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

The N ature o f Letters o f Credit

9.Standby Credits

2.43A standby credit is an undertaking by a bank to pay the beneficiary on the presentation of specified documents. It is in form similar to the traditional or commercial letter ofcredit but in function similar to a demand guarantee. Its purpose is usually, like that of a demand guar­ antee, to secure performance by the account party of his obligations under the underlying contract rather than as a method of payment of the contract price (which is the function of a commercial letter of credit). Whereas under a commercial credit the intention is that payment will be due to the beneficiary upon full performance of the underlying contract by the beneficiary, under a standby credit the intention is that payment will be due where there is default in the underlying contract on the part of the account party. The standby letter of credit has its origins in the United States where it emerged as a device developed by banks to circumvent a prohibition on domestic banks from issuing guarantees.88 The documents to be presented under a standby letter ofcredit are similar to those normally required under a demand guarantee. This is normally a beneficiary’s statement that the account party has defaulted in the performance of the underlying contract. A standby credit is therefore a hybrid instrument, assuming the form of a letter of credit but discharging the office of a demand guarantee. For this reason rules that apply to letters of credit may apply to standby credits89 and rules that apply to demand guarantees may also apply to standby credits,90 although special rules have been adopted to apply specifically to standby credits.91

V.TH E CONTRACTUAL RELATIONSHIPS

2.44A letter of credit issued in respect of an export trade transaction usually involves five contrac­ tual relationships. The first is the commercial relationship between the applicant and the beneficiary of the credit (the underlying contract). This is the contract that requires the opening ol the credit. The second is the contractual relationship between the applicant and the bank that issues the credit. This is the contract under which the bank agrees to open the credit. Next, there is the contract between the issuing bank and the beneficiary. Where another bank is used, there will be a contract between the issuing bank and the other bank (the advising or nominated bank). And, where the nominated bank is a confirming bank there will be a further contract between the confirming bank and the beneficiary. It may be helpful to consider each of these relationships briefly.

1.Contract between Importer and Exporter

2.45A letter of credit is normally opened pursuant to a requirement in a commercial transaction between the applicant and the beneficiary. This transaction is known as the underlying contract.

38 See, e.g. J. Dolan, The Law o fLetters o f Credit (Commercial and Standby Credits) (1996, update 2002, Boston), [12.03].

89Art. 5-101 to 5-118 of the United States Uniform Commercial Code. See also Art. 1, UCP 600 by which the rules apply to standby credits ‘to the extent which they may be applicable’.

90UN Convention on Independent Guarantees and Standby Letters of Credit.

91International Standby Practices 1998 (ISP98).

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of the particular sale contract whether the obligation is a condition precedent to the conclu­ sion of a binding contract of sale (in which case it is a contingent condition precedent) or whether it is a condition precedent to the seller’s obligation to deliver the goods (in which case it a promissory condition precedent). Where, as in many cases, the obligation of the buyer to open the credit is a promissory condition precedent, there is a binding contract under which the buyer has an obligation to open the credit so that failure to do so does not prevent a contract from coming into existence but constitutes a repudiatory breach of

92e.g. whether by sight payment or by deferred payment.

93e.g. whether by courier, airmail, or teletransmission.

94Schijveshuurder v. Canon (Export) Ltd{ 1952] 2 Lloyds Rep. 196.

95Ficom SA v. Sociedad Cadex Ltd [1980] 2 Lloyd s Rep. 118; ShamsherJute Milk Ltd v. Sethia (London) Ltd

[1987] 1 Lloyd’s Rep. 388, at 392.

96 Ficom SA v. Sociedad Cadex Ltd [1980] 2 Lloyd’s Rep. 118 (where the seller was found to have accepted the terms of the credit by conduct); Glencore Grain Rotterdam BV v. Lebanese Organisation for International Commerce [1997] 2 Lloyd’s Rep. 386, 394 (where the alleged conduct was not sufficiently unequivocal to show acceptance of the terms of the credit).

