Source: https://globalarbitrationreview.com/chapter/1208986/bonds-and-guarantees
Timestamp: 2020-04-04 18:50:47
Document Index: 764862230

Matched Legal Cases: ['EWCA ', 'EWCA ', 'UKPC ', 'EWCA ', 'EWCA ', 'EWCA ']

Whether a particular instrument is treated as imposing an autonomous or accessory obligation is a matter of construction of the instrument in question and not dependent on the label attached by the parties.[2] In light of the different legal characteristics of the two, and the consequences that flow therefrom (as set out further below), the question of the proper construction of such security instruments frequently gives rise to litigation or arbitration and is the subject of numerous reported decisions of the English courts.[3]
The documents required vary from case to case. The most common forms of on-demand bonds and guarantees simply require the employer to demand payment, combined with a formal declaration from the employer that the contractor has failed to perform its obligation under the construction contract.[4] In practice, it is not unusual in the construction industry for on-demand bonds or guarantees to include a pro forma demand letter that the parties negotiate as part of the negotiation of the construction contract and security itself. Additional requirements may include (1) a statement from a specified person that the contractor is in breach of its obligations (for example, the relevant minister or attorney general for public works contracts);[5] or (2) a certificate from a third party (for example, the engineer or the dispute adjudication board). Less common requirements can include provision of an arbitration award or judgment in respect of the underlying construction contract.
The employer beneficiary of such an on-demand bond or guarantee will generally seek to obtain security with the least onerous documentation requirements, such as, for example, a simple demand or certificate issued by the employer, whereas the contractor will seek the additional protection provided by a third-party certificate or judgment. Ultimately, the terms of the security will depend on the parties’ respective bargaining positions and/or what terms the available issuers[6] are prepared to accept.
In Edward Owen Engineering Ltd v. Barclays Bank International Ltd, Lord Denning MR observed:[7]
In practice, depending on the commercial relationship between the issuer of the security and the contractor (or the counter guarantor as the case may be),[8] the issuer may notify the contractor (or the counter guarantor) upon receipt of a demand before making payment. The issuer will do so for one of two reasons: (1) if the issuer is concerned that it may not be able to enforce the security it is holding in relation to the bond/guarantee; or (2) to give the contractor the opportunity to make direct payment and avoid an act of default under the terms of the agreement between the contractor and the issuer.[9]
Accordingly, in the 2007 decision in Permasteelisa Japan KK v. Bouyguesstroi and Bank Intesa SpA,[10] the English Technology and Construction Court discharged an interim injunction obtained by a subcontractor to prevent the main contractor (a Russian subsidiary of Bouygues Bâtiment International) from making further calls under an on-demand guarantee pending the resolution of the underlying dispute in arbitration, The judge (Ramsey J.) found that there was no basis for maintaining the status quo pending the outcome of the arbitration, in the absence of fraud.[11]
In Simon Carves Limited v. Ensus UK Limited the English Technology and Construction Court had to consider the extent to which the terms of the construction contract pursuant to which the performance security had been issued might prevent the employer from seeking payment under the security.[12] In Simon Carves, the underlying construction contract provided that the security would be ‘null and void’ and was to be returned to the contractor immediately once the acceptance certificate was issued save in respect of pending claims. The acceptance certificate was issued, albeit with a list of defects attached; one month later the employer issued a defects notice under the mechanism for notifying defects during the defects liability period. The judge, after reviewing a long line of decisions, held that: ‘fraud is not the only ground upon which a call on the bond can be restrained by injunction’ and that ‘if the underlying contract, in relation to which the bond has been provided by way of security, clearly and expressly prevents the beneficiary party to the contract from making a demand under the bond, it can be restrained by the Court from making a demand under the bond.’ The judge found that the security was null and void under the terms of the construction contract as between the employer and the contractor, and injuncted the employer from making a demand under the bond.[13]
41. I have formed the view that damages would not be an adequate remedy. My reasons are the same as set out in my earlier judgements on this matter which I will not again set out in detail. Broadly, they are that the calling of the bond as in this case gives rise to a very real risk of damage to the commercial reputation, standing and creditworthiness of [the Contractor] which would be very difficult to quantify; there would be a very real risk that [the Contractor] would not pre-qualify for tenders because often tenderers have to disclose whether there have been recent calls on the bonds and if so on what grounds. There was evidence that there had been an earlier call on the bond but I attach little importance to that in commercial terms because the unchallenged evidence is that it was done by agreement to secure speedy payment; in those circumstances, the call could be readily explained. An added factor is that if, as I have held, [the Contractor] does have a strong case on the continuing validity of the bond as between it and [the Employer], the commercial advantage of not having the bond actually called or the loss of that advantage is unquantifiable.[14]
The English Technology and Construction Court reached a similar conclusion in Doosan Babcock v. Mabe.[15] In Doosan Babcock, the employer had commenced commercial production of electricity from a power plant for which Doosan Babcock had provided two boilers. The on-demand guarantees provided by Doosan Babcock expired on their terms on the earlier of a specified date or the issue of a taking-over certificate. The employer did not issue a taking-over certificate, relying on a contractual provision that permitted use of the boilers without the issuance of the taking-over certificate as a temporary measure. The judge granted an injunction preventing the guarantees being called, finding that there was a strong likelihood that Doosan Babcock would be able to demonstrate that the use of the boilers was not temporary, or that the employer was in breach of the underlying supply contract in not issuing the taking-over certificate.
