The starting point is that the Bank Guarantee does not expressly say that the demand shall include a statement that no amendment has been made to the Contract impacting the timely performance of the Works under the Contract. Therefore a process of interpretation is required to see if that is what it means. That process takes place in the knowledge that in prior cases on different wordings the Court of Appeal has held that it is not essential for there to be an express statement of what is to be included in the demand and has held that words such as “We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance” (Esal) in the context of that instrument required a statement to the effect that the supplier had failed to execute the contract properly; and that words such as “we undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the above named principal” (I. E. Contractors) in the context of that instrument required the demand to state that it was a claim for damages brought about by the contractors. The principle underpinning that conclusion in each case was that the Bank needed to know whether, on the face of the demand, the obligation to pay was triggered.
Turning to the present Bank Guarantee, there is a tension between [4] and [5] which goes to the heart of the dispute about interpretation of the document as a whole. It is not controversial that [1] sets out Barclays’ undertaking and that, if read in isolation, [1] imposes no formal requirement for the making of a demand beyond that it should be in writing. Specifically, Lukoil would not under [1] alone be required “to provide any proof or justification” of its request for the amount demanded. For present purposes I am prepared to accept (without deciding) Barclays’ submission that “justification” means explanation of how the sum claimed is calculated, computed or otherwise made up so as to provide the right to claim it.
[2] and [3] do not add to or assist in the process of interpretation that concerns the Court.
A number of points arise on [4]. First, Barclays does not contend that the demand must include a statement that the Bank Guarantee has not expired. It explains this by saying that Barclays, having issued the Bank Guarantee and any subsequent amendments to it will know whether or not it has expired without being told. It is therefore able to determine, in this respect, whether its obligation is triggered without any statement being made in the demand. Second, the words “if the Contractor fails to fulfil the Contract provisions” are analogous to those that appeared in Esal and I. E. Contractors and are nearly adjacent to the reference to the Company’s first written request submitted to Barclays. Third, the words “… on the condition that no amendment has been made to the Contract …” are part of the same sentence as the reference to the Contractor failing to fulfil the Contract provisions, though separated from them by a comma. This proximity to words that are similar to those in Esal and I. E. Contractors gives some support to the submission that if the earlier words require a statement to be made in the demand, the later words should do so too.
[5] is clear in its terms and meaning that no amendments or addenda to the Contract shall relieve Barclays from its responsibilities under the Bank Guarantee and that Barclays waives the right to be notified of such amendments or addenda. Barclays refers to the fact that it is a principle of suretyship, but not in relation to performance bonds, that a variation in the terms of the agreement between the creditor and the debtor which could prejudice the surety will (absent the surety’s consent) discharge the surety from liability. Three points arise. First, the Bank Guarantee is not alleged to be a contract of suretyship, so the principle does not apply. Second, it has been suggested (for example in Caterpillar v Mutual Benefits Assurance Company [2015] EWHC 2304 (Comm) at [21]) that a term agreeing that variations to the underlying contract shall not affect the liability of a party issuing a performance bond may have been inserted “to put beyond doubt that the rule applicable to true guarantees did not apply”. While that is a possibility, the intention or motivation of the parties is not in evidence in this case (and would be inadmissible as an aid to construction if it were). What matters is the substance of the term, the meaning of which is clear. Third, the waiver of any right to be notified of any amendments or addenda goes beyond the clarification that no amendments or addenda will relieve Barclays of its responsibilities under the Guarantee and itself requires to be given due attention in the interpretative process.
I note in passing Lukoil’s submission in reply that the last sentence of [4] may also be an historical throwback. I am not in position to form a view either way on the reasons why it may have been included, though that explanation seems possible. As with [5], the Bank Guarantee contains [4] and [5] for whatever reasons. The result is a document that verges on the incoherent; but it is the obligation of the Court to find the meaning of the instrument, whatever motivations that may have affected the parties in their negotiations or in deciding what words to use.
There is (at least) a tension between Barclays’ case in relation to [4] and [5] when they are read in context. The Court is required to interpret the Bank Guarantee as a whole and any individual words, clauses or provisions that it contains are to be interpreted in context. That context includes an appreciation of the terms of the Contract, by virtue of the references to it in [1]. And, without restating well known principles extensively, the Court will not willingly endorse or adopt an interpretation that is commercially absurd unless compelled to do so by very clear words.
The first problem in interpreting [4] and [5] when they are read in context stems from Barclays’ correct acceptance that, because of [5], no amendment to the Contract, even if it impacts the timely performance of the Works under the Contract, can affect Barclays’ responsibilities under the Bank Guarantee. In other words, an amendment to the Contract which impacts the timely performance of the Works under the Contract is irrelevant to whether or not Barclays’ obligation to pay under the Bank Guarantee is triggered. Therefore, the principled justification that underpinned the requirement that facts be stated in cases such as Esal and I. E. Contractors is absent.
Second, Barclays’ submission that it is a pre-requisite that a valid demand should include a statement about such amendments is directly contrary to the clear intention of [5] which is not merely that such amendments are irrelevant to Barclays’ obligation but also that Lukoil is not obliged to inform Barclays of them. Barclays’ attempted rationalisation of its position was to suggest that [5] merely refers to the duration of the contract, but that [4] requires a statement to be made when making a demand. This seems to me to be counter-intuitive and commercially sterile to the point of absurdity. If Barclays has any legitimate interest in knowing about an amendment that impacts on timely performance, that interest would be just as compelling (or uncompelling) in the period before any allegations of default and demands on the Bank Guarantee as they would be at the time of making the demand.
