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

Lite N ature o f D em and Guarantees

Insurance Co.,'2*where there had been substantial argument before the Court of Appeal on the rule in Holme v. Brunskill, Scott L.J. said that the rule did not apply because there was in fact no variation of the underlying transaction ‘and, in any event, the bond was not a guarantee’.4125 This makes it clear that in his view even if there had been a variation of the underlying transaction the rule in Holme v Brunskill would not have applied to the performance bond in that case. More recently, in Wittmann (UK) Ltd v. Wildav Engineering SA'26 Moore-Bick L.J., disagreeing with the trial judge,127 expressly stated that a variation of the underlying transaction in that case could not discharge the issuer because the issuer had expressly contracted as a primary obligor, not merely as a surety. . . and thereby incurred an obligation that was not susceptible of being discharged by dealings of a kind that would ordinarily discharge one whose liability is secondary only’.

5.Section 4 of the Statute of Frauds 1677

3.70A further difference concerns the requirement of writing of section 4 of the Statute of Frauds 1677. The section applies to any promise ‘to answer for the debt default or miscar­ riage of another person’. Since a suretyship guarantee contains such a promise, it is subject to the formal requirement of section 4, namely that it should be in writing. By contrast, since under a demand guarantee the issuer promises to pay, as principal, his own debt rather than the debt of another person, a demand guarantee falls outside the scope of section 4, just as an indemnity.128 However, in practice this difference is unlikely to be very relevant since, considering the commercial context in which most demand guarantees are issued, it would be extremely rare for the issuer’s promise not to be in writing. The URDG 758 defines a demand guarantee as any ‘signed undertaking’ providing for payment on presentation of a complying demand.129

IV. PROBLEMS OF CATEGORIZATION: DEMAND

GUARANTEE OR SURETYSHIP GUARANTEE?

3.71The differences between a demand guarantee and a suretyship guarantee mean that the correct categorization or characterization of a particular instrument is a matter of consider­

able practical importance. In Marubeni Hong Kong and South China Ltd v. Government o f Mongolia,130 for example, the central issue turned on ‘the correct characterisation of

124[1992] 2 Lloyd’s Rep. 365.

125Ibid., at 377.

126[2007] EWCA Civ 824 at [22].

127See also Marubeni v. Governmento fMongolia [2004] 2 Lloyds Rep. 198 at [142] where CressweliJ. held that the issuer’s undertaking was secondary rather than as a primary obligor so that the rule applied. He then went on to express the view, obiter, that the feet that an instrument is one which creates a primary liability does not mean that the rule in Holme v. Brunskill has no application to it. The Court of Appeal ([2005] 2 Lloyds

Rep. 231; [2005] 2 All ER (Comm) 289), expressed no opinion on this point, as it was not necessary to do so, since the court agreed with Cresswell J.’s characterization of the instrument as a suretyship guarantee creating secondary liability.

128AssociatedBritish Ports v. Ferryways NV [2009] EWCA Civ 206 at [1].

129Art. 2. By contrast, in Art. 2 of the UN Convention the undertaking is not required to be in writing

130[2005] 2 AUER (Comm) 289.

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considers all the terms in the context in which the instrument was issued. If, on the whole, there are more features indicating that the issuer’s undertalcing is primary and independent, the court is likely to hold that the instrument is a demand guarantee, even though it also contains some terms indicating that the liability is secondary.

A.Description

3.75The terminology by which the instrument describes itselfor the issuer is a relevant indicator. For example, where an instrument describes itself as a ‘guarantee’ or where it is so described in correspondence between the parties or where it refers to the issuer as the ‘surety’, that is an indication that the instrument is a true guarantee rather than a demand guarantee. In the Trafalgar House case,138 where the instrument described the issuer as ‘the surety’, the use of the word ‘surety’ was one of the important factors that led the House of Lords to conclude that the instrument was a contract of suretyship rather than a demand bond. Indeed where the instrument is described as a ‘guarantee’ or some other language not appropriate to a performance bond and the issuer is not a bank a strong presumption is raised in favour of construing the instrument as a true guarantee {the Marubeni presumption).139 Conversely, where on its face, the instrument is described as a ‘performance bond’ or some other termi­ nology appropriate to a demand guarantee or if it is so described in correspondence between the parties to the underlying contract and the issuer, the court takes that into account.140 In such a case, the Marubeni presumption will not be raised even if the issuer is not a bank.