However, the English authorities do not all speak with one voice. More recently, in MW High Tech Projects UK Limited & Another v. Biffa Waste Services Limited,[16] Biffa sought to set aside an interim injunction restraining it from calling on a retention bond. The underlying construction contract between Biffa and MW had provided that it was a condition precedent to Biffa’s right to call on the retention bond that Biffa first call on a parent company guarantee in respect of the same matter. MW argued that Biffa should be restrained from pursuing a call on the retention bond because, although Biffa had first made a call on the parent company guarantee, that call was not ‘valid’, such that the condition precedent had not been satisfied. In discharging the interim injunction, Stuart-Smith J. reviewed the decisions in Simon Carves and Doosan Babcock. He held that, ‘if and to the extent that the subsequent decisions of Akenhead J. in [Simon Carves] or Edwards-Stuart J. in [Doosan] suggest that a less rigorous test is to be applied, I respectfully consider that the views of Ramsey J [in Permasteelisa Japan KK v. Bouyguesstroi and Bank Intesa SpA [2007] EWCH 3508 (QB)] prevail as being in accordance with the substance of the decisions of higher authority… It seems to me, both on principle and authority, that the only established exceptions to the rule that the court will not intervene should be where there is a seriously arguable case of fraud, or it has been clearly established that the beneficiary is precluded from making a call by the terms of the contract’.[17] It therefore remains to be seen whether the English courts will embrace the wider exceptions endorsed in Simon Carves and Doosan.
The English Technology and Construction Court faced a novel attempt to injunct a call on an on-demand performance bond in J. Murphy and Sons Ltd v. Beckton Energy Ltd.[18] The underlying construction contract was an amended version of the FIDIC design and build form of contract. The employer issued a notice of intention to call the bond in relation to liquidated damages for delay. The contractor relied on the 2015 UK Privy Council decision in NH International (Caribbean) Ltd v. National Insurance Property Development Co Ltd[19] that an employer could not make a claim for payment against the contractor under the contract, unless the claim had been notified ‘as soon as practicable’ under clause 2.5. The contractor argued that demanding paying when no notice had been given in accordance with clause 2.5 engaged the fraud exception, permitting the judge to intervene. The judge refused the injunction finding that on the specific wording on the amended FIDIC contract, the parties had expressly removed the obligation to notify claims for liquidated damages under clause 2.5.[20] The judge held further that the contractor was confusing liability to pay delay damages and the contractual mechanism for enforcing that liability, and the injunction would have been refused even if his analysis of the contract amendment was incorrect.[21]
Other jurisdictions take different approaches. The authors are currently involved in arbitrations where bonds have been ‘frozen’ by local courts on the basis that ‘freezing’ the bonds – injuncting the employer from making a call or the bank from paying out if a demand is received – pending the outcome of the arbitration preserves the status quo between the parties.[22] Quite aside from the legal soundness of this approach and the immediate impact of an injunction on the employer’s cash flow, these injunctions can cause significant difficulties if the court does not require the relevant instrument to be extended for the duration of the arbitration and any subsequent challenge proceedings. Indeed, it is not unknown for contractors to seek an injunction for the purpose of ‘running down’ the remaining duration of the security until it expires.