Barclays submitted that it had an interest in knowing whether or not there had been any amendment made to the Contract impacting the timely performance of the Works under the Contract because such an amendment might increase its risk. I could accept in theory that an amendment which foreshortened the time for BH to complete its original scope of the Works, or an amendment which increased the scope of the Works to be completed in the original time allowed would increase the risk of contractor’s default. But that theoretical possibility ignores the contractual realities, of which Barclays and Lukoil were always aware:
i) It is fanciful to the point of absurdity to imagine that a contract of this nature would be subjected to an amendment that foreshortened the time for completing the Works as originally defined, and Mr Cutress was not able to suggest any realistic circumstance in which that might happen;
ii) If the scope of the Works were to be increased, the contractual machinery of Variations under Article 22 provided for extensions of time that were appropriate for the revised scope of the Works. So, assuming that Variations constituted an amendment to the Contract within the meaning of [4], any increased risk to Barclays is attenuated if not removed altogether.
For these reasons, it seems to me that to interpret [4] as imposing upon Lukoil an obligation to state in the demand that no amendment had been made to the Contract impacting the timely performance of the Works would be to require Lukoil to declare something that was irrelevant to Barclays’ obligation and which was unnecessary to enable Barclays to know whether its obligation to pay had been triggered. For that reason alone, I consider that Barclays’ interpretation lacks any commercial or principled legal justification.
There is a second major objection to interpreting the Bank Guarantee so as to make the statement that no amendment had been made to the Contract impacting the timely performance of the Works a pre-requisite to the validity of the demand. Given the mechanism for altering the scope of the Works (with their expected impact upon timely performance of the Works either as originally defined or later amplified), it would be almost inconceivable that, in the course of a huge construction contract such as the Contract, there would be no changes to the scope of the Works that would impact on timely performance. So it is almost inconceivable that, on Barclays’ construction, Lukoil would ever be able to make the statement that was required to constitute a valid demand. The Bank Guarantee would therefore be rendered virtually useless on Barclays’ interpretation. That, to my mind, pushes the interpretation beyond the realms of being unjustified into the realms of commercial absurdity.
Mr Cutress attempted to refine his submission by saying that the amendments being referred to in [4] are amendments adversely prejudicing timely performance. Pursuing that submission, and consistently with his submission that the demand was concerned with assertions of fact rather than proof of the facts asserted, he submitted that Lukoil was obliged to look at all amendments that might have impacted on timely performance of the works and to decide whether it could, in all good commercial conscience, state that no amendment had been made to the Contract impacting the timely performance of the Works under the Contract; and it would be required to do so in the knowledge that its assertion of fact (and not the truth of the fact asserted) was the pre-requisite to a valid demand and payment under the Bank Guarantee and that its assertion may be shown to be wrong in due course. To my mind, this merely emphasises the absurdity of introducing this irrelevance and elevating it to be a pre-requisite to validity of the demand.
For these reasons, I conclude that there is no principled justification for interpreting [4] as meaning that there had to be a statement in the demand that no amendment had been made to the Contract impacting the timely performance of the Works under the Contract in order for a demand under the Bank Guarantee to be valid. I would go further and conclude that to adopt Barclays’ interpretation would be commercially absurd. In the absence of clear words requiring the Court to adopt such an interpretation I decline to do so.
Barclays was insistent that the Court had to expound the true meaning of [4] if it rejected Barclays’ interpretation. I do not agree and decline the invitation on the basis of the submissions I have received. However, I have already declared my view that the Bank Guarantee when viewed as a whole is virtually incoherent. In those circumstances, I would not shrink from concluding that the last words of [4] should be treated as having no effect for the purposes of the making of a demand and, to that extent at least, are to be regarded as surplusage. If it is right that they are an historical relic that has washed up in a modern Bank Guarantee, that would not be unique and would lend support to a finding that they should be treated as surplus to modern requirement.
Wuhan Guoyu Logistics Group Co Ltd & Anor v Emporiki Bank of Greece SA
[2012] EWCA Civ 1629 [2014] 1 Lloyd’s Rep 266, [2012] 2 CLC 986, [2013] 1 All ER (Comm) 1191, [2013] Bus LR D76, [2013] CILL 3300, [2013] BLR 74
Longmore LJ
The Judgment
The judge decided that the document was a traditional guarantee and not an “on demand” bond. I mean no disrespect to the judge whatever when I say that the judgment is an exhausting document. Entirely understandably he found it necessary, in order to resolve this question of construction, to cite no less than 20 authorities and deliver a judgment of 93 paragraphs. Beatson J needed to cite a similar number of authorities in Meritz v Jan de Nul [2011] 1 AER (Comm) 1049. But something has surely gone wrong if this comparatively simple question of construction requires such lengthy consideration. It is a problem of our system of precedent, that as more and more cases get decided, it seems to be necessary for judges at first instance to consider each case and determine how near or how far the document in question differs from the document construed in each past case. The commercial community deserves better than this, if better can be done.
