Экзамен зачет учебный год 2023 / The independence principle of letters of credit and demand guarantees (1)

The N ature o f D em an d Guarantees

party’s breach.196 In other words, the issuer’s liability arises upon the beneficiary’s statement rather than upon final accounting between the parties to the underlying contract.

K. Undertaking to pay ‘if and when

3.93 Where an instrument states that the issuer undertakes to pay ‘in the event that’ or ‘if and when’ a particular event occurs (for example the account party fails to perform his obligation under the underlying contract) and there is no requirement of a certificate either by the beneficiary or a third party, that is taken to indicate that the issuer’s obligation is conditional on proof that the stipulated event has actually occurred.19718Thus, in Marubeni v. Government o fMongolia™ the issuer promised to pay on demand all amounts payable under the underly­ ing contract ‘if not paid when the same becomes due’. This was construed as meaning that the issuer’s obligation only arose if the amounts payable were not paid and that that was wording appropriate to a secondary obligation. It was therefore held that the issuer’s obliga­ tion was conditional on default by the account party. The position may be different where the instrument contains an ‘if and when’ part but it is required that a demand should be accompanied by a certificate.199

L. Undertaking to pay ‘notwithstanding any contestation’

3 .9 4 Issuers sometimes undertake to pay on demand ‘notwithstanding any contestation’ by the account party or any other party.200 A variant of a ‘no contestation’ clause of this kind is one where the issuer waives ‘all rights of objection, defence, subrogation or suretyship’ arising from the underlying transaction.201 Although courts in some jurisdictions may regard such a clause as a strong indication that the instrument is a demand guarantee,20223that is not the approach of the English courts. In Marubeni v. Government o fMongolia™ there was a clause by which the issuer waived ‘any rights’ to require the beneficiary to proceed against the account party or to pursue any other remedy. Carnwath L.J., with whose judgment Sir Martin Nourse and Waller L.J. agreed, rejected a submission that the clause indicated that the instrument was intended to take effect as a performance bond. He said that the clause was ‘at best a neutral indication. In a normal performance bond there would be no need for such a waiver, because there would be no question of the issuing party having any such right’.204 It is submitted that this approach correctly follows, by analogy, the approach of the House of

196e.g. IE Contractors Ltd v. Lloyd’s Bank Pic [1990] 2 Lloyds Rep. 496.

197e.g. Heald v. O'Connor [1971] 1 WLR 497, where the issuer promised to pay ‘if and whenever the [account party] makes default in payment’ the instrument was held to create a secondary obligation. See also

GeneralProduce Co. v. UnitedBank Ltd [1979] 2 Lloyd’s Rep. 255.

198[2005] 2 AUER (Comm) 289.

199See discussion in para 3.82 above.

200e.g. the performance bond in Wahda Bank v. Arab Bank [1996] 1 Lloyd’s Rep. 470, 472. See also

the guarantee in Chartered Electronics Industries Pte Ltd v. Development Bank o fSingapore [1999] 4 SLR 655 at [47].

201A non-contestation clause does not prevent the issuer from refusing to pay where a demand does not satisfy the requirements of the instrument itself. For the beneficiary to be entitled to payment under an instrument which includes a non-contestation clause, the demand must comply with all the formal require­ ments of the instruments.

202A number of French courts have taken this view. See, e.g. Soc. Toit etjoie c. Banque de Placement et de Credit, Com. 2 February 1988, D. 1988. Somm. 239; Caisse Franco-Neerlandaisede Cautionnementsc. Soc. Borie SAE, Paris, 1 March 1989,0. 1990. Somm. 196; Societe Financiers des Parahotellerie c. Banque du Batiment et des Travaux Publics, Paris, 20 March 1992, D. 1993. Somm. 96.

203[2005] 2 All ER (Comm) 289.

204Ibid., at [33].

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IV. Problems o f Categorization: D em and Guarantee or Suretyship Guarantee?