The Singaporean approach to attempts to stop payment under on-demand bonds is of note, with the courts accepting unconscionability – which the Singaporean courts describe as a broader concept than fraud, including abusive calls, bad faith and dishonesty – as a reason for injuncting calls on on-demand bonds and guarantees.[23]
In addition, and to the extent not otherwise provided by the guarantee itself, the general law of suretyship[24] provides additional protection, and possible defences to the guarantor such that the guarantor will be released from liability if there have been any material changes to the terms of the underlying construction contract without his or her consent[25] or where the employer has given additional time to the contractor to perform.[26]
In Marubeni Hong Kong v. Mongolian Government[27] the English Court of Appeal held that, when interpreting a document that was not a banking instrument, the absence of language in the document itself describing the document as a demand bond or similar, created a strong presumption against the document being an autonomous bond rather than merely as a see-to-it guarantee imposing only secondary liability.[28]
In contrast, in Wuhan Guoyu Logistics Group Co Lt v. Emporiki Bank of Greece SA,[29] the Court of Appeal held (citing Paget’s Law of Banking) that, where an instrument (1) related to an underlying transaction between parties in different jurisdictions; (2) was issued by a bank; (3) contained an undertaking to pay on demand (with or without the words ‘first’ or ‘written’); and (4) did not contain clauses excluding or limiting the defences available to a guarantor, there is a presumption under English Law that the instrument is a demand guarantee.
Guarantees or bonds issued by a bank. These tend to be ‘on-demand’ instruments, as banks are generally reluctant to become involved in investigating or assessing the merits of demands or dispute. The underlying construction contract will often specify what bank (or banks) will be acceptable to the employer, for example, specifying the required location and credit rating of the issuing bank.[30]
Standby letters of credit issued by banks. These are very similar to on-demand bonds and share the key characteristic that they are payable against documents (rather than proof of liability) and impose an autonomous obligation on the bank independent of the underlying transaction. Standby letters of credit are not frequently used in the construction industry; they are sometimes used to secure delivery of key components where significant up-front payments are required, or as a mechanism for making (and securing) payment where the employer is a government in an unstable jurisdiction.[31]
With the exception of parent company guarantees, when procuring a bond or guarantee, the contractor will need to pay an issuing fee, with further fees payable whenever the bond or guarantee is extended in duration or value. Many international contractors increasingly enter into facility agreements with their bank, pursuant to which the bank will provide a number of commercial banking services, including the provision of bonds and guarantees. The alternative is for the contractor to enter into an ad hoc arrangement with its bank or a commercial provider of bonds and guarantees on a project-by-project basis. In both cases, the contractor will typically have to commit that all sums paid to the contractor under the construction contract will be paid into a specified bank account located at the issuing bank, which ultimately bears the risk on the guarantee or bond.[32] In addition, the contractor will have to provide security to the value of the bonds and guarantees. A combination of blocked funds in cash accounts and security over the contractor’s fixed and floating assets is typical. The need to provide security in relation to the value of the bonds and guarantees limits the amount of bonds and guarantees that a contractor can procure at any given time.
While it is generally cheaper for the contractor to procure bonds and guarantees under a facility agreement than on an ad hoc basis, the consequence of a demand being made on security procured under a facility agreement can be catastrophic for the contractor. Most facility agreements contain default clauses, whereby a call on an on-demand bond or guarantee constitutes an act of default under the facility agreement unless the contractor is able to make immediate direct payment of the sums demanded to the bank. An act of default may entitle the bank to call in all loans, lines of credit and security provided under the facility agreement whether related to this construction contract or otherwise. Further, cross-default provisions are increasingly common in facility agreements, whereby an act of default under one facility agreement constitutes an act of default under other facility agreements, including facility agreements made with other banks. In short, making a demand on an on-demand guarantee or bond may result in the contractor being unable to continue trading.[33] For this reason, calling an on-demand guarantee or bond tends to be the action of last resort for an employer.
