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

97SeaconsarFar East Ltd v. Bank MarkaziJombouri Islami Iran[\ 993] 1 Lloyd’s Rep. 236 at 240.

98[1999] Lloyd’s Rep. 219.

99Ibid., at [12].

100 [2009] EWLIC 2303 (Comm).

m Ibid., at [42]. ,

102 Guaranty Trust Co o fNew York v. Van Den Berghs Ltd (1925) 22 LI L R. 447 at 455.

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Moreover, whereas the guarantee required payment in the event that the buyer failed to open a letter of credit, the demand stated that ‘no valid . . . letter of credit had been tendered’. It was held that the demand was valid in spite of the errors. Hirst J. explained the reason why the requirement of compliance should be less strict in the case of demand guarantees than in letters of credit. He said that ‘in a letter of credit the bank is of course dealing with the very

106Ibid., at 500.

10726 February 1997, Thomas J.

108Thomas], said that this conclusion was supported by the decision of the Court ofAppeal in Singapore in

Indian Overseas Bank v. United Coconut OilMills Inc, 24 September 1992. In that case a letter of credit called for a certificate of analysis of oil with a set measurement of FFA on a given scale. The certificate presented had the required measurement of FFA on that scale and a further measurement on another scale. Although it was known in the trade that the scales were convertible and the measurements identical, the Court of Appeal held that the document was not compliant because a prudent banker would not know that the scales were convertible and the measurements identical and the bank was entitled to make its judgement without reference to extrinsic evidence.

10922 October 2001, Garland J.

110Art. 2.

111[1982] 2 Lloyd’s Rep. 146.

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The Independence Principle

documents themselves, and is obliged to compare with meticulous care those tendered with those described in the mandate, whereas in the present case the bank is dealing with no more than a statement in the form ofa declaration to the effect that a certain event has occurred’.11213 In IE Contractors Ltd v. Lloyd’s Bank'n Staughton L.J. agreed with the view that there is less need for a doctrine of strict compliance in the case of performance bonds. He gave two rea­ sons for this view. The first is that performance bonds ‘are used less frequently than letters of credit, and attract attention at a higher level in banks. They are not so much part of the day- to-day mechanism of ordinary trade.’ The second reason advanced is that the kind of docu­ ments which performance bonds require is usually different from the land required under а letter of credit. However, Staughton L.J. also said that ‘[t]he degree of compliance required by a performance bond may be strict, or not so strict. It is a question of construction of the bond’.114 In that case the performance bond stated that the issuers promised to pay the speci­ fied sum unconditionally and on demand ‘being your claim for damages’ brought about by the account party. The demand asserted breaches of contract but did not in terms mention damages. Leggatt J. held that the demand was invalid because, inter alia, it failed to state that the demand was ‘for damages’ brought about by the account party. But the Court of Appeal refused to take such a strict approach and held that the demand was valid because it did say in substance, although not in express words, that what it claimed was damages for breach of contract. Staughton L.J. resolutely declined to interpret the performance bond as stating that the issuer will pay if, but only if, the precise words of the bond are to be found in the demand. It should be noted that the Court of Appeal took the view that strict compliance with the precise words was not required in that case partly because the bonds were issued by one Iraqi company to another, written in both English and Arabic, in language which was vague. In those circumstances, Staughton L.J. could ‘not attribute to the parties an intention that there had to be a strict degree of compliance’.11516The position may therefore be different in a case where the bond is issued by one company in England to another company also in England (or in another English-speaking country), was written in English only, and in language which was very precise.

4 .52 In any event, in a number of cases concerned with demand guarantees the courts have adopted a strict approach to compliance. For example, in Maridive & Oil Services (SAE) v. C AN Insurance Co (Europe) L td )K where a demand guarantee required a demand by and payment to A, and A was described in the bond as the legal representative of B, it was held that A alone was the beneficiary entitled to make a demand. Consequently, a demand by B, on the basis that A is merely B’s agent, was a non-complying demand and the issuer was entitled to reject it. A very strict compliance was also required in the Singapore case of

Brightside Mechanical and Engineering Services Group Ltd v. Standard Chartered Bank117

where the Singapore High Court held that the words ‘as determined by you [the beneficiary] in your absolute judgment’ in a performance bond required the beneficiary to make a deter­ mination before it could make a demand. Consequently, a demand notice did not comply with the requirement because it simply stated that the beneficiary had a belief rather than

112Ibid., at 159.