The judge did not find this case particularly easy and neither do I. The difficulty, as so often in these cases, is that there are pointers in different directions. The following points might be thought to favour a conclusion that the document is a traditional guarantee:-
i) the document is called a “payment guarantee” not an “on demand bond”;
ii) clause 1 says that the Bank guaranteed “the due and punctual payment by the Buyer of the 2nd instalment”;
iii) clause 2 describes the second instalment as being payable (in terms different from Article 3(b) of the Building Contract) 5 days after completion of cutting of the first 300 metric tons of steel of which a written notice is to be given with a certificate countersigned by the Buyer;
iv) clause 3 guarantees the due and punctual payment of interest;
v) clause 4 imposes an obligation on the Bank to pay “in the event that the Buyer fails punctually to pay the second instalment”;
vi) clause 7 says that the guarantor’s obligation is not to be affected or prejudiced by any variations or extensions of the terms of the shipbuilding contract or by the grant of any time or indulgence.
Conversely the following points might be thought to favour a conclusion that the document is an “on demand” bond:-
i) clause 4, which is the clause which requires payment by the Bank, provides that
a) payment is to be made on the Seller’s first written demand saying that the Buyer has been in default of the payment obligation for 20 days; and
b) payment is to be made “immediately” without any request being made to the Seller to take any action against the Buyer;
ii) clause 7 provides that the Bank’s obligations are not to be affected or prejudiced by any dispute between the Seller and the Buyer under the shipbuilding contract or by any delay by the Seller in the construction or delivery of the vessel;
iii) clause 10 provides a limit to the guarantee of US$ 10,312,500 representing the principal of the second instalment plus interest for a period of 60 days; it is thus not envisaged that there will be any great delay in payment after default as there will be if (as in the present case) there is a dispute about whether the second instalment has ever became due.
In deciding whether the document is a traditional “see to it” guarantee or an “on demand” guarantee, it would be obviously absurd to say that there are 6 pointers in favour of the former and only 4 pointers in favour of the latter and it must therefore be the former. But if the law does not permit boxes to be ticked in this way, commercial men will need some assistance from the courts in determining their obligations. The only assistance which the courts can give in practice is to say that, while everything must in the end depend on the words actually used by the parties, there is nevertheless a presumption that, if certain elements are present in the document, the document will be construed in one way or the other.
It is exactly this kind of assistance that the editors of Paget’s Law of Banking have endeavoured to provide. In the 11th edition of that work these words appeared under the heading of “Contract of Suretyship v. demand guarantee”:-
“Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.
…
In construing guarantees it must be remembered that a demand guarantee can hardly avoid making reference to the obligation for whose performance the guarantee is security. A bare promise to pay on demand without any reference to the principal’s obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured.”
The words “will almost always be” amount to a presumption which was by then fully justified by the Court of Appeal authorities, Howe Richardson v Polimex [1978] 1 Lloyd’s Rep 161, Owen v Barclays Bank [1978] QB 159 and Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd’s Rep 546. It is enough to quote from the judgment of Lord Denning MR in Owen at page 170H – 171C:-
“So, as one takes instance after instance these performance guarantees are virtually promissory notes payable on demand. So long as the … customers make an honest demand, the banks are bound to pay: and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.
All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice.
Such has been course of decision in all the cases there have been this year in our courts here in England.”
And from the judgment of Ackner LJ in Esal at page 549:-
“… a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the bank’s knowledge of that fraud.”
In Siporex v Banque Indosuez [1986] 2 Lloyd’s Rep 146, 158 Hirst J was able to say this:-
“All three of the leading Court of Appeal cases are the strongest authority in favour of the proposition that the bank guarantor is not and should not be concerned in any way with the rights and wrongs of the underlying transaction. This is also the case in relation to letters of credit, with which all the authorities draw a very close analogy …
I, of course, accept Mr Hallgarten’s submissions that every bond has to be construed in accordance with its terms, and there can be no blind categorization of its character or blind assumption of the obligations which it creates. However, I can see nothing whatsoever in the present performance bond to differentiate it from a number of those quoted in the authorities (particularly that in the Esal case) or to justify a departure from the general principles laid down in those cases.
I also consider it is extremely important that, for such a frequently adopted commercial transaction, there should be consistency of approach by the Courts, so that all parties know clearly where they stand.”
Paget’s presumption was in due course approved by this court in Gold Coast Ltd v Caja de Ahorros [2002] 1 Lloyd’s Rep 617 para 16 where the document was held to be an on demand guarantee although (as in this case) the fourth element of the presumption was absent but the others were present.
The fact is that guarantees of the kind before the court in this case are almost worthless if the Bank can resist payment on the basis that the foreign buyer is disputing whether a payment is due. That would be all the more so in a case such as the present when the Buyer can refuse to sign any certificate of approval which may be required by the underlying contract.
Why then did Christopher Clarke J come to a contrary conclusion on the facts of the present case? He relied on the following indications with greater or lesser enthusiasm
i) the document is called a “guarantee”;
ii) when referred to in the exhibits to the contract, it is called an “irrevocable letter of guarantee”;
iii) clause 1 contains the “core obligation” guaranteeing the due and punctual payment of the second instalment and identifies the second instalment in the terms set out in clause 2 without at that stage saying anything about agreeing to pay on demand;
iv) clause 3 relating to interest requires the Buyer to be in default;
v) clause 4 follows on from clauses 1, 2 and 3 and calls for payment “in the event that the Buyer fails punctually to pay” and goes “well beyond” what is needed for the purpose of identifying the obligation for which the security was being given;
vi) the closing words of clause 4 would be unnecessary if the document was an on demand guarantee;
vii) the later words of clause 7 were only necessary if the document was a true “see to it” guarantee;
viii) the Bank was not providing the guarantee for a set fee but was closely connected with the whole transaction which it was financing;
ix) although the contractual background did not provide any sure guide to the contract’s correct interpretation, the judge was struck by the fact that the Bank could find itself having to pay up to the amount of the second instalment without any Refund Guarantee being in place from the Seller’s bank to secure its return. The refund guarantee had to be provided before the second instalment was due under the contract and indeed arbitrators have now held (subject to any appeal for which leave might be given) that because it was not provided in the appropriate terms, the Buyer was not in fact obliged to pay the second instalment. The judge evidently thought reciprocity was appropriate.