In an international context the employer will typically require that the contractor procures an on-demand bond or guarantee from a bank in the employer’s home country. This arrangement is advantageous for the employer, who can recover monies quickly in their home country without first having to issue proceedings against the contractor in another jurisdiction, or having to pursue a foreign bank to enforce a demand for payment under the guarantee or bond. Unless an international contractor has a significant presence in the foreign jurisdiction, the contractor will not normally have the commercial relationship in place, or available security, to procure a guarantee or bond from a local bank directly. The normal arrangement is for a chain of back-to-back guarantees and counter guarantees to be set up through a series of SWIFT messages,[34] linking the local bank that issues the guarantee to the employer to a bank in the contractor’s home jurisdiction that has the commercial relationship with the contractor. Where a demand is made by the employer, the demand will be passed up the chain; the bank in the contractor’s home jurisdiction that has the direct relationship with the contractor will provide the funds, which are then fed back down the chain to the employer.
In most situations, the flow of funds from counter guarantor to guarantor is seamless. The chain of guarantees and counter guarantees may be broken if the international community places the employer under sanctions prohibiting the passing of financial benefit to the employer. While the local bank may not be subject to these sanctions, the international banks that have provided counter-guarantees may be prohibited permanently from honouring the counter-guarantees.[35] In practice, this may result in the local bank (or a bank somewhere in the chain) defaulting on the security.
Where a large contract is put out to tender, the employer will spend considerable time and money in choosing a suitable contractor. If the prospective contractor withdraws prior to entering into a binding contract or refuses to accept the award of the contract or fails to procure the performance bond required to support the contract, the employer may have to re-open the tender process, incurring substantial delay and additional expense. Accordingly, invitations to tender will often require tenderers to submit a bid bond or tender guarantee for a specified sum. The bond will be released if the tenderer is not selected, or once the tenderer has entered into the construction contract and provided the required performance bond. A bid bond will almost invariably take the form of an on-demand bond or guarantees.[36]
This can cause considerable problems in the context of conditional guarantees. As set out above, a claim under the guarantee requires the same proof that the contractor is liable as would be required if the employer sued the contractor directly. However, in the absence of an express provision in the guarantee that the guarantor will be bound by the findings in proceedings between the employer and the contractor, an award or judgment in those proceedings will not be binding on the guarantor,[37] and in principle, the guarantor would be entitled to demand that the matter be re-litigated. The decision of the Commercial Court in Autoridad del Canal de Panamá v. Sacyr S.A. & Others[38] provides a recent example. That case is one of many concerning the major construction and engineering project for the widening of the Panama Canal by a third set of locks. Autoridad del Canal de Panamá (ACP) was the employer under the project. The contractor (GUPC) was a Panamanian company, owned in varying proportions by the four defendants. The main contract between ACP and GUPC was governed by Panamanian law and prescribed arbitration in Miami under the ICC Arbitration Rules. There were three separate types of guarantee given by the first to fourth defendants to secure advance payments made by ACP to GUPC. These were all governed by Panamanian law with Miami ICC arbitration clauses. In 2015, ACP made further advance payments, and the defendants provided further guarantees governed by English law and subject to the exclusive jurisdiction of the English courts. ACP commenced proceedings in the English courts seeking declarations that it was entitled to payment under six of the advance payment guarantees governed by English law (the APGs). ACP contended that the guarantees were demand bonds and that it was entitled to payment under the APGs as a result of GUPC’s alleged failure to repay advance payments pursuant to the main contract. GUPC and the defendants filed a request for ICC arbitration under the main contract and various other guarantees, seeking declarations that repayments of the advance payments were not due or payable under Panamanian law and the relevant agreements. The defendants sought a mandatory stay of the English proceedings under Section 9 of the English Arbitration Act 1996 on the basis that they concerned matters that should have been referred to arbitration, alternatively a stay under the court’s inherent jurisdiction or case-management powers on the basis that it would be more appropriate for the parties’ disputes to be resolved in the arbitration proceedings. Blair J. rejected both contentions. The mandatory stay was refused because the subject of the parties’ controversy in the English proceedings was a claim under the APGs: while the issue of the liability of the GUPC (as the principal debtor) was necessarily bound up with the nature of the instrument as a guarantee, GUPC’s underlying liability was not the matter that had to be decided by the English court.[39] While acknowledging the risk of inconsistent decisions,[40] Blair J. also rejected a stay on case-management grounds.[41]
