Demand guarantees not subject to doctrine of strict compliance
The High Court holds that the doctrine of strict compliance does not automatically apply to demand guarantees (or performance bonds) in the way that it applies to letters of credit
The High Court recently granted an order to enforce a demand guarantee against a guarantor despite claims that the demand did not comply with the terms of the guarantee. The High Court held that the doctrine of strict compliance did not automatically apply to demand guarantees (or performance bonds) in the way that it applies to letters of credit and that it is necessary to consider the construction of the terms of the particular guarantee to determine the validity of the demand.
MUR, a Dutch company, made a claim for USD 500,000 plus interest under a demand guarantee (the Guarantee) issued by the defendant, a private bank in Monaco (the Bank).
MUR had entered into a joint operations agreement with Monaco Seatrade (Seatrade) for the chartering and operations of a Handysize bulk carrier. MUR alleged that Seatrade failed to make various payments under this agreement and hence made the demand under the Guarantee.