113[1990] 2 Lloyd’s Rep. 496, 500.

114IE Contractors Ltd v. Lloyd’s Bank Pic [1990] 2 Lloyd’s Rep. 496, 501.

115Ibid., at 502.

116[2002] EWCA Civ 369 at [10] and [51].

117[1989] 3 MLJ 13.

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III. The Role o f Documents

that it had made a determination. The court took the view that there was more than semantic difference between saying: ‘We have determined that [the account party] has failed’ and ‘We believe that [the account party] has failed’.118 The doctrine of strict compliance also applies

in respect of any requirement in the instrument for the basis of the demand to be stated.

(ii) Basis o fthe demand

guarantee in this context the court should construe it as requiring a statement of breach merely because that construction will help to curb abusive calls on demand guarantees. In Esal (Commodities) and Relton v. Oriental Credit and Wells Fargo Bankni Ackner L.J. construed the bond in that case as requiring a statement by the beneficiary that there was a breach of contract. He said that this interpretation of the performance bond was justified on the ground that ‘the need to inform the bank of the true basis upon which he is making his demand may be very salutary. . . [it] may prevent some of the many abuses of the perfor­ mance bond procedure that undoubtedly occur’.123 But Neil L.J. did not agree with this view. He stated that in the absence of any requirement in the performance bond itself for a statement to support the demand he would be reluctant to introduce into this field any rule which allowed scope for an argument that the qualifying event had not been sufficiently identified.124 In the subsequent case of IE Contractors L td v. Lloyd’s Bank Plcns Ackner L.J.’s approach was rejected by Staughton L.J. Whilst he agreed with Ackner L.J. that a construction which holds that a demand had to assert a breach of contract was one which one would wish to adopt because it would provide some safeguard against abusive demands, nevertheless he did not think that it was a sufficient reason to adopt a particular

118 On the basis that the words ‘belief’ and ‘determination’ were conceptually different. The word ‘belief’, it was held, expressed a state of mind (for example that something is the case) whereas the word ‘determination’ expressed a conscious act of deciding that something is the case. It is doubtful that the parties had this fine distinction in mind when agreeing to the terms of the performance bond.

119e.g. Article 34 of the OHADA Uniform Act on Securities.

120Esal (Commodities) and Relton v. Oriental Credit and Wells Fargo Bank NA [1985] 2 Lloyd’s Rep. 546.

Followed in the Malaysian case of Teknik Cekap Sdn Bhd v. Public Bank Bhd\\995\ 3 MLJ 449.

121Esal (Commodities) and Relton v. Oriental Credit and Wells Fargo Batik N A [1985] 2 Lloyd’s Rep. 546.

122[1985] 2 Lloyd’s Rep. 546.

123Ibid., at 550.

124Ibid., at 554.

125[1990] 2 Lloyd’s Rep. 496 at 500.

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The Independence Principle

construction of a commercial contract that the result would be desirable or salutary.12617It is submitted that Staughton L.J.’s approach is to be preferred since commercial contracts are normally construed to determine what the parties intended rather than to reach a result that is desirable.