These could all be very serious points if a court was approaching the document on a wholly fresh basis without regard to previous authority. But the court is not in that position. There were also the positive factors in favour of the document being an on demand guarantee and, granted these positive factors, and the presumption enunciated by Paget (now contained in almost identical words in 13th ed (2007) para 34.4) and supported by previous authority, the judge ought in my respectful view to have had much more regard to the presumption than he did. As Hirst J said:-
“it is extremely important that … there should be a consistency of approach by the Courts, so that all parties know clearly where they stand.”
There are, moreover, indications that the document which began as Exhibit B to the contract was to some extent drawn up by persons not entirely familiar with the English language; it may well be something of a palimpsest (to use the word of Lord Diplock in Federal Commerce v Tradax Export (The Maratha Envoy) [1978] A.C. 1, 13H) incorporating words of previous forms. In these circumstances it is not in my judgment right to treat the words with similar reverence to the reverence with which one would construe a statute. It is much better (and indeed simpler) to be guided by the general tenor of previous authority enunciated by past judges of great distinction.
Conclusion
For these reasons, which an appellate court can state more shortly than a first instance judge, I consider that it is appropriate to follow the guidance offered by Paget and conclude that the document sued on is an on demand guarantee and to enter judgment accordingly.
Postscript
We had some argument as to the legal position if, on the assumption that the Bank is liable to pay and does pay the amount guaranteed, the underlying position turns out to be that the Buyer never was obliged under the ship-building contract to pay the second instalment. Would the Seller hold the amount paid by the Bank on constructive or resulting trust for the Buyer? That is better considered when finality is reached in the arbitration.
Lord Justice Rimer:
I agree.
Lord Justice Tomlinson:
I also agree.
Meritz Fire & Marine Insurance Co Ltd v Jan De Nul NV & Anor
[2011] EWCA Civ 827 [2011] 2 Lloyd’s Rep 379, [2011] BLR 535, 137 Con LR 41
Lord Justice Longmore:
Introduction
In this case the Buyers of dredgers being built by a Korean shipyard (known as HWS) became obliged to make advance payments of the purchase price of the vessels but also secured an Advance Payment Guarantee (“APG”) from the appellant insurers, Meritz, that in the event of premature termination for any of the reasons set out in clause 17 of the contracts, such advance payments would be returned with appropriate interest. As it happens, the shipbuilding contracts were, without the knowledge or consent of either the Buyers or Meritz, transferred first to a company known as Buyoung and then to a third company known as Asia Heavy. Those contracts were found by Beatson J to be effective according to Korean law to discharge HWS from their obligations and require the Buyers to look only to Buyoung and/or Asia Heavy for performance of the contracts to build the dredgers. On the same day as the contracts were transferred, HWS was dissolved. The question is what effect that transfer has on the guarantees issued by Meritz. Meritz say that the guarantee was discharged on the day the transfer took place. The Buyers say that the guarantees continued to exist, so that if the substituted builders failed to perform and the Buyers were entitled to give notice of termination, Meritz had to re-pay the amount of the advance purchase price already paid by the Buyers.
Although there was much debate at trial (and some debate in this court) whether the APGs were to be categorised as Performance Bonds or On-demand guarantees on the one hand or “See-to-it” guarantees on the other, the question at issue on this appeal must be resolved primarily by reference to the words used by the parties to define their obligations.
Brief Facts
I can take these largely from the judgment.
Two of the APGs were issued to the first defendant, in respect of payments under two shipbuilding contracts (“HS1005” and “HS1006″) both dated 10th August 2006 with the Korean shipbuilding company, Huen Woo Steel Co Ltd (HWS”). The third APG was issued to the second defendant in respect of payments under a shipbuilding contract (“HS1007”) which HWS entered into on 4th April 2007. The terms of the three shipbuilding contracts are materially the same.
On 1st September 2006 Meritz agreed with HWS that it would provide APGs for contracts HS1005 and HS1006. This was a commercial transaction for a fee. Clauses 5.11 and 5.12 of their agreement, the “Basic Agreement”, provided that HWS were to pay Meritz “all costs, fees, taxes, charges and expenses” incurred in connection with the negotiation, preparation and execution of the APGs and any enforcement costs. Clauses 5.9 and 5.10 provided that, without Meritz’s consent, HWS should not merge or consolidate with another corporation, that there be no change in its ownership, and that named persons be maintained as officers of HWS during the period of the APGs. By clause 3(d) and 4(g) HWS warranted that financial information it was required to provide to Meritz was true. On the same day Meritz executed the APGs in respect of those two contracts. Contract HS1007 was signed on 4th April 2007 and the APG in respect of that contract was executed on 27th April 2007.