Blair J. came to the same conclusion in Deutsche Bank AG v. Tongkah Harbour Public Co Limited,[42] in which the defendants sought a stay of court proceedings brought under a guarantee pending the outcome of arbitration under the underlying contract. He said:[43]
A practical issue concerning the interaction between an on-demand guarantee and claims under the construction contract arose in Fluor v. Shanghai Zhenhua Heavy Industry Co., Ltd.[44] Fluor had engaged the defendant to fabricate steel monopiles for an offshore wind farm, with the defendant’s performance secured by an on-demand warranty bond issued in euros. Fluor called the bond and received the secured sums. In subsequent litigation, Fluor was awarded damages in excess of the monies recovered under the bond. The parties agreed that credit should be given by Fluor for the monies received under the warranty bond, but disagreed as to how the credit was to operate. The judge found that:
the bond monies were to be treated as a payment on account of Fluor’s claim;[45]
the remaining euro sum was to be converted into sterling at the exchange rate prevailing on the date Fluor received the bond monies, irrespective of when Fluor actually converted the euros into sterling.[46]
[1] Jane Davies Evans is a barrister practising as counsel and arbitrator at 3 Verulam Buildings. Versions of this chapter published in the first and second editions of this Guide were co-authored with Christopher Harris QC, also of 3 Verulam Buildings.
[2] Contracts of suretyship … are an area of law bedevilled by imprecise terminology and where therefore it is important not to confuse the label given by the parties to the surety’s obligation (although the label may be indicative of what the parties intend) with the substance of that obligation. Because the parties are free to make any agreement they like, each case must depend upon the true construction of the actual words in which the surety’s obligation is expressed. This involves ‘construing the instrument in its factual and contractual context having regard to its commercial purpose’, a task which the court approaches ‘by looking at it as a whole without any preconception as to what it is.
[3] See Andrews and Millett, paragraph 16-002 and the cases referred to therein, including Trafalgar House Construction (Regions) Ltd v. General Surety and Guarantee Co Ltd [1996] 1 A.C. 199; Marubeni Hong Kong and South China Ltd v. Mongolia [2005] EWCA Civ 395; IIG Capital LLC v. Van Der Merwe [2008] EWCA Civ 542; Vossloh Aktiengesellschaft v. Alpha Trains (UK) Limited [2010] EWHC 2443; Carey Value Added SL v. Gruppo Urvasco [2010] EWHC 1905. For more recent examples, see Multiplex Construction Europe Limited v. Dunne [2017] EWHC 3073 (TCC), Authoridad del Canal de Panamá v. Sacyr S.A. & Others [2017] EWHC 2228 (Comm) and Spliethoff’s Bevrachtingskantoor BV v. Bank of China Limited [2015] EWHC 999 (Comm) (cited with approval in Bitumen Invest AS v. Richmond Mercantile Limited FZC [2016] EWHC 2957 (Comm), paragraph 16 and Caterpillar Moteren GmbH & Co KG v. Mutual Benefits Assurance Company [2015] EWHC 2304 (Comm), paragraph 21). In the latter case, Carr J. endorsed (at paragraph 69) the following general principles: ‘(a) the question of whether a document such as each of the Guarantees is a true guarantee or a performance bond is a matter of construction to be determined on a case-by-case basis; (b) there are certain factors which may be indicative of the nature of the instruction, but these are not necessarily decisive; (c) the question that the Court will always be faced with is what, objectively, the parties to the contract intended; (d) in the modern commercial world, parties are capable of drafting agreements that are clear and that oblige the surety to pay regardless of the existence of any underlying liability if that is what they intend’.
[4] For example, the pro forma performance security demand guarantee provided with the FIDIC Red Book (1999 Edition) requires a written statement that the contractor is in breach of his or her obligations under the contract, and ‘the respect in which the [Contractor] is in breach’.
[5] For example, the FIDIC Red Book (1999 Edition) pro forma proposes that a demand for payment must contain the signature of the relevant minister or the employer’s directors authenticated by the employer’s bankers or a notary public.