97 Kronos Worldwide v. Sempra Oil TradingSARL [2004] 1 All ER (Comm) 915.

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The N ature o f Letters ofC redit

contract which entitles the seller to treat himselfas discharged from further performance and to claim damages rather than serving to prevent a contract from coming into existence.98

2.Contract between Importer and Issuing Bank

2.48Pursuant to his duty under the underlying contract to open a credit, the buyer will approach a relevant bank with a request for the bank to open the credit. Usually this will be a bank where the buyer already has an account so that there is already a banker and customer rela­ tionship between the buyer and the bank. The buyer will normally complete an application form requesting the bank to open the credit in accordance with the buyer’s instructions in the form. The forms are designed to allow the applicant to include instructions on matters agreed in the underlying contract such as the amount of the credit, the name of the benefi­ ciary, the expiry date, the name of the nominated bank, whether the credit should be confirmed by the nominated bank, if so, whether the confirmation charges will be paid by the applicant or the beneficiary, and the list of required documents. The application form also contains the terms on which the bank agrees to issue the letter of credit. The form will

normally include a term stating that the letter of credit is subject to UCP 600.

2.49 The buyer, as the applicant, bears the risk of any ambiguity in his instructions to the bank to issue or amend the credit.99 If the instructions are ambiguous and the bank adopts a rea­ sonable interpretation and based on this interpretation it accepts documents presented and makes payment the applicant is bound and must reimburse the bank even if the interpreta­ tion adopted by the bank is not in accordance with the buyer’s subjective intention.100

2.50If the bank accepts the buyer’s request, a contract comes into existence between the buyer and the bank on the terms of the form. Each party to the contract is under specific duties. The bank is under a duty to open a credit which complies with the buyer’s instructions, either by itself or through a nominated bank, to notify the seller of the credit, to examine the docu­ ments presented by the seller to determine whether they appear on their face to constitute a complying presentation101 and, if so, to make payment to the seller in accordance with the terms of the credit. For a credit subject to UCP 600 the issuing bank is irrevocably bound to honour the credit as of the time it issues the credit.102 If it fails to pay it may be sued by the buyer for damages for breach ofcontract. On the other hand if it makes payment when it was not entitled to do so (as where the bank accepts non-complying documents), the buyer will not be bound to reimburse the bank.103 Where the bank has not yet paid but is willing to pay in circumstances that the buyer claims will be in breach of the bank’s mandate, the buyer may apply for an injunction to stop the bank from making payment in breach of its mandate. This may be the case where the allegation is that the documents do not comply with the requirements of the credit104 or where the documents appear on their face to comply

98UR Power GmbH v. Kuok Oils and Grains Pte Ltd [2009] EWHC (Comm); [2009] 2 CL.C 386; Trans TrustSPRL v. Danubia Trading Co [1952] 2 QB 297 at 304; AELindsay & Co Ltd v. Cook\ 1953] 1 Lloyd’s Rep. 328 at 335.

99See, e.g. ISBP, Art. 2.

100Fortis Bank SA/NVv, Indian Overseas Bank [2009] EWHC 2303 (Comm).

101Art. 14, UCP 600. See discussion in paras 4.39 to 4.48 below.

102Art. 7.b.

103Equitable Trust G oofNew York v. Dawson Partners Ltd (1926) 27 LI L R. 49.

104See discussion on injunctions in Chapter 10.

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The N ature o f Letters ofC redit

unilaterally be amended or cancelled by one party without the consent of the other.110 Also, if one party to the credit clearly and unequivocally renounces his obligations before the time of performance the other party may accept the repudiation and treat the contract as discharged.111 For example, if, after issuing the credit, the bank informs the beneficiary that it has decided to cancel it, the beneficiary may accept the bank’s repudiation and treat the contract as discharged and sue the bank for damages for breach of contract.112 However, the beneficiary must take care before coming to the conclusion that the bank has repudiated the contract, since a court will be slow to find that the contract has been repudiated. The court will only find that there has been a repudiation of the contract where there is a clear and unequivocal refusal to perform and a statement which merely casts doubt, even grave doubt, on the bank’s willingness to perform, would not do.113

2.54 Under the letter of credit contract the issuing (and where there is one, the confirming) bank undertakes to honour a complying presentation. In other words, if the beneficiary presents documents that comply with the requirements of the credit within the time that the credit is available the bank must accept them and make payment even if there may be a dispute between the buyer and the seller as to whether the seller has performed the sale of goods contract correctly. In this sense the obligation of the bank under the common law is absolute.114 A similar obligation arises under UCP 600 which states that the bank ‘must honour the credit provided that the stipulated documents are presented and that they constitute a complying presentation.115