On 26th April 2007 HWS agreed to merge with Xxien Environmental Company (“Jacksien”). The shareholders’ resolution approving the merger was passed on 27th April, and notice to the public was given on 7th May 2007. With effect from 8th June, the company was re-named Buyoung Heavy Industries Co Ltd (“Buyoung”). On 16th June Buyoung advised Meritz that “as of” 31st May HWS “has been merged” with Jacksien. On 18th June Buyoung informed the defendants of the merger. It stated that it replaced HWS “as of 1st June” and that all HWS’s rights and obligations under the three shipbuilding contracts “are to be transferred”.
A few months later, on 10th December 2007 Buyoung’s board resolved that its shipbuilding business and its blockbuilding business be partitioned. Buyoung was to continue to undertake its traditional business but the shipbuilding business was to be transferred to a newly incorporated company, Asia Heavy Industries Co Ltd (“Asia Heavy”). The proposal was approved by the shareholders on 28th December 2007 and was registered at the court on 5th February 2008. The partitioning became effective on registration and Asia Heavy informed the defendants of it on 21st March.
In letters dated 26th November and 4th December 2008 the defendants served notice of default under contract HS1007 and HS1005 on Asia Heavy, stating they reserved their rights to terminate the contracts. In a letter dated 9th March 2009 the first defendant terminated HS1005 for delay and demanded that Asia Heavy repay the money paid by it under the contract with interest. In a letter dated 10th March 2009 the second defendant terminated HS1007 for delay and demanded the repayment of all money paid. In a letter dated 2nd April 2009 the first defendant terminated HS1006 on the ground that an item had been seized by a third party creditor. This letter stated it had been informed steel plates intended for use in construction of HS1006 had been sold. It also required the repayment of monies paid with interest. Asia Heavy Industries did not pay any of these demands. On 9th April, the first and second defendants (whom I shall now call, collectively, “the Buyers”) demanded payment from Meritz under the three APGs, stating that the demand was made in conformity with clause 17 (the termination clause) of the shipbuilding contracts.
Two expert witnesses gave evidence on Korean law at the trial. It was common ground that, under Korean law, on merger, Buyoung succeeded to all the rights and obligations of HWS. It was also common ground that, since Meritz were informed of the merger on 16th June, they had an opportunity to annul it under Article 529(1) of the Korean Commercial Code. As they did not do so within the specified six month period, it was too late to do so, the merger was effective and Meritz were deemed to have consented to it.
As far as the partitioning was concerned, the experts agreed that, if Buyoung succeeded to all the rights and obligations of HWS under the shipbuilding contracts, Asia Heavy in turn also succeeded to those rights and obligations. They also agreed, in the light of the partitioning and the merger plan, that Buyoung remained jointly and severally liable in respect of those obligations. The parties before us agreed that the consequence of the expert evidence and the relevant English conflict of laws rule was therefore that English law recognised that HWS was succeeded as “the Builder” under the shipbuilding contracts, first by Buyoung, and then by Asia Heavy: see National Bank of Greece v Metliss [1958] AC 509, 525 and 528-9.
The contracts
It is only necessary to set out the relevant terms of the HS1005 contract. The termination clause reads as follows:-
“17.1 The Owner may immediately terminate the Contract by notice to the Builder if at any time before takeover of the Vessel:
a) The Owner demonstrates that the Builder is in delay on any one of the Milestones … by more than hundred and fifty (150) Days; or
…
d) The Builder has a receiver, administrator or administrative receiver, trustee, liquidator or like person appointed over any substantial part of its assets under any jurisdiction or law relating to the reorganisation, arrangement or adjustment of debts or the dissolution, administration or liquidation of corporation.
17.2 In the event of such termination of the Contract the Owner shall have the option – at its discretion – either (i) to take possession of the Vessel as it is constructed and to take over all the materials, equipments, design and services purchased by the Builder for this project and have it completed by a third party, whereby the Builders shall promptly repay the Owner all sums not used in the construction of the Vessel plus the extra costs incurred in the completion thereof up to the amount guaranteed under the [APG], [or] (ii) the Builder shall refund to the Owner the amount of all monies paid by the Owner under the Contract together with interest. …”
Clause 19.1 provided for the APG:-
“As soon as possible after the signature of this Contract, the Builder shall at its expense provide to the Owner through a First-Class Bank a Guarantee in the form as per Annex 3 to guarantee the faithful and timely performance of the Builder’s obligations under the Contract.”
Annex 2 contained the milestone programme and Annex 3 contained a Pro Forma APG.
The APG as issued for contract HS1005 was (as were the other APGs) in the following terms (the judge helpfully added the paragraph numbers for ease of reference):-
“[1] We hereby issue the irrevocable Advance Payment Guarantee (Letter of Guarantee Number …) in favor [sic] of [Jan de Nul NV/Codralux SA] … (hereinafter called “the Buyer”) for the account of Heun Woo Steel Co Ltd, a shipyard organized and existing under the laws of the Republic of Korea … (hereinafter called (“the Builder”) in connection with the shipbuilding contract … (hereinafter called (“the Shipbuilding Contract”) made by and between the Buyer and the Builder for the construction [the Vessel is then identified by description and its Builder’s Hull number] … (hereinafter called “the Vessel”).