4.55 Once a demand guarantee is construed and what it requires is identified, the approach of the courts is to insist on strict compliance by the beneficiary, although, as in the case of letters of credit, the words in the demand need not mirror exactly the words of the guarantee. In IE Contractors v. Lloyd's Bank Pic and Rafidain Bankm a performance bond provided that the issuer undertakes to pay you, unconditionally, the said amount on demand, beingyour claim for damages brought about by the account party.128 The Court of Appeal held that the bond required something more than a mere demand. The beneficiary was required, in addition to making a demand, to state that it was a claim for damages brought about by the account party. It was also held that it was not necessary for the beneficiary to use the precise wording of the bond. Therefore, a demand which asserted breaches of contract by the account party but did not in terms mention damages was held to be sufficient. Staughton L.J. said that the demand made did say ‘in substance, although not in express words, that what it claimed was damages for breach of contract’. In the same case, a counter-guarantee given to the issu­ ing bank stated that the counter-guarantor undertook to pay on demand ‘any sums or sums which you are obliged to pay under your guarantee’. It was held that the obligation was to pay any sum which the issuing bank might be obliged to pay under its guarantee. Consequently, the counter-guarantees were payable on a demand by the issuing bank following a demand by the beneficiary under the performance bond.

4.56 In the same case, under a different counter-guarantee the counter-guarantor undertook to pay ‘any amount you state you are obliged to pay’. It was held that it was not enough for the issuing bank to demand payment stating that the beneficiary has demanded payment under the performance bond. A demand under this counter-guarantee was required to state the basis of the demand, namely, that the issuer was obliged to pay under the performance bond. Consequently, a demand which did not state that the issuing bank was obliged to pay under the performance bond was not compliant and the counter-guarantor was not bound to pay.129130Similarly, in Esal (Commodities) and Reltor Ltd и Oriental Credit Ltd and Wells Fargo Bank N Ana where the issuer promised to pay on demand ‘in the event that the [account party] fails to execute the contract in perfect performance’ the Court of Appeal held that the bond required that, in addition to the beneficiary making a demand, he must also inform the bank that the demand was being made on the basis provided in the performance bond itself, namely that the account party has failed to execute the contract. Consequently, a demand

126 Although Ackner L.J.s approach has been well received in Singapore and Malaysia. See Brightside Mechanicaland EngineeringServices Group v. Standard CharteredBank [1989] 3 MLJ 13; Kvaerner Singapore v. UDL Shipbuilding (Singapore) [1993] 3 SLR 350; Chartered Electronics Indtistries Pte Ltd v. Development Bank o fSingapore [1999] 4 SLR 655 at [47]-[48]. See also Teknik CepakSdn Bhdv. Public Bank AW [l 995] 3 MLJ 449, esp. 457, 459; Berhadv. BandarSubangSdn AW [1998] 650 MLJU 1 at 9-10.

127IE Contractors v. Lloyds Bank Pic and Rafidain Bank[ 1990] 2 Lloyds Rep. 496.

128Emphasis added.

It is for this reason that the demand under the third counter-guarantee in the E l Contractorsesse (relating to the Kerbala contract) was not compliant.

130 [1985] 2 Lloyds Rep. 546.

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131 The approach of the Court of Appeal in IE Contractors and Esal has been followed by the courts in Malaysia. In Teknik Cepak Sdn Bhd v. Public Bank Bhd [1995] 3 MLJ 449, for example, where the issuer undertook to pay ‘if the sub-contractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder’ the Court ofAppeal of Malaysia held that the bond required that any demand foi payment must assert that the account party has failed to perform his obligation under the contract. See also the decisions of the Federal Court of Malaysia in ChinaAirlines Ltd v. Maltran Air Corp Sdn Bhd [1996] 2 MLJ 517 and Government o fMalaysia v. South EastAsia Insurance Bhd [2000] 3 MLJ 625. However, more recently, in Katya Lagenda Sdn Bhd v. Kejuteraan Bintai Kindenko Sdn Bhd [2008] 6 MLJ where the relevant clause of the performance bond was in terms virtually identical to that in the Teknik case, the Malaysian Federal Court, whilst claiming to follow the decision in the Teknik case, interpreted the bond as not requiring the beneficiary to assert that the account party had failed to perform or had committed a breach of the underlying contract. Tire reason advanced for this view is that the bond was independent of the underlying contract and the court would not inquire into any breach in the underlying contract. This view, with respect, confuses proofofa breach of the underlying contract as a condition of payment with a requirement in the bond itself that the beneficiary should merely assert (without proof) that there has been a breach of the underlying contract.

132[2001] Lloyd’s Rep. Bank 14.