3.76However, although the terminology used to describe the instrument or the issuer is a relevant indicator, it is not conclusive.141 The terms of the instrument may show that the terminol­ ogy used to describe it is a misnomer. For example, an instrument may describe itself as a performance bond’ but the terms may show that the obligation which it creates is secondary so that it is a true guarantee.14213The reverse is also true. In Gold Coast Ltd v. Caja de Ahorros delM editerranean where the instrument described itselfas a ‘guarantee’ the Court ofAppeal said that that description ‘is simply a label; [the instrument] does not use the language of guarantee’. Since the terms of the instrument showed that the parties’ intention was to create a primary liability, it was held that that was enough to displace the ordinary sense of the term

guarantee and to lead to the conclusion that the instrument in question was a performance bond.144

138Trafalgar House Construction (Regions) Ltd v. GeneralSurety & Guarantee Co Ltd[ 1996] 1 AC 199.

139MarubeniHong Kongo. Governmento fMongolia [2005J EWCACiv395; [2005] 2A(IER(Comm) 289, discussed in paras 3.95 to 3.98 below.

140Siporex TradeSA v. Banque Indosuez[ 1986] 2 Lloyd’s Rep. 146, where a letter oi guarantee was held to be a performance bond even though the term performance bond’ did not appear anywhere in the guarantee itself. Howevei, the teim was used in the underlying contract and in most of the correspondence between the parties relating to the guarantee (see 151-153).

141 Marubeni. HongKongandSouth China Ltd v. Governmento fMongolia [2005] 2 All ER (Comm) 289 at [30]. 14 e.g. Greenore PortLtd V. Technical & General Guarantee Company Ltd [2006] EWHC 3119 (TCC)

143[2002] 1 All ER (Comm) 142 at [21].

144See also, to the same effect, Van DerMerwe v. TIG CapitalLLC [2007] EWHC 2631 (Ch). In Greenland Bank Ltd v. American Express Bank Ltd [2008] EWHC 421 (Ch), at [3], where the parties described the instrument as a guarantee , Evans-Lombe J . regarded that terminology ‘as confusing because the document in question is not a guarantee’. It was held to be a performance bond.

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

B. Payment‘on demand’

underlying contract.155 The issuer, as Lord Denning once said, ‘must pay. . . on demand if so stipulated, without proof or conditions’.156 This is the case even though there is no term in

145 e.g. IE Contractors Ltd v. Lloyds Bank Pic [1990] 2 Lloyds Rep. 496; Esal (Commodities) Ltd v. Oriental Credit Ltd [1985] 2 Lloyd’s Rep. 546.

146e.g. Balfour Beatty Civil Engineering v. Technical & General Guarantee Co Ltd [2000] CLC 252.

147Gold CoastLtd v. Caja deAhorros DelMediterraneo, 2 May 2001, QBD, Commercial Court, affd [2002]

1All ER 142.

148Ibid., at [29].

149WoodHallLtd v. The PipelineAuthority (1979) 141 CI..R 443, 451.

150[2000] CLC 252.

151See also Esal (Commodities) Ltd v. Oriental Credit Ltd [1985] 2 Lloyds Rep. 546; Siporex Trade SA v.

Banque Indoseuz [1986] 2 Lloyd’s Rep. 146.

152[2008] EWCA Civ 542.

153Ibid., at [31].

154e.g. Marubeni Hong Kong v. GovernmentofMongolia [2005] 2AllER(Comm) 289.

155Esal (Commodities) Ltd v. Oriental Credit Ltd [1985] 2 Lloyd’s Rep. 546.

156Edward Owen Engineering Ltd v. Barclays Bank InternationalLtd [197H\QB 159, 171.