[2] If, in connection with the terms of the Contract, the Buyer shall become entitled to a refund of advance payments made to the Builder prior to the delivery of the Vessel, we hereby irrevocably and unconditionally guarantee the repayment of the same to the Buyer within Thirty (30) days after demand is made not exceeding the sum [specified] … together with interest …
[3] Under no circumstances shall the amount of this Advance Payment Guarantee (Letter of guarantee) exceed [the specific sum, being an amount equal to 20% of the total Contract Price in the case of HS1005 and HS1006 and 70% of the total Contract Price in the case of HS1007] plus interest thereon at the rate of Six percent (6%) per annum …
[4] The Buyer’s demand for payment under this Advance Payment Guarantee (Letter of Guarantee) is payable upon our receipt of the Buyer’s signed statement certifying that the Buyer’s demand for refund is made in conformity with Clause 17 of the Contract and that the Builder has failed to make the refund.
…
[6] Notwithstanding the provisions hereinabove, in the event that within Thirty (30) days from the date of your claim to the Builder referred to above, we receive written notification from either you or the Builder stating that your claim for refund hereunder is disputed by the Builder and has been referred to arbitration in accordance with the provision of the Contract, we shall, under this Advance Payment Guarantee (Letter of Guarantee), refund to you the sum as per the award issued under such arbitration immediately upon receipt from you of a demand for the sum so adjudged together with a copy of the arbitration award, and not before.
[7] This Advance Payment Guarantee (Letter of Guarantee) [shall] become null and void upon receipt by the Buyer of the sum guaranteed hereby or upon acceptance by the buyer of the delivery of the Vessel in accordance with the terms of the Contract …
[8] This Advance Payment Guarantee (Letter of Guarantee) is valid from the date herein stated below until such time that the Vessel is delivered by the Builder to the Buyer in accordance with the provision of the Contract.
[9] This Advance Payment Guarantee (Letter of Guarantee) shall be governed by and construed under the substantive law of England and the undersigned hereby submits to the non-exclusive jurisdiction of the courts of England.
[10] **** This Advance Payment Guarantee (Letter of Guarantee) is subject to the Uniform Rules for Demand Guarantee of the International Chamber of Commerce (ICC), ICC Publication No. 458.”
These Uniform Rules are of some importance. They were issued by the ICC in 1992 and replaced an earlier version (No 325) which were called Uniform Rules for Contract Guarantees and had been found to be in some respects unsatisfactory. The essence of the 1992 Rules is explained in the Introduction.
“… The Rules are intended to apply worldwide to the use of demand guarantees, that is, guarantees, bonds, and other payment undertakings under which the duty of the guarantor or issuer to make payment arises on the presentation of a written demand and any other documents specified in the guarantee and is not conditional on actual default by the principal in the underlying transaction.
Demand guarantees differ from documentary credits in that they are properly invoked only if the principal has made default. However, the guarantor, like the issuer of a documentary credit, is concerned not with the fact of default, but only with documents.
…
These Rules do not apply to suretyship or conditional bonds or guarantees or other accessory undertakings under which the guarantor’s duty to pay arises only on actual default by the principal. Such instruments are widely used but are different in character from demand guarantees and are outside the scope and purposes of these Rules.
…
The Beneficiary
The beneficiary wishes to be secured against the risk of the principal’s not fulfilling his obligations towards the beneficiary in respect of the underlying transaction for which the demand guarantee is given. The guarantee accomplishes this by providing the beneficiary with quick access to a sum of money if these obligations are not fulfilled.
The Principal
Whilst recognising the needs of the beneficiary, the principal can expect on the grounds of equity and good faith to be informed in writing that, and in what respect, it is claimed he is in breach of his obligations. This should help to eliminate a certain level of abuse of guarantees through unfair demands by beneficiaries.
The Guarantor
For these Rules to apply, the guarantee should not stipulate any condition for payment other than the presentation of a written demand and other specified documents. In particular, the terms of the guarantee should not require the guarantor to decide whether the beneficiary and principal have or have not fulfilled their obligations under the underlying transaction, with which the guarantor is not concerned. The wording of the guarantee should be clear and unambiguous.
The Instructing Party
The new Rules recognise the existing widespread practice whereby an instructing party may forward to the guarantor instructions received from or on behalf of the principal and counter-guarantee such instructions.
General
The ICC wishes to encourage good demand-guarantee practice which is equitable to all concerned, and believes that these Rules will result in a fair balance of interests, recognising the rights and obligations of all parties. Compared with the ICC Rules published in 1978, these Rules incorporate a major change in favour of beneficiaries in that they are no longer confined to guarantees which require the presentation of an arbitration award or other independent documentary evidence in support of any demand. However, guarantees which do require such evidence are still within the scope of these Rules. …
It is a characteristic of all guarantees subject to these Rules that they are payable on presentation of one or more documents. The documentary requirements specified in demand guarantees vary widely. At one end is the guarantee which is payable on simple written demand, without a statement of default or other documentary requirements. At the other end is the guarantee which requires presentation of a judgment or arbitral award.
Between these two extremes lie various intermediate forms of guarantee, such as guarantees requiring a statement of default by the beneficiary, with or without an indication of the nature of the default, or the presentation of a certificate by an engineer or surveyor. All these fall within the scope of the new Rules.