2.55The bank is liable to pay under the credit only if the beneficiary has performed his duty by presenting documents that comply with the requirements of the credit, at the place stipu­ lated in the credit116 and within the time when the credit is available.117 Upon presentation of the document, the bank owes a duty to the applicant to examine them to determine whether they comply with the requirements of the credit.118 Where the documents comply but the bank wrongly rejects them and refuses to pay, the seller can sue the bank for damages for breach of contract.119

2.56 However, the bank is entitled to refuse payment even where the documents comply with the requirements of the credit if the letter of credit contract is void on the ground of common

110Art. 10.a. The position is different in the case of a revocable credit under which the bank is entitled to amend or cancel the credit anytime before documents have been accepted. Under UCP 600 there is no provision for revocable credits. UCP 500 made provision for revocable credits.

111There is a duty on the party who wishes to treat the other part)' as being in repudiatory breach to communicate his decision clearly and unequivocally; silence or inactivity is not sufficient:Jaks (UK) Ltd v. Cera InvestmentBank SA [1998] 2 Lloyd’s Rep. 89 at 96; VitalSA v. NorelfLtd [\996} AC 800.

112In order to recover damages on this basis, the beneficiary is obliged to accept the banks repudiation as discharging the contract:Jaks (UK) Ltd v. Cera InvestmentBank SA [1998] 2 Lloyd’s Rep. 89 at 95.

113Jaks (UK) Ltd v. Cera InvestmentBank SA [1998] 2 Lloyds Rep. 89.

114Stein v. Hambros Bank o fNorthern Commerce (1921) 9 LI L R. 433 at 507.

115Art. 7.a, in relation to the issuing bank, and Art. 8.a, in relation to the confirming bank.

Under Art 6.d.ii, UCP 600 the place for presentation is the place of the bank with which the credit is available.

117Art. 6.e, UCP 600.

118The banks duty to examine the documents is discussed further in paras 4.35 to 4.38 below.

119Belgian Grain drProduce Co Ltd v. Cox & Co (France) Ltd (1919) 1 LILR .256; Urquhart, Lindsay & Co Ltd v. Eastern Bank Ltd [1922] 1 KB 318; British Imex Industries Ltd v. Midland Bank Ltd [1958] 1 QB 542; ForestalMimosa Ltd v. Oriental Credit Ltd [1986] 1 WLR 631.

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V. The Contractual Relationships

mistake or voidable for duress or misrepresentation120 or unenforceable for some other reason such as illegality of the credit.121 In certain cases the bank may also be able to refuse payment by setting-offa liability owed by the beneficiary to the bank.122 The bank is entitled to refuse payment where there is fraud on the part of the beneficiary.123 Where the documents pre­ sented fail to comply with the requirements of the credit the bank is entitled to reject them and refuse to make payment. However, if the bank accepts discrepant documents thinking that they are compliant and makes payment, it will normally not be allowed to recover the

money paid from the beneficiary on the ground that it was paid by mistake.124

4. Contract between Issuing Bank and Correspondent Bank

120Solo Industries UKLtd v. Сапам Bank [2001] 1 WLR 1800.

121See discussion in paras 8.03 to 8.05 below.

122See discussion at paras 4.24 to 4.26 below.

123Fraud is a recognized exception to the principle of independence of letters of credit. It is discussed in

Chapter 5. Other possible exceptions are discussed in Chapter 6 (Nullity or Recklessness), Chapter 7 (Unconscionable conduct), Chapter 8 (Illegality in the underlying contract), and Chapter 9 (Demands made in breach of the underlying contract).

124Art. I6.f, UCP 600. But the bank can recover the payment where there is fraud on the part of the beneficiary. See discussion in paras 11.02 to 11.07.

125Art. 2, UCP 600.

126Art. 9.a, UCP 600.

127Gian Singh v. Banque de Tlndochine [1974] 1 WLR 1324, 1238.

128Art. 2, UCP 600.