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the instrument expressly specifying that the issuer’s obligation is unconditional.15718960Therefore, where the issuers obligation is expressly stated to be unconditional’, the court will be more inclined to construe it as being independent of the underlying transaction. Thus, in Wood Hall Ltd v. The Pipeline Authority,™ where the issuer unconditionally’ undertook to pay, Gibbs J. said that to hold that the instrument was conditional on the making of a demand that conformed to the requirements of the underlying contract ‘would of course be quite inconsistent with the express statement in the bank guarantees that the undertaking of the Bank is unconditional’. And in Gold Coast Ltd v. Caja de Ahorros del Meditteraneo159 the Court of Appeal construed the issuer’s obligation as being independent of the underlying contract partly because it was expressed to be irrevocable and ‘unconditional’. Although the guarantee in that case also stated that it was subject to certain ‘conditions’, such as that a demand should be accompanied by a third party’s certificate of default, the court did not consider that those ‘conditions’ made the issuer’s obligation to pay conditional in the sense that the obligation could only arise upon proof of the account party’s default under the underlying contract.

D.Primary obligor clause

3.80A term in an instrument to the effect that the issuer is liable as ‘primary’ or ‘principal’ obligor and ‘not merely as a surety’ indicates that the parties are likely to have intended that the issuer’s obligation should be independent of the underlying contract. In Van Der Merwe v. TIG Capital LLC 160 the issuer’s undertaking was to pay on demand upon presentation of a certificate of default stating the amount due and payable under the guarantee. The guarantee also stated that the certificate was to be conclusive evidence of the issuer’s liability to pay the amount stated. There was a clause stating that the guarantor’s undertaking to pay was ‘as principal obligor and not merely as surety’. In concluding that the instrument created an obligation independent of the underlying contract, Lewison J. took into account the fact that the obligation was ‘cast in the form of a primary obligation’.161 The decision was upheld by the Court of Appeal where it was held that the obligation to pay ‘as principal obligor’ ‘not merely as a surety’ indicated that the issuer undertook something more than a secondary obligation.162

3.81However, the mere fact that an instrument contains a clause stating that the issuer is liable as ‘primary obligor’ does not necessarily lead to the conclusion that the issuer’s obligation is completely independent of the underlying contract. In some cases a ‘primary obligor’ clause may be inserted in an instrument which otherwise creates a secondary obligation in order to make the issuer liable as primary obligor in limited circumstances only. In such cases the instrument will remain a suretyship guarantee though the issuer will be liable as principal obligor in the limited circumstances envisaged by the instrument.163

157e.g. Howe Richardson Scale Co Ltd v. Polimex-Cekop and National WestminsterBank Ltd [1978] 1 Lloyd s Rep. 161; Esal(Commodities) Ltdv. Oriental Credit Ltd [1985] 2 Lloyd’s Rep. 546.

158(1979) 141 CLR 443,451.

159[2002] 1 A1IER (Comm) 142, 149.

160[2007] EWHC 2631 (Ch).

161Ibid., at [49]. See also [51] and [531.

162[2008] EWCA Civ 542 at [31 ].

163z.g.Healdv, O’Connor \\97\\1 WI.R497; GeneralProduce Co v. UnitedBank 7fc/[l 97912 Lloyds Rep. 255, esp. at 259.

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clear that the parties intended that the issuer’s liability shall depend on the certificate rather than the correct resolution of disputes arising from the underlying contract. In Bache & Co (London) Ltd v. Banque Vernes et Commerciale deParis SAU9 a conclusive evidence clause in a bank guarantee was upheld by the Court ofAppeal. I he guarantee was issued to commodi­ ties brokers on behalfof their customer. The clause provided that a beneficiary’s notice to the bank stating that the account party was in default was conclusive evidence that the bank’s liability under the guarantee had accrued in respect of the amount claimed. It was held that if a notice was given the bank was liable to pay. The bank’s liability did not depend on the underlying facts. Scarman L.J. said that it was clear beyond dispute that the words ‘conclu­ sive evidence’ in the instrument were to be a bar to any evidence being tendered to show that the statement in the notice of default was not correct. The same approach was adopted in

164IE Contractors Ltd v. Lloyds Bank Pic [1990] 2 Lloyd’s Rep. 496, 500. See also Siporex Trade SA v. Banque Indoseuz [1986] 2 Lloyd’s Rep. 146, where the undertaking was to pay on demand In the event that no letter of credit had been opened by a specified date and the bond required any demand for payment to be supported by the beneficiary’s declaration to that effect. Hirst J. held that the bond was independent of the underlying events. The payment obligation was triggered by a demand plus a declaration to the effect that no credit had been opened.