However, the interests of the beneficiary must be balanced against the need to protect the principal against an unfair claim on the guarantee. The ICC considers it reasonable to provide that in accordance with principles of equity and fair dealing a demand should be in writing and should at least be accompanied by a statement by the beneficiary that, and in what respect, the principal is in default, and Article 20 so provides. A party who wishes to avoid or alter even this requirement is free to do so but must take the deliberate step of excluding or modifying Article 20 by the terms of the guarantee. However, Article 20, when read with Articles 2(b) and (c), 9 and 11, also makes it clear that guarantors are not concerned with the adequacy of any statement of breach. The documents must, of course, appear to conform to the guarantee, so that where a non-conformity is apparent on the face of the documents the beneficiary is not entitled to payment. Moreover, these Rules do not affect principles or rules of national law concerning the fraudulent or manifest abuse or unfair calling of guarantees.”
From this introduction it can be seen that the intention of the Rules (and of parties who incorporate the Rules into their guarantees) is that payment is to be made against documents without reference to the underlying contract between the Principal (here HWS) and the Beneficiary (here the Buyers). But if the parties expressly choose to make payment depend on the resolution of any dispute, they can agree (as Meritz and the Buyers did in paragraph 6 of the APG) that a relevant document against which payment is to be made can be an arbitration award.
A further important feature (apparently absent from the previous version) is that there has to be a statement by the beneficiary not only saying that the principal is in default of his obligations but also specifying the respect in which he is in default. This means that the beneficiary cannot just assert a claim to payment but must explain that there has been a default. The Buyers did make such a statement in the present case; the grounds in contracts HS1005 and HS1007 were that there had been a delay of more than 150 days of a relevant Milestone. The ground in HS1006 was that a relevant item of equipment (an Ejector) had been seized by a third party creditor.
These intentions are made good in the Rules themselves which provide inter alia:-
“Article 2
a) For the purpose of these Rules, a demand guarantee (hereinafter referred to as “Guarantee”) means any guarantee, bond or other payment undertaking, however named or described, by a bank, insurance company or other body or person (hereinafter called “the Guarantor”) given in writing for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and such other document(s) (for example, a certificate by an architect or engineer, a judgment or an arbitral award) as may be specified in the Guarantee, such undertaking being given
a) at the request or on the instructions and under the liability of a party (hereinafter called “the Principal”); or
b) at the request or on the instructions and under the liability of a bank, insurance company or any other body or person (hereinafter “the Instructing Party”) acting on the instructions of a Principal to another party (hereinafter the “Beneficiary”).
b) Guarantees by their nature are separate transactions from the contract(s) … on which they may be based, and Guarantors are in no way concerned with or bound by such contract(s) … despite the inclusion of a reference to them in the Guarantee. The duty of a Guarantor under a Guarantee is to pay the sum or sums therein stated on the presentation of a written demand for payment and other documents specified in the Guarantee which appear on their face to be in accordance with the terms of the Guarantee.
Article 20
a) Any demand for payment under the Guarantee shall be in writing and shall (in addition to such other documents as may be specified in the Guarantee) be supported by a written statement (whether in the demand itself or in a separate document or documents accompanying the demand and referred to in it) stating:
a) that the Principal is in breach of his obligation(s) under the underlying contract(s) …
b) the respect in which the Principal is in breach.”
The Arguments
No notice of arbitration pursuant to either the shipbuilding contracts themselves or paragraph 6 of the APGs has ever been served. The Buyers have accordingly sought to invoke the APGs according to their terms and demanded the repayment of sums paid in advance under the contracts. One of Meritz’s main arguments below was that the APGs were not like performance bonds in respect of which money was automatically due on the beneficiary’s say-so but were traditional “see to it” guarantees pursuant to which the beneficiary had to prove that the principal debtor was truly liable to his counter party under the original contract. In the light of the incorporation of the Uniform Rules No. 458, which expressly state that the terms of the underlying contract are of no concern to the beneficiary and the guarantor, this argument is extremely difficult and was, in my view, rightly rejected by the judge. The main focus of the argument in this court depended, unsurprisingly, on the precise terms of the APGs and the effect of the novation which occurred on 8th June 2007 as a result of the transfer of the rights and obligations under the shipbuilding contracts first to Buyoung and then to Asia Heavy.
Mr David Oliver QC for Meritz submitted:-
i) On the true construction of the APGs, Meritz had guaranteed the obligation of HWS to make the repayment and not the obligation of anyone else. Once the obligation of HWS had disappeared (whether by transfer to Buyoung or for any other reason), the APGs no longer had any application;
ii) No demand in conformity with clause 17 of the shipbuilding contract could be made, as required by paragraph 4 of the APG, once the Builder was no longer HWS but Asia Heavy;
iii) Commercial Bank of Tasmania v Jones [1893] AC 313 decided that, where a debtor has been released by novation, the guarantor is discharged.
Mr Iain Milligan QC for the Buyers submitted:-
i) On the true construction of the APGs, Meritz promised to repay the sums advanced if HWS did not. HWS had not paid and had therefore failed to pay within the meaning of paragraphs 2 and 4 of the APG;
ii) the contract documents had been presented and, in the absence of fraud (which is not suggested) Meritz are bound to pay;
iii) Commercial Bank of Tasmania was a case of a “see-to-it” guarantee and, in any event, only applied when the creditor/beneficiary was a voluntary party to the novation.
Mr Oliver responded by saying that the effect of the Buyer’s argument was that the phrase “the Builder” in the APGs was to be construed not as being HWS (as the APGs required) but the Builder whoever that builder might be from time to time.