[6] This reflects that, unlike conditional guarantees, on-demand bonds are usually issued by banks and insurance companies.
[7] Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] QB 159 at [171].
[8] See ‘Procuring the security’, infra.
[10] Permasteelisa Japan KK v. Bouyguesstroi and Bank Intesa SpA [2007] EWCH 3508 (QB).
[11] The author notes that, in her experience, status quo injunctions (of the type rejected in Permasteelisa) are frequently granted by courts in many jurisdictions, preventing the beneficiary of the on-demand security from calling, or receiving payment under, the security until the outcome of the underlying arbitration is known.
[12] Simon Carves Limited v. Ensus UK Limited [2011] EWHC 657 (TCC).
[13] Ibid, Paragraph 37.
[14] Ibid, Paragraphs 40 and 41.
[15] Doosan Babcock Limited (formerly Doosan Babcock Energy Limited) v. Comercializadora de Equipos y Materiales Mabe Limitada (previously known as Mabe Chile Limitada) [2013] EWHC 3201 (TCC).
[16] [2015] EWHC 949 (TCC).
[17] Ibid, paragraph 34. See Stuart-Smith J.’s decision, to similar effect, in Lukoil Mid-East Limited v. Barclays Bank Limited [2016] EWHC 166 (TCC).
[18] [2016] EWHC 607 (TCC).
[19] [2015] UKPC 37.
[20] J Murphy and Sons Ltd v. Beckton Energy Ltd at paragraph 47.
[21] Ibid, at paragraphs 62–68.
[22] For a contrasting view, see the Singaporean Court of Appeal in BS Mount Sophia Pte Ltd v. Join-Aim Pte Ltd [2012] 3 SLR 352 / [2012] SGCA 28, where the court found that the status quo is that the bond is allowed to be called.
[23] See for example, Bocotra Construction Pte Ltd v. AG [1995] 2 SLR(R) 262 where the judge held that bad faith could include making a call for payment ‘well in excess of … the beneficiary’s actual or potential loss’. Confirmed by the Singaporean Court of Appeal in BS Mount Sophia Pte Ltd v. Join-Aim Pte Ltd [2012] 3 SLR 352/ [2012] SGCA 28, albeit noting that the discretion should be exercised ‘sparingly’ with the court ‘slow … to disruption the allocation of which the parties had decided upon’. See also the recent (July 2018) decision in AES Façade Pte Ltd v. Wyse Pte Ltd [2018] SGHC 163 and the analysis of Singaporean case law on this issue at paragraphs 16–19.
[24] A detailed discussion of the law of suretyship is outside the scope of this chapter and readers are recommended to consult specialist texts in this area, such as Andrews and Millet, Law of Guarantees, Seventh Edition, 2015 or Phillips, O’Donovan and Courtney, The Modern Contract of Guarantee,Third Edition, 2016.
[25] Holme v. Brunskill (878) 3 QBD 495; Andrews and Millett, Paragraphs 9-023–9-028. The scope of the rule in Holme v. Brunskill was reviewed by the Court of Appeal in Topland Portfolio No. 1 Limited v. Smiths News Trading Limited [2014] EWCA Civ 18; [2014] 1 P & CR 17.
[26] Andrews and Millett, Paragraphs 9-029–9-034.
[27] Marubeni Hong Kong v. Mongolian Government [2005] EWCA Civ 395, per Carnwath LJ at para. 30.
[28] However, see Rubicon Vantage International Pte Ltd v. Krisenergy Ltd [2019] EWHC 2012 (Comm) in which the English High Court rejected a submission that, applying Marubeni by anology, where a non-bank had submitted itself to an autonomous on-demand obligation, these obligations should be construed narrowly.
[29] Wuhan Guoyu Logistics Group Co Lt v. Emporiki Bank of Greece SA [2012] EWCA Civ 1629, per Longmore LJ at paras. 26 to 29.
[30] There is authority for the proposition that there is a presumption in English law that an instrument not given by a bank or financial institution should not be construed as an on demand bond (see Autoridad del Canal de Panama v. Sacyr SA [2017] EWHC 2228 at paragraph 81(4) per Blair J). However, this presumption can be rebutted. See, for example, Ultrabulk A/S v. Jagatramka [2017] EWHC 2792 (Comm) where a personal guarantee provided by a director was found to be an on-demand guarantee. The judge (Teare J.) held the words ‘unconditionally and irrevocably’ were indicative of a primary liability arising on demand.