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The N ature o f Letters ofC redit

state the bank with which it is available or whether it is available with any bank’. The nomi­ nated bank is the bank authorized by the issuing bank to receive and examine documents and to pay the beneficiary.129 Therefore, the place of the nominated bank is the place for presenta­ tion of documents under the credit.130 It is the duty of the nominated bank to receive and examine the documents presented by the beneficiary under the credit. If the documents constitute a complying presentation and the nominated bank pays in accordance with its instructions it is entitled to reimbursement from the issuing bank or, where there is one, the confirming bank.131 Where the nominated bank is not also a confirming bank, receipt or examination ofdocuments by the nominated bank does not make the nominated bank liable to honour or negotiate.132 Article 12.a of UCP 600 states that authorization to a nominated bank that is not a confirming bank to honour or negotiate the credit does not impose any obligation on the nominated bank to do so. However, if the nominated bank acts under its nomination it does so as agent of the issuing bank. Although authorization to honour or negotiate imposes no obligation on the nominated bank to do so, where the nominated bank expressly agrees to do so and communicates this agreement to the beneficiary it comes under an obligation to honour or negotiate.133 It is not entirely clear whether the obligation is owed to the issuing bank or to the beneficiary or to both

2.60Thirdly, the correspondent bank may be requested to confirm the credit. If it does so, by adding its own undertaking to pay the beneficiary, it becomes a confirming bank. The con­ firming bank undertakes to pay the beneficiary provided that complying documents are presented. If there is a nominated bank, other than the confirming bank, the confirming bank undertakes to reimburse the nominated bank that has received complying documents and made payment to the beneficiary. This undertaking to reimburse a nominated bank that has paid applies in the case of a credit available by acceptance or deferred payment even where the nominated bank has prepaid or negotiated before the date o f maturity.134 The confirming bank’s undertaking to the nominated bank is independent of its undertaking to the beneficiary. Since a confirming bank is a nominated bank, it is entitled to reimbursement by the issuing bank under Article 7.c of UCP 600. The legal position of the confirming bank falls into two categories. In relation to its responsibilities towards the issuing bank it is an agent of the issuing bank.135 However, in relation to the beneficiary and the nominated bank (to each of whom it has given an independent undertaking), the confirming bank acts as a principal.

2.61Fourthly, the applicant’s bank may request the correspondent bank to issue the credit in its own name. If it does so, it assumes the role of a correspondent issuer’. In such a case, the correspondent issuer becomes the issuer of the credit rather than the applicant’s bank and the beneficiary has no contractual relationship with the applicant’s bank. The beneficiary’s sole contract is with the correspondent issuer.136

129An. 12, UCP 600.

130Art. 6,d.ii, UCP 600.

131Arts 7.c and 8.c of UCP 600.

132Art. 12.c, UCP 600.

133Art. 12.a, UCP 600.

134Art. 8,c, UCP 600.

135Equitable Trust Co. o fNew York v. Dawson Partners Ltd {l927) 27 LI L R. 49 at 52, 57; BankMelli Iran v. Barclays Bank DCO11951 ] 2 Lloyd’s Rep. 367 at 376.

136See, e.g. NationalBank o fEgyptv. HannevigsBank Ltd(1919) 1 LI L R. 69; Skandinaviska Kreditaktiebobtgetv. Barclays Bank (1925) 22 LI L R. 523.

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3

THE NATURE OF DEMAND GUARANTEES

I.IN TRO D U CTIO N

1.Outline of a Demand Guarantee Transaction

A.The issuer’s undertaking

A demand guarantee is a contractual undertaking by a person (the ‘issuer’) to make 3.01 payment of, or up to, a specified amount to another person (the ‘beneficiary’) usually upon demand by the beneficiary. It is normally given by the issuer (usually a bank) on

the request of another person (the ‘applicant’, ‘principal’ or ‘account party’)’ who has a commercial transaction with the beneficiary.12 The purpose of the guarantee is to secure the account party’s performance of his contract with the beneficiary.3 Demand guarantees are commonly used in international sale of goods contracts and in building and engineering contracts where the purpose of the guarantee is to secure the performance of the seller or

1 The bank charges a fee for the issue of the instrument. In GreenlandBank: Ltdv. American Express Bank Ltd [2009] EWCA Civ 14, for example, the amount of the performance bond issued was US$1.5 million and the

fee or commission payable was 1 % per anum.

2 For a detailed treatment of demand guarantees, see R. Bertrams, Bank Guarantees in International Trade

(3rd edn, Kluwer Law International, 2004).