165[2002] 1 All ER (Comm) 142.

166Ibid., at [23].

167[2005] 2 AUER (Comm) 289.

168Ibid., at [29].

169[1973] 2 Lloyd’s Rep. 437.

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Balfour Beatty Civil Engineering Ltd v. Technical & General Guarantee Co Ltd.'70 In that case the instrument required a beneficiary’s demand to include a statement that the account party had defaulted on his obligations under the underlying contract and that the sum demanded was due and payable. The instrument provided that such a statement was to be accepted by the issuer as conclusive evidence’ that the sum demanded was due under the instrument. Waller L.J. held that the instrument contained ‘the clearest possible indication’ that as between the issuer and the beneficiary there was to be no investigation into the underlying facts.

3.84A conclusive evidence clause has the same potency even in the case of an instrument issued by an individual rather than a bank. In Van DeMerwe v. IIG CapitalLLC'1' guarantees were given by a husband and wife to secure the liability of a company in which they were the only shareholders to repay a loan advanced to the company. The guarantee contained a clause stipulating that a beneficiary’s certificate stating the amount ‘due and payable’ under the guarantee shall, save for manifest error, be ‘conclusive and binding’ on the issuer for purposes of the guarantee. Lewison J. did not hesitate to conclude that the instrument created a liabil­ ity independent of the underlying obligation. After a careful consideration of the features indicating that the instrument created a secondary obligation, as the guarantors contended, and those indicating that it created a primary and independent obligation, as the beneficiary argued, the learned Judge said that what clinched the argument in favour of the beneficiary was the conclusive evidence clause.1720 The Court of Appeal agreed with Lewison J. that the conclusive evidence clause ‘puts the matter beyond doubt’.173

3.85However, for a conclusive evidence clause to be regarded as a strong indication that the issuer’s liability is primary and independent, the certificate or statement to which it relates must extend to the liability rather just the amount.17415And since conclusive evidence clauses are interpreted strictly, with any ambiguity resolved in favour of the guarantor, if there is any ambiguity as to whether a particular clause includes liability, it is resolved in favour of the guarantor. The recent case of Carey ValueAdded SL (Formerly Losan Hotels World ValueAdded ISL) v. Grupo Urvasco SAm concerned an application for summary judgment by the benefi­ ciary. The relevant clause provided that ‘[a]ny certification or determination by [the benefi­ ciary] of a rate or amount under any Transaction Document or this deed is, in the absence of manifest error, conclusive evidence of the matters to which it relates’. Blair J. held that although a certificate under this clause was conclusive evidence as to ‘amount’ it was not conclusive evidence as to liability, since, unlike the clause in IIG Capital which covered both amount and liability, the clause in this case related only to amount. Blair J. explained that there was a major difference between a certificate as to ‘amount’ and a certificate as to ‘amount due and payable’. He said that in so far as there was any ambiguity in the clause, it was to be resolved in favour of the guarantor, by holding that a certificate given under the clause

170(1999) 68 Con LR 180.

171[2007] EWHC 2631 (Ch).

172Ibid., at [51].

173HG Capital LLC v. Van Der Merwe [2008] EWCA Civ 542 at [32]. The position is different where the instrument requires a certificate from an expert, such as an engineer, and requires the expert to give reasons. In such a case if the instrument provides that the certificate shall be conclusive evidence save for manifest error, the court may conclude that the clause permits an investigation into the reasons of the expert: Invensys Pic v. Automotive Sealing Systems Ltd, 8 November 2001.

174VosslohAktiengesellschaft v. Alpha Trans (UK) Ltd[20U)\ EWHC 2443 (Ch) at [50].

175[2010] EWHC 1905 (Comm).

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

was not conclusive evidence as to liability.176 The result was that the issuer had shown that it was arguable that the instrument in this case did not contain language indicating that it was a demand bond.

178[2007] EWHC 2631 (Ch) at [48].

179[2010] EWHC 1905 (Comm).

180Ibid., at [37].

181Set out in para [25] of the judgment.