Lords in the Trafalgar House case205 in relation to clauses excluding discharge by variation of

the underlying contract.

2. Where the Issuer is not a Bank

205See discussion in para 3.89.

206[2005] 2 All ER (Comm) 289.

207(1877) 3Q BD 495.

208Ibid., at [30].

209Ibid., at [28].

210Ibid.

211Such that the issuer shall be liable to pay when only ‘if’ the amounts payable under the underlying

contract are not paid when they become due.

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The N ature o f D em a nd Guarantees

presumption was not rebutted, the conclusion was that the instrument created secondary liability and was a suretyship guarantee. Similarly, in VosslohAktiengesellschaft v. Alpha Trains (UK) L td ln the presumption was not rebutted. In that case the presumption arose because the instrument in question was not issued in a banking context but was given by a parent company to support a contract entered into between its subsidiary and the beneficiary and the instrument described itself as a guarantee’ and the issuer as the ‘guarantor’. The instru­ ment stated that the guarantor unconditionally and irrevocably’ guaranteed to the benefi­ ciary ‘as principal debtor and not merely as surety’. It was held that those words were capable of having the effect of creating purely primary obligations. However, a contention that those words led to the conclusion that the instrument created purely primary obligations was rejected because the clause which contained those terms (Clause 2) went on to set out sub­ clauses ((a) to (e)) which had the appearance of secondary obligations in that liability under the clause was premised upon establishing a failure of performance of the underlying con­ tract by the account party. For example, under sub-clauses (a) to (c) the guarantor guaran­ teed the ‘due and punctual observance and performance’ by the account party of the underlying contract. As there were other terms in the guarantee indicating that the liability was secondary,221324it was held that the beneficiary had failed to rebut the Marubeni presump­ tion. However, in IIG CapitalLLC v. Van Der Merwe,lu where the presumption was raised, it was rebutted because there were powerful indicators in the terms of the instrument in favour of construing it as a demand guarantee.215

B.Scope of the presumption

3.98In Marubeni Carnwath L.J. did not explain why cases where the instruments were issued by commercial banks provide no useful guidance when construing similar instruments issued by persons other than commercial banks. A possible reason is that, since demand guarantees are a specialized form of irrevocable instrument developed by banks, the banks are familiar with them, whereas non-bank issuers are unlikely to be familiar with them or to have intended to assume the primary and independent liability created by such instruments unless the instrument is described in terms appropriate to demand guarantees or bonds. Seen in this way, the rationale of the presumption is to guard against a non-bank issuer being held to have undertaken the more onerous obligations arising under a demand guarantee when the issuer only intended to assume a secondary obligation arising under a true guarantee. Through the presumption the law adopts a protective attitude towards non-bank issuers. If this is the case, then it may be questionable whether it is necessary for the presumption to cover all non-bank issuers. Whereas it might be easy to see the need for the law, through the presumption, to show a particular tenderness towards an issuer who is an individual, the basis for the same protection is not so clear in the case of other issuers such as insurance companies,216 whose

212[2010] EWHC 2443 (Ch).

213Including a ‘pay now, argue later clause’, which assumed that the guarantor could raise defences of the account party, and a conclusive evidence clause which was limited to the amount but did not extent to the liability.

214[2008] EWCA Civ 542.

215See discussion in para 3.83.

216In CamnerInternationalInc v. UKMutualSteamshipAssuranceAssociation (Bermuda) Ltd [2005] EWHC 1694 (Comm), esp. at [50], the court felt bound to apply the Marubeni presumption to a letter of undertaking

issued by the UK P&I Club on account of a ship owner.

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IV. Problems o f Categorization: D em and Guarantee or Suretyship Guarantee?

business includes the issuing of guarantees,217 or commercial companies, who should be familiar with performance bonds, since they were developed for their benefit, or states, who can look after themselves.218 It is suggested that in applying the Marubeni presumption a distinction should be drawn between corporate or institutional issuers, on the one hand, and individuals, on the other hand. The presumption should apply to the latter but not the former.

3. International Transaction

Since performance bonds have been used mainly in relation to international trade 3.99 transactions,219 the courts once took the view that the fact that the underlying contract was

an international trade transaction was a factor indicating that the issuer had assumed a pri­ mary liability, independent of the underlying transaction.220 However, as performance bonds are commonly used in purely domestic transactions nowadays,221 it is not clear what weight, if any, the courts will give to the international character of the underlying transaction. It would appear that the fact that the underlying transaction is a domestic contract does not necessarily indicate that the instrument is not a demand guarantee. In Van DerMerwe v. IIG Capital LLC222 it was contended for the issuer that the fact that the account party was registered in England and Wales, the same jurisdiction in which the issuer lived, and the fact that the beneficiary had a debenture over the account party’s assets showed that it was not a case in which the account party was in some ‘difficult loreign jurisdiction’ where he could evade payment. The contention was that this was essentially a domestic transaction and therefore the court should be slow to construe the instrument as a performance bond. But the judge refused to give this feature any weight, saying that: ‘[performance] bonds are well known in a purely domestic context, particularly in the context of building and engineering projects. They are not restricted to international transactions’.22324So the interna­ tional character of the underlying contract may no longer be accorded the same significance which it once had. In Marubeni,224 where the court construed the instrument as imposing a secondary liability, the fact that the underlying transaction was a contract for the interna­ tional sale of goods was not discussed as an important factor.

217For example, in Greenore Port Ltd v. Technical & General Guarantee Company Ltd [2006 ] EWHC 3119 (TCC) at [142] the evidence ofthe solicitor and company secretaryo fTechnical & General Guarantee Company Ltd was that the company issued about 500 performance bonds per year, mostly in the field of construction.

218States should be familiar with performance bonds as they are often beneficiaries under performance bonds. See, e.g. Consolidated Oil Ltd v. American Express Bank Ltd (2002) CLC 488 (the beneficiary was the Privatisation Committee of Cote d’Ivoire); Wahda Bank v, Arab Bank Pic, 16 June 1999 (an agency of the Libyan Armed Forces was the beneficiary); Banque Saudi Fransi v. Lear Siegler Services Inc [2005] All ER (D) 142 (performance bond in favour of the Saudi Ministry of Defence, issued by the parent company of the account party rather than a bank).

219Thus Lord Denning M.R. was able to say that the performance bond was ‘a part ofthe essential machinery of international trade’: State Trading Cotp o fIndia Ltd v. ED & F Man (Sugar) Ltd\ 1981] Com LR 235, 236.

220Gold Coast L.td v. Caja De Ahorros Del Mediterraneo [2002] 1 All ER (Comm) 142, 148; TTI Team

Telecommunications International Ltd v. Hutchinson 3G UKLtd[2003] 1 AUER (Comm) 914,937.

221 e.g. IHersbridge Property Developments Ltd v. Muir Construction Ltd [2008] CSOH 44; The Wardens and Commonalty o fthe Mystery o fMercers o fthe City o fLondon v. New Hampshire Insurance Co [1992] 2 Lloyds Rep. 365.

222[2007] EWHC 2631 (Ch).

223Ibid., at [39].

224[2005] 2 All ER (Comm) 289.

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4

THE INDEPENDENCE PRINCIPLE

I.IN TRO D UCTIO N

1. Nature of the Principle

A fundamental principle that applies to letters of credit and demand guarantees is that the 4.01 obligation of the bank to make payment under the instrument is independent of claims or defences arising from the underlying contract in respect of which the instrument is issued.