3 For a detailed discussion of the functions and types of demand guarantees, see paras 3.16 to 3.31 below.

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The N ature o f D em and Guarantees

the builder. As a condition for payment to the beneficiary (the buyer, in a sale of goods con­ tract) the demand guarantee may require: (a) only a demand, (b) a demand plus a statement by the beneficiary stating that the account party is in breach of his obligations and the respects in which he is in breach, (c) a demand coupled with a certificate issued by a third party, usually an expert, such as a surveyor, certifying that the account party is in default and confirming the amount payable to the beneficiary, or (d) a demand plus a judgment or arbitral award in favour of the beneficiary.4 In the case of an international sale of goods contract, whereas a letter of credit is issued to secure payment of the contract price to the exporter, a demand guarantee is usually given to secure the performance of the exporter. Thus, whereas under a letter of credit payment is to be made to the exporter, under a demand guarantee payment is to be made to the importer.56

3.02A fundamental principle of demand guarantees is that, like the letter of credit, the undertak­ ing of the issuer is independent of the underlying commercial contract between the account party and the beneficiary. The issuer is therefore not concerned with disputes arising from the underlying contract. If a complying demand is made the issuer must pay even though the account party claims that he is not in breach of the underlying contract. The independence principle of demand guarantees is discussed in detail in Chapter 4. However, it may be noted at this stage that the independent nature of the issuer’s liability is the principal feature which makes a demand guarantee similar to an irrevocable letter of credit and attractive as a form of security, especially in international trade transactions. In Bolivinter OilSA v. ChaseManhattan Bank NA6 Sir John Donaldson M.R. said that the ‘unique value’ of a demand guarantee or a letter of credit is that once the instrument has been issued ‘the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the bank’s customer in relation to the performance or indeed existence of the underlying contract, the bank is per­ sonally undertaking to pay him provided that the specified conditions are met'.

3.03Since the obligation of the issuer is independent of the underlying contract a demand guarantee is different from a true contract of guarantee or suretyship under which the liabil­ ity of the surety is secondary to that of the principal obligor and the surety has all the defences of the principal obligor.7 In this respect, a demand guarantee is more like an indemnity8 or a promissory note payable on demand.910

3.04 In Marubeni Hong Kong and South China Ltd v. Government o fMongolia,'0 Carnwath L.J. said that one of the problems in this area is terminology. The reason is because there is no standard terminology used to describe a demand guarantee. It has been referred to variously as a ‘first demand guarantee’, ‘on-demand guarantee’, ‘performance guarantee’, ‘performance bond’, ‘demand bond’, ‘first demand bond’, Tetter of guarantee’, and ‘independent guarantee’.

4 However, this last option is so disadvantageous to the beneficiary that it is hardly ever used in practice. For a discussion on the range of documentary requirements, see paras 5.10-5.18 below.

5For a comparison with letters of credit see paras 3.09 to 3.15 below.

6[1984] 1 WLR 392 at 393.

7The differences between a demand guarantee and a true guarantee are discussed in paras 3.61 to 3.70 below.

8 Marubeni Hong Kong and South China Ltd v. Government o fMongolia [2005] 2 All ER (Comm) 289 at [20].

9 Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] QB 159 at 170, per Lord Denning M.R.

10 [2005] 2 All ER (Comm) 289 at [20].

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I. Introduction

As Blair J. has recently observed,11 ‘there is no standard nomenclature by which such an instrument can automatically be classified’. However, the important question is whether the instrument (however described) creates a primary obligation which is independent of the underlying contract, so that the issuer is bound to pay on a complying demand without

proof. That question is to be determined as a matter of construction of the instrument.12

B. The parties and stages in a demand guarantee transaction

(i) "[heparties

11Carey ValueAddedSL formerly Losan Hotels World ValueAddedISL) v. Grupo UrvascoSA [2010] EWHC 1905 (Comm) at [23].

12See the discussion at paras 3.71 to 3.99.

13In some cases the chain of banks may be longer ifthe bank in the exporter’scountry instructs another bank

to instruct a bank in the importer’s country to issue the guarantee.

14However, in some cases the beneficiary may be a bank that has provided the importer with funding to enable him to make advance payment to the exporter.

15Such as specialized bond companies or insurance companies.

16e.g. Van der Merwe v. IIG Capital LLC [2008] EWCA Civ 542; [2008] 2 All ER (Comm) 1173; Sucdcn

FinancialLtd v. Fluxo-cane Overseas Ltd [2010 ] EWCA Civ 249.

17URDG 758, discussed in paras 3.34 to 3.38.

18See, e.g. Art. 29(1) of the OHADA Uniform Act on Security, criticized in N. Enonchong, ‘Demand Guarantees Under the OHADA Uniform Act on Securities’ (2009) JBL 568, 573 etseq.

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