182[2010] EWHC, 1905 (Comm) at [37]. It may be open to doubt whether the issuer’s liability under clause 2.1(d) was со-extensive with that of the borrower. Although, in terms ofamount, the extent of the issuers liability under the clause was equal to that of the borrower, in terms of conditions of liability, under the clause (2.1 ,(d)(ii)) the issuer may be liable in circumstances where the borrower may not be liable, as where any of the guaranteed obligations became ‘unenforceable, invalid or illegal’. This appears to be the language of a demand guarantee.

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T—

Mi

i f f

The N ature o f D em a n d Guarantees

URDG 758 only applies to demand guarantees or counter-guarantees’83 and under the rules a guarantee is by its nature independent of the underlying contract,11843 if the parties decide to make their guarantee subject to those rules then this should be a very strong indication that they intended their guarantee to be the kind regulated by the rules. Therefore, unless there are compelling reasons to the contrary, a guarantee subject to the URDG 758 is likely be construed as a demand guarantee rather than a suretyship guarantee.185

I. Clause excluding the effect of a variation of the underlying contract

3.89 A provision in an instrument to the effect that a variation of the terms of the underlying contract shall not have the effect of discharging the issuer from his liability is normally an indication that the instrument is a suretyship guarantee. The reason is because such a clause is required in a suretyship guarantee since, as indicated above, without it the guarantor will be discharged by a material variation of the underlying contract without his consent. The leading case is Trafalgar House Construction (Regions) L td v. General Surety & Guarantee Co Ltd786 The main contractor for the construction of a leisure complex for a borough council entered into a subcontract for ground works. To support the subcontract a guarantee com­ pany provided a bond for 10 per cent of the value ofthe subcontract. The subcontractor was unable to carry out the work so the contractor completed the work and claimed under the bond. The question was whether the liability of the guarantor was independent of the sub­ contract. The Court of Appeal held that the obligation created by the bond was ‘an indepen­ dent obligation to pay’. The House of Lords held that by so holding, the Court ofAppeal was effectively treating the bond ‘as a type of on demand bond’.187 Their Lordships reversed the decision of the Court of Appeal and held that the bond was a suretyship guarantee. One reason why the House of Lords construed the bond in this way was the fact that it contained a clause to the effect that no alteration in the terms of the underlying contract would release the guarantor from his liability. Lord Jauncey ofTullichettle, with whose speech all the other members of the Judicial Committee agreed, stated that in the absence of such a provision a surety would normally be released from his obligation by any subsequent material alteration to the provisions of the underlying contract agreed between the parties without the consent of the surety.188 Therefore, he explained, the clause was only necessary because the parties regarded the issuer’s obligation under the instrument as a secondary obligation dependent on the underlying liability.18910

3.90 Although such a clause is an indication that the instrument is a suretyship guarantee, it is not decisive. If other terms of the instrument strongly indicate that the instrument is a demand guarantee the court will construe it as such. In Gold Coast Ltd v. Caja de Ahorros del Mediterraneo190 an instrument was construed as a demand guarantee even though it con­ tained a provision that the issuer’s liability would not be affected by any variation of the

183Art. l.a.

184Art. 5.a.

185In UzinterimpexJSC v. Standard Bank Pic [2007] EWHC 1151, where the guarantee was subject to the URDG 458 it was common ground that it was an independent guarantee rather than a suretyship guarantee.

186[1996] 1 AC 199.

187Ibid., at 207.

188Ibid., at 205.

189Contra. WoodHallLtd v. The PipelineAuthority (1979) 141 CLR443, 445, where BarwickC.J. saidofa similar clause in a guarantee, that it had been ‘sensibly included as a precaution’ and therefore it did not indicate that the parties intended the issuer’s obligation to be secondary.

190[2002] 1 All ER 142.

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underlying contract, it may be construed as only requiring the beneficiary to include in his demand for payment a statement that his claim is for damages brought about by the account

191At [25]: ‘It might, for example, have been included to avoid argument that variation of the shipbuilding contract by, for example, postponing a stage payment or remitting part of it in settlement of any cross-claim would imperil recovery under the refund guarantees. It could have been inserted simply to ensure that the rule applicable to true guarantees did not apply to this instrument.’

192[2008] EWCA Civ 542.

193Ibid., at [30].

194[1996] 1 AC 199.

195Ibid., at 208. Therefore claims by the account party against the beneficiary for unpaid sums had to be

taken into account in determining the extent of the issuer’s liability under the instrument.