[31] A standby letter of credit will typically require presentation of documents (often signatures from the employer confirming that payment is due) in order to payment to be made under the instrument. An employer who issues a standby letter of credit to make or secure payment may be able to block payment under the standby letter of credit by refusing to provide the required documents or signatures. Where the English courts have jurisdiction over the letter of credit, the contractor may be able to seek judicial assistance. Section 39 of the Senior Courts Act 1981 permits the English High Court to direct a person to execute any conveyance, contract or other document, or indorse any negotiable instrument, and to step in and execute the document or indorse the negotiable instrument if that person fails to comply. This power has been used in relation to payments under letters of credit. See, for example, Astro Exito Navegcaion SA v. Southland Enterprise Co Ld (No. 2) (Chase Manhattan Bank NA intervening) [1983] 2 AC 787; Jack: Documentary Credits (Fourth Edition) at 9.85.
[32] Some banks will require that the contractor provide in addition an assignment of the proceeds of the construction contract as a condition of issuing the guarantees or bonds.
[33] The potentially catastrophic consequence of calling an on-demand guarantee or bond explains why banks may notify the contractor before paying out on the demand.
[34] SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication, a cooperative utility of banks headquartered in Belgium.
[35] See the English House of Lords decision in Shanning International Limited v. Lloyds TSB Bank plc; Lloyds TSB Bank plc v. Rasheed Bank (2001) 1 WLR 1462 (HL). EU Regulation No. 3541/92 prevented performance of a supply contract in Iraq. The supplier’s performance was guaranteed by an on-demand guarantee issued by a local bank in Iraq and counter guaranteed by Lloyds Bank in the UK. Article 2 of EU Regulation No. 3541/92 prohibited satisfaction of any claims ‘under or in connection with a contract or transaction the performance of which was affected, directly or indirectly, wholly or in part by the measured decided on pursuant to [the relevant UN Security Council] resolutions’. The House of Lords found (1) a claim under the performance guarantee was a claim ‘under or in connection with’ the supply contract, performance of which was prohibited under EU Regulation No. 3541/92; and (2) Article 2 of EU Regulation No. 3541/92 permanently prohibited a claim being satisfied in relation to the non-performance, including a claim from the issuing bank against the bank who had provided the counter guarantee.
[36] For example, the FIDIC Red Book (1999) provides an example proforma of tender security; the security to be provided by all prospective tenderers (referred to as the ‘Principal’ in the proforma) as a condition of submitting a bid. Any demand must be submitted within 35 days after the expiry of the validity of the tenderers’ tender and include signatures of the prospective employer (the ‘beneficiary’) authenticated by the beneficiary’s bankers or a notary public. The tender security can be called in the following situations: (1) if the tenderer withdraws its offer after the latest time specified for submission and before the validity of the offer expires; (2) if the tenderer refuses to accept the correction of errors in his offer in accordance with the conditions of tendering; (3) if the beneficiary awards the contract to the tenderer, and the tenderer fails to sign the contract agreement within 28 days from when it receives the letter of acceptance (or a different period as may be agreed); or (4) if the beneficiary awards the contract to the tenderer, and the tenderer fails to provide compliant performance security to the beneficiary within 28 days from when it receives the letter of acceptance (or a different period as may be agreed).
[37] Re Kitchin Ex p. Young (1881) L.R. 17 Ch. D. 668; Alfred McAlpine Construction Ltd v. Unex Corpn Ltd (1994) 38 Con LR 63, CA.
[38] [2017] EWHC 2228 (Comm); cited with approval in China Expert & Credit Insurance Corporation v. Emerald Energy Resources Limited [2018] EWHC 1503 (Comm), paragraph 55.
[39] Ibid, paragraph 137.
[40] Ibid, paragraph 161.
[41] Ibid, paragraph 166.
[42] [2011] EWHC 2251 (QB).
[43] Ibid, paragraph 30.
[44] [2018] EWHC 490 (TCC).
[45] Ibid, paragraph 41.
[46] Ibid, paragraph 55.