Discussion
It is fair to say that a novation of the shipbuilding contract by operation of law does give rise to problems of construction of the APGs which inevitably do, to some extent, depend on the existence of an underlying contract. But so could other events such as a frustration of the underlying contract or the dissolution of the shipbuilding company. I do not think it could be intended that the APGs would become a dead letter in either of those events unless the wording to that effect were clear; any beneficiary would expect that, in the latter events the guarantee would be available in respect of sums already paid to the Builder.
There is, on the other hand, much to be said for Meritz’s submission that they took on the risk of HWS’s defaults not the defaults of any persons who might be their successors, whose financial integrity or business acumen they would not have previously assessed. As against that there is the finding of the judge that under Korean law Meritz had 6 months after the transfer to Buyoung had taken place within which they could have objected to this merger with Buyoung and the transfer of the contracts. But they did not take that opportunity.
In these circumstances it seems to me that paragraph 2 of the APGs requires a literal construction on the basis that the APGs are to be operated against documents without regard to the underlying contract. The Buyers did make advance payments; they stated that they had terminated the contracts in accordance with clause 17 of those contracts; unless a notice of arbitration was served pursuant to paragraph 6, they became entitled to a refund of the advance payments; no notice of arbitration was served, so they were entitled to a refund of the advance payments; in the absence of that refund, the repayment has to be made by the guarantors. Mr Milligan submitted that the APGs were intended to operate on the basis that no refund had occurred not on the basis that the Builder had failed to make the refunds when it was obliged to do so. On the true construction of the APG as a whole, I agree with that submission.
The argument, that the Buyers were not able to make a demand in conformity with clause 17 of the shipbuilding contract in accordance with paragraph 4 of the APGs, ignores or overlooks the fact that the payment under the APGs is to be made against documents; there is no requirement that any assertion in the documents is correct in law. Paragraph 4 says that the Buyers’ demands are payable upon receipt of the Buyers’ signed statement certifying that the Buyer’s
“demand for refund is made in conformity with Clause 17 of the Contract and that the Builder has failed to make the refund.”
That is precisely what the signed statement of the Buyers did certify in respect of each of the shipbuilding contracts. It matters not whether there is a true liability to refund under clause 17, nor whether the Builder has, in fact, failed to make the refund. But since as a matter of fact no refund has been made it is, in any event, no abuse of language to say that the Builder has failed to make the refund. It may be that in the light of the novation HWS was not liable to make the refund but Asia Heavy was; it may be that in the light of the fact that HWS was dissolved on 8th June 2007, HWS cannot make the refund. But neither of those facts matters. It has still “failed to make the refund” as envisaged by paragraph 4 of the APG.
It does not seem to me, for similar reasons, that the decision of the Privy Council in Commercial Bank of Tasmania v Jones can be dispositive of this appeal. In that case the principal debtor and the creditor had, after the date of the guarantee, agreed that the sum owed by the debtor was no longer to be regarded as owing by the debtor but by a third party. The Privy Council held that the guarantor was no longer bound because he had guaranteed that the principal debtor would pay and, once the debtor was no longer bound to pay, he was no longer under any obligation to pay so he had not failed in any of the obligations which the guarantor had guaranteed. Lord Morris said (page 316):-
“It may be taken as settled law that where there is an absolute release of the principal debtor, the remedy against the surety is gone because the debt is extinguished, and where such actual release is given no right can be reserved because the debt is satisfied, and no right or recourse remains when the debt is gone. Language importing an absolute release may be construed as a covenant by the creditor not to sue the principal debtor, when that intention appears, leaving such debtor open to any claims of relief at the instance of his sureties. But a covenant not to sue the principal debtor, is a partial discharge only, and, although expressly stipulated, is ineffectual, if the discharge given is in reality absolute. In this case, the acceptance of Marshall as full debtor, in room and stead of Wakeham, which constituted a complete novation of the debt, necessarily operated as an absolute release of Wakeham, and it is therefore in vain to contend that such novation merely amounted to a covenant not to sue the debtor for whom the respondent was surety.”
This is an authority in relation to a traditional “see-to-it” guarantee in respect of which the guarantor can say that he is not liable if the principal debtor is not. But, as I have already said, questions whether the debtor is liable under the underlying contract are irrelevant to guarantees (such as the APGs) where payment is to be made against documents (whether certificates or awards or other documents). In such cases, if the documents are in order, the guarantor must pay.
I prefer to express no opinion on Mr Milligan’s further argument that the novation in the Tasmania Bank case was a voluntary agreement between the debtor and the creditor, whereas the novation in the present case seems not to have been the result of any agreement between HWS and the Buyers. That is a difficult point which, in the view I take in this case, does not arise.
Nor do I think it strictly matters whether the word “Builder” in the APGs case can be construed to mean only “HWS” or “the Builder to whom the rights and obligations of the shipbuilding contract may be transferred”. All that is necessary to say is that HWS did fail to make any refunds and that paragraph 4 of the APGs is, therefore, operative.
I therefore find myself agreeing with the much fuller judgment of Beatson J and would dismiss this appeal.
Postscript
The parties have sought, since the hearing of this appeal, to make fresh points by correspondence. For my part, I deprecate attempts to influence the court after the oral hearing is closed. In this country, unless the court otherwise orders, arguments are to be made orally in the face of the court where they can be tested; it is by disputation that the law is made known.
Lord Justice Etherton:
I agree.
Lord Justice Laws:
I also agree.