133[2003] EWCA Civ 1324.

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The Independence Principle

settlement agreement the breach could no longer be said to exist since no further perfor­ mance was required. The decision was reversed on appeal. Since the judge accepted, for purposes of the first demand, that the bank’s obligation to pay could be triggered by a breach that was merely anticipatory, his decision in relation to the second demand, that a demand made in reliance of an anticipatory breach must itself be made while the obligation to per­ form the contract continues to subsist, could not be sustained. Rix L.J. said that if the judge was right that the breach ol December 2001 was merely anticipatory, ‘then it may be that MEA’s first demand could be attacked, subject, however, to the doctrine that a performance guarantee is autonomous from the underlying contract for which it is security and that only fraud is an exception to the rule that the merits of the underlying contract are irrelevant to the operation of the guarantee’.134 If that reasoning were correct, it would mean that a demand made after the beneficiary has accepted the account party’s anticipatory repudiation would be too late. The Court of Appeal remarked that such a result would be extraordinary as it would mean that the parties intended the performance guarantee to cease to operate in exactly the situation in which the beneficiary most needs it, namely, when there was a total failure by the account party to perform the contract.135 Therefore, if it is correct that a bank’s obligation under a performance guarantee can be triggered by a demand made following an anticipatoty breach, the fact that the obligation to perform has come to an end following the anticipatory breach (whether by acceptance of the breach or otherwise) before the making of the demand is irrelevant.

4 .60 In the M anx Electricity case the bank sought to argue in the Court ofAppeal that as a matter of construction the guarantee required that, at the time when the demand was made, the breach relied on by the beneficiary should be capable of remedy in a suit by the beneficiary against the account party. The breach relied on was no longer actionable as a result of the settlement agreement. In other words, the contention was that the guarantee did not bite on accrued, existing, but non-actionable breaches. Rix L.J. said that the arguments on that issue were capable of being well balanced. But he was not impressed with the bank’s argument that the guarantee contemplated the continuing possibility of performance of the primary obligation by providing the contractual services or the secondary obligation by paying damages. He said: I would have thought that the parties to a performance guarantee con­ template that it will continue to provide security to its beneficiary in exactly those situations where the principal is in substance able to perform neither his primary nor his secondary obligations. The fact that in theory, but not in practice, he remains amenable to a claim to pay damages, seems to me to be of uncertain importance’.136 However, the Court of Appeal did not express a final view on this point because it was an issue that was to be addressed at the trial. A possible argument against the bank’s suggested construction of the provision in the guarantee is that it would make the bank’s liability under a demand guarantee to be con­ ditional on the liability of the account party, whereas this is normally a feature o fa suretyship guarantee.137 Moreover, the suggested construction would require the bank to go beyond the documents required under the guarantee to investigate facts, which would be contrary to the

134Ibid., at [36].

135Ibid., at [37] and [47].

136Ibid., at [40].

137See discussion in para 3.64.

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IV. Exceptions

general principle that the issuer of a demand guarantee is not required to investigate facts to determine if a demand is compliant.138

IV. EXCEPTIONS

1. Reasons for the Exceptions

As already indicated, the independence principle shields the bank’s undertaking to pay 4.61 against any interference based on matters outside the terms of the letter of credit or demand guarantee. The purpose is to give the beneficiary of the instrument an assurance that the bank

will make payment even though there may be disputes relating to the underlying contract. The principle renders the account party powerless to stop payment on the ground that he has a defence or cross-claim arising from the underlying contract. It puts the beneficiary in a position of power in relation to the bank and the account party. If the beneficiary presents complying documents the bank is entitled and bound to pay, even though, in the case of a letter of credit, for example, the buyer claims that the seller has committed a breach of the contract of sale by supplying defective goods. The position of power in which the principle of independence places the beneficiary is one which, like most positions of power, is suscep­ tible to abuse by some unscrupulous beneficiaries.139 The risk of abuse is diminished by the requirement of strict compliance which means that the bank is only entitled to pay where the documents presented comply strictly with the requirements of the instrument. By stipulat­ ing for specific documents to be presented an account party provides himself some protec­ tion from abusive demands. As explained below,140 the degree of protection will depend on the content of the document required and the signatory of the document. However, the protection afforded by the requirement of strict compliance is limited and may not be very effective in a case where the beneficiary is determined to commit fraud. A more direct form of protection is required. Recognition of the need to provide the account party with some protection more than that based on strict compliance has resulted in the acceptance in vari­ ous jurisdictions of a number of exceptions to the independence principle specifically designed to protect the account party from abusive demands for payment.