This means that in deciding whether it is bound to make payment under the instrument the bank is only concerned with the requirements of the instrument and the documents pre­ sented pursuant to those requirements. If the documents presented appear on their face to comply with the requirements of the instrument the bank is bound to pay even though the account party asks the bank not to pay because of a dispute with the beneficiary arising from the underlying contract.12Hie courts will not grant an order either to restrain the ben­ eficiary from demanding payment under the instrument or to restrain the bank from making payment under it on grounds outside of the terms of the instrument itself. As Waite L.J. said in Themehelp Ltd v. West-} ‘Letters of credit, performance bonds and guarantees are all subject to the general principle that they must be treated as autonomous contracts, whose operation is not to be interfered with by the court on grounds extraneous to the credit or guarantee itself.’ Thus, if a seller presents complying documents under a letter of credit the bank is not entitled to refuse to pay on the ground that the goods delivered by the seller are not of satisfactory quality. The bank must pay and leave the buyer to pursue any claim he may have against the seller for damages for breach of the contract of sale.

1 Urqubart, Lindsay & Co Ltd v. Eastern Bank Ltd [1922] 1 KB 318; United CityMerchants (Investments) Ltd v. RoyalBank o fCanada [1983] 1 AC 168, at 183.

2 [1996] 1 QB 84, 89.

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The Independence Principle

4.02 The principle of independence also applies to the chain of interlocking contracts arising in a letter of credit or demand guarantee transaction. Each contract is independent of the other contracts.3 Tfius, in the case of a letter of credit, the beneficiary’s contract with the confirming bank is independent of the confirming bank’s contract with the issuing bank, the confirming bank’s contract with the issuing bank is independent of the issuing bank’s contract with the account party and the issuing bank’s contract with the account party, the buyer, is independent of the underlying contract of sale between the account party and the beneficiary, the seller. Similarly, in the case of a demand guarantee, the beneficiary’s contract with the issuing bank is independent of the issuing bank’s contract with the instructing bank, the issuing bank’s contract with the instructing bank is independent of the instructing bank’s contract with the account party, the seller, and the instructing bank’s contract with the account party is independent of the underlying contract of sale between the account party and the beneficiary, the buyer. Thus, in the case of a demand guarantee, the account party has no contractual relationship with the issuing bank instructed by the account party’s bank. This is so even if the account party is mentioned in the demand guarantee, as where the guarantee states that the issuing bank issues it ‘by order of’ or ‘on behalf of’ the account party.4

4.03 The letter of credit or demand guarantee contract remains separate and independent of the underlying contract even for purposes of determining the applicable law. Thus, if the parties to the letter of credit or demand guarantee contract have not selected the law that governs their contract it will not automatically be governed by the law that governs the underlying contract by application of the doctrine o f‘infection’.5

2. Rationale and Sources

A. Rationale

4 .0 4 The purpose of the independence principle is to insulate the letter of credit and demand guarantee from disputes arising from the underlying contract and thereby to give the benefi­ ciary a cast-iron assurance that payment will be made even in the face of complaints by the account party about the performance or breach of the underlying contract. The principle prevents the account party from stopping payment by the simple device of claiming that there is a dispute between the parties to the underlying contract. The principle dictates that the bank must pay even though there is a genuine dispute between the seller and the buyer. In short, the principle seeks to make letters of credit and demand guarantees so reliable as payment instruments as to be regarded as equivalent to cash in hand. In United City Merchants v. Royal Bank o f Canada,6 Lord Diplock explained that ‘[t]he whole commercial purpose for which the system of confirmed irrevocable documentary credits has been devel­ oped in international trade is to give the seller an assured right to be paid before he parts with control of the goods that does not permit any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment. It is the assurance of payment that gives letters of credit and demand guarantees their international commercial value and enables them to perform such a vital role in the

3 e.g. Alaska Textile Co Inc v. ChaseManhattan Bank 982 F 2d 813 at 815 (2d Cir. 1992). 4 United Trading Corporation v. AlliedArab Bank [1985] 2 Lloyds Rep. 554, 559-560.

5See the discussion in Chapter 13, para 13.72.

6[1983] 1 AC 168 at 183F.

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I. Introduction

financing of international trade that they have been described as part of ‘the life-blood of international commerce’.7 It is for this reason that in Bolivinter Oil SA v. Chase Manhattan BankNA8Sir John Donaldson M .R. referred to the principle of independence as a ‘great and fundamentally important’ principle. Without it there will no assurance of payment under letters of credit or demand guarantees since an account party will be free to stop payment whenever there is a dispute relating to the underlying contract. If that were to be the case then, as Hirst J. once remarked, ‘the lifeblood of international trade would truly be afflicted with thrombosis’.9

B. Sources

Whereas in some civil law jurisdictions, like France, the principle is contained in a code,101234 4.05 in England, it has been recognized as part of the common law. An early statement of the principle, in the context of letters of credit, is by Jenkins L.J. in Hamzeh Malas & Sons v. British Imex Industries L td 11 where he explained that a confirmed letter of credit ‘constitutes

a bargain between the banker and the vendor of goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties [to the underlying contract of stile] as to whether the goods are up to contract or not. An elabo­ rate commercial system has been built up on the footing that bankers’ confirmed credits are of that character.’The same principle applies to demand guarantees. Thus in Howe Richardson Scale Co Ltd v. Polimex-Cekop and National Westminster Bank L td'1Roskill L.J. stated that:

[wjhether the obligation arises under a letter of credit or under a [demand] guarantee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contract; the bank here is simply con­ cerned to see whether the event has happened upon which its obligation to pay has arisen.

A very lucid statement of the principle is the often cited passage in the judgment of Lord

Denning M.R. in Edward Owen Engineering Ltd v. Barclays Bank International Ltd,™ where,

after reviewing the relevant authorities, he concluded that:

[a] 11 this leads to the conclusion that the performance bond 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 [benefi­ ciary] and the [account party], nor with the question whether the [beneficiary] has performed his contracted obligations or not; nor with the question whether the [beneficiary] 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 where there is a clear fraud of which the bank has notice.

In spite of these statements, in Potton Homes Ltd v. Coleman Contractors L td u Eveleigh L.J. 4.06 questioned the extent to which a demand guarantee may be regarded as independent of the

7 RD Harbotde v. National Westminster Bank /.Лс/ [1978] QB l46at 155.

8[1984] 1 Lloyds Rep. 251 at 257.

9Hong Kongand Shanghai Banking Corporation v. Klocckncr & Co AO' [19901 2 QB 514 at 525.

10Article 2321 (3) of the French Civil Code, introduced in 2006 by Ordinance No. 2006-346 of 23 March 2006 (Art. 2 JORF 24 March 2006).

11[1958] 2 QB 127, at 129.

12[1978] 1 Lloyd’s Rep. 161, 165.

13[1978] 1 QB 159, 171.

14 (1984) 28 BLR 19 at 26.

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The Independence Principle

underlying contract. He said that ‘[u]nlike the letter of credit, the [demand] bond is in its infancy, although it is developing rapidly. There are several features of the bond which have not yet been universally established. One is the extent to which it is to be regarded as inde­ pendent of the underlying contract.’ It is submitted that if there was doubt in 1984 as to the extent to which the principle of independence was applicable to demand guarantees, nowa­ days it is widely accepted that the principle applies to demand guarantees as much as to let­ ters of credit.15

4.07 The principle of independence is also recognized in other jurisdictions. An illuminating statement of the principle may be found in the decision of the Supreme Court of Canada in Bank o fNova Scotia v. AngelicaWitewear L td 16 where, in delivering the judgment of the court, Le Dain J. said:

The fundamental principle governing documentary letters o f credit and the characteristic which gives them their international commercial utility and efficacy is that the obligation o f the issuing bank to honour a draft on a credit when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions o f the credit is independent o f the performance o f the underlying contract for which the credit was issued. Disputes between the parties to the underlying contract concerning its performance cannot as a general rule justify refusal by an issuing bank to honour a draft which is accompanied by apparently conforming documents. This principle is referred to as the autonomy o f documentary credits.

4 .0 8 In the United States, although the principle of independence was fundamental to letter of credit transactions,17 it was not expressly stated in the original Article 5 of the Uniform Commercial Code (UCC). The revised Article 5 clearly states that the issuers undertaking under the letter ofcredit is independent of the underlying transaction. Thus, Article 5-103(d) provides that ‘Mights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or non-performance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary’. This is reinforced byArticle 5 -108(f) which makes it clear that an issuer is not responsible for the performance or non-performance of the underlying con­ tract, arrangement, or transaction, an act or omission of others, or the observance or knowl­ edge of the usage of a particular trade other than the relevant standard banking practice.

4.09 An example ofinternational recognition of the principle is to be found in the UN Convention on Independent Guarantees and Standby Letters of Credit.18 International practice, as evidenced in UCP 600 and URDG 758, confirms that the principle of independence applies to demand guarantees as much as to letters of credit. In relation to letters of credit, Article 4.a of UCP 600 provides that:

[a] credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference

15e.g. Themehelp Ltd v. West [1996] QB 84 at 89. See also the discussion in paras 4.13 to 4.16.

16[1987] 1 SCR 59 at [10].

17e.g. Marino Ind. Corp v. Chase Manhattan Bank, NA 686 F 2d 112, 155 (2dCir. 1982); Alaska Textile Co Incv. ChaseManhattan Bank 982 F 2d 813 at 815 (2dCir. 1992).

18Art. 3. See also Art. 29 of OHADA Uniform Act on Securities.

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II. The Scope o f the Independence Principle

whatsoever to it is included in the credit. Consequently, the undertaking o f a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary.

Article 5 then reinforces the independent nature of the bank’s undertaking by stating that 4 .10

‘banks deal with documents and not with goods, services or the performance to which the documents may relate’. In relation to demand guarantees, Article 5.a of the URDG 758, like Article 4.a of UCP 600, provides that a demand guarantee ‘is by its nature independent of the underlying relationship and the application, and the [issuer] is in no way concerned with or bound by such relationship . . . The undertaking of a [issuer] to pay under the guarantee is not subject to claims or defences arising from any relationship other than a relationship between [the issuer] and the beneficiary’.19 Article 6 then stipulates, in the same terms as Article 5 of UCP 600, that issuers ‘deal with documents and not with goods, services or performance to which the documents may relate’. Thus in the case of a letter of credit or demand guarantee subject to UCP 600 or URDG 758 the independence principle of the relevant uniform rules supplements the common law principle recognized by the courts.

II. T H E SCOPE OF TH E IN DEPENDENCE

PRINCIPLE

The independence principle insulates the bank’s undertaking to pay the beneficiary from 4.11 defences or claims of the account party arising from the underlying contract. However, it

does not extend to prevent the bank from raising defences or claims that it might have against the beneficiary arising from the letter of credit or demand guarantee itself.

1. Account Party’s Defences and Cross-claims

As a general rule the principle of independence precludes the account party’s defences or 4.12 claims against the beneficiary, arising from the underlying contract, from interfering with

the rights and obligations created by the contract embodied in the letter of credit or demand guarantee. This means that the account party’s defences or claims cannot be relied upon by the bank as a basis for refusing to make payment to the beneficiary or by the account party as a ground for an injunction either to prevent the bank from malting payment to the beneficiary or to prevent the beneficiary from demanding or receiving payment under the instrument. However, the extent to which the account party’s claims or defences may not be relied upon as a ground to interfere with the operation of the instrument is not entirely clear. Whereas the independence principle does not allow for any reliance on a defence or claim based on the performance or breach of the underlying contract, there is some uncer­ tainty as to the extent to which the independence principle prevents the account party from relying on a claim challenging the validity or enforceability of the underlying contract or, in the case of a demand guarantee, a claim that the demand is based on a breach of the underly­ ing contract that is merely anticipatory. It may be helpful to consider these points in turn.

19 Art. 5(b) makes similar provision in relation to a counter-guarantee.

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