These extraordinary times set the stage for what is a challenging environment for the international construction industry with inevitable impacts on cash flow to supply chains. 

Against this unwelcome scene, cash is and remains king and so it is - big but difficult decisions lie ahead on whether a call on a payment guarantee or on a demand bond should (can) be made. In all likelihood, we anticipate increased reliance on payment guarantees in the unprecedented Covid-19 climate.

Chancing upon a case that was recently handed down in the English Technology and Construction Court, which we now share with you our thoughts below, we hope that it provides helpful clarification on the interpretation of payment guarantees or on demand bonds which are likely to be of increasing importance in the months ahead with the possibility of a global recession looming.  

From an English law perspective, it is instructive that the fraud exception provides the only way out to resist such a call, unfortunately.   

Tecnicas reunidas saudia for services and contracting co LTD v The Korea Development Bank

Advance payment bonds of the on demand type were the central plank of this dispute. 

The importance of the case arises not from the facts of the case itself but the illuminating words of Mr Justice Waksman in his judgment, albeit in obiter. 

Técnicas Reunidas (TR) entered into a subcontract agreement with Sungchang & Abdullah Al-Shaikh Contracting Co Ltd (Sungchang) for the performance of part of the construction of a gas project in Saudi Arabia. As part of the agreement Sungchang provided TR with a demand guarantee from the Korean Development Bank (KDB) as security for the advance payment from TR. TR terminated the sub-contract alleging various breaches by Sungchang and sought to call on the demand guarantee. KDB rejected TR's demand claiming that TR had not complied with a requirement in the guarantee for funds to be paid into a bank account held by HSBC (the HSBC Condition). TR had in fact paid the funds into an account with the account number specified in the guarantee but the account was held by Saudi British Bank (SBB) which at the relevant time was a 40% subsidiary of HSBC. 

Mr Justice Waksman found in favour of TR ruling that the proper interpretation of the HSBC Condition was that the SBB account was the account intended in the guarantee for the funds to be paid into on the basis that SBB was associated to HSBC at the time, HSBC did not have a retail bank in Saudi Arabia and HSBC did not have an account with the number specified in the guarantee. 

Importantly however, he went on to consider two alternative arguments based on the URDG which are of general importance when considering demand guarantees. 

Non-Documentary Conditions 

Article 7 of the ICC Uniform Rules for Demand Guarantees (URDG) provides the following.

“A guarantee should not contain a condition other than a date or the lapse of a period without specifying a document to indicate compliance with that condition. If the guarantee does not specify any such document and the fulfilment of the condition cannot be determined from the guarantor’s own records or from an index specified in the guarantee, then the guarantor will deem such condition as not stated and will disregard it except for the purpose of determining whether data may appear in a document specified in and presented under the guarantee do not conflict with data in the guarantee.”

Mr Justice Waksman stated that since the HSBC Condition did not indicate a document that had to be provided to prove compliance with it that it was to be disregarded in its entirety. This is the first English judgment to consider the application of Article 7 around which there had previously been some doubt as to its operation in relation to the specific inclusion of a non-documentary condition. 

The Presenter Concept

Article 24(d) concerns rejection formalities and requires any rejection of a demand to be served on the "presenter" of the demand without any delay and in any event, within 5 working days of the demand. 

KDB rejected the demand by way of a SWIFT message to BNP (the advising bank) who in turn passed the information on to TR the next day meaning the message was communicated to TR outside the 5 working days window. 

Mr Justice Waksman explained that KDB had not compiled with Article 24 as the demand had been delivered by hand to KDB by TR and therefore TR was the presenter for the purposes of Article 24. The rejection had therefore not been validly served and TR would have been able to rely on this argument had it not already succeeded on the interpretation argument. 

Where are we now?

The judgment highlights the importance of including documentary evidence for all conditions specified in demand guarantees subject to the URDG should they wish to rely on them. It also acts as a reminder to follow the strict procedures set out in the URDG (should it apply in the first instance) for serving and rejecting demands and any documentary conditions specified in the demand guarantee itself. 

Refreshingly, in another recently published judgment the Court of Appeal of the Qatar Financial Centre confirmed the strict application of the URDG. This judgment encompasses a comprehensive analysis of the URDG that could yet be relevant in jurisdictions outside of Qatar as it is the first appeal court judgment in any jurisdiction to consider the issues in such depth (see here).

For further information please contact Chau Ee Lee or Victoria Rintoul.

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