However, not every exception is designed solely for the protection of the account party. 4.62 Considerations of the public interest have also provided the bases for some of the exceptions.

The illegality exception, for example, is not based on a need to protect the account party fiom the illegal conduct of the beneficiary. It is based on the public interest which requires that the court should not lend its aid to a person who founds his cause of action upon an illegal act.

138See discussion in paras 4.35 to 4.38.

139See, e.g. Esal (Commodities) Ltd v. Oriental Credit Ltd [1985] 2 Lloyd’s Rep. 546 at 550, where

Ackner L.J. referred to the ‘many abuses of the performance bond procedure that undoubtedly occur’. The problem of fraud or abuse in demands for payment under demand guarantees and letters of credit was also recognized as ‘a particularly troublesome and disruptive area in practice’ in para 45 of the Explanatory Note to the UN Convention on Independent Guarantees and Standby Letters of Credit, prepared by the

UNCITRAL Secretariat.

140 Paras 5.П 0 to 5.127.

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The Independence Principle

2. What are the Exceptions?

4.63 Originally it was thought that the independence principle was absolute so that there was no exception to its application.141 However, it soon became clear that an exception was needed to deal with cases of blatant abuses involving fraud. Consequently the fraud exception was established. For a long time fraud was regarded as the only exception.142 But there have been pressures for more exceptions to be recognized. The narrow scope of the fraud exception, based on dishonesty, offered only limited protection to the account party. There was no pro­ tection where the conduct ol the beneficiary in demanding payment was an abusive exercise of his right under the instrument even though it did not amount to fraud. This left a protec­ tion gap that needed to be bridged. A suggestion that the account party should simply accept the risk of abusive demand for payment as part of commercial life and to factor that into the pricing of the underlying contract143 is considered to be unrealistic. Such an approach might be commercially unwise for a party who may thereby price himselfout of the bidding for the relevant contract. It has increasingly come to be accepted that the protection gap is one that has to be bridged by recognizing some other exceptions in addition to the fraud exception. Moreover, it became clear that for the protection of the public interest, an exception based on the illegality of the underlying contract might be necessary. The result is that there are clear indications that English law is now prepared to recognize other exceptions in addition to the long established fraud exception.

4 .6 4 The possible additional exceptions include; illegality of the underlying contract, unconscio­ nable conduct or bad faith, a recklessness exception and an exception where a demand for payment is made in breach of the underlying contract. If these four possible additional exceptions are all recognized in English law there will be five exceptions to the independence principle. It would therefore appear that the list of exceptions is not closed. Further excep­ tions may be added according to changing circumstances. Some jurisdictions have already recognized some ol the lour possible additional exceptions and some jurisdictions have gone further to recognize other exceptions that have so far been rejected by English law, such as a nullity exception. These exceptions are examined in the next five chapters.144

141cf. United Trading Corporation Л/1 v. AlliedArab Bank [1985] 2 Lloyd’s Rep. 554, 561.

142e.g. United City Merchants (Investments) Ltd v. Royal Bank o f Canada [1983] 1 AC 168, 182; Manx Electricity Authority v. JP Morgan Chase Bank [2003] EWCA Civ 1324 at [36]. See also R. Goode, Abstract

Payment Undertakings’ in P. Cane and J. Stapleton, Essaysfor Patrick Atiyah (Clarendon Press, Oxford, 1991) at 233-234.

143e.g. Edward Owen Engineering Ltd v, Barclays Bank InternationalLtd [1978] QB 159 at 170 and 176.

144Chapters 5 to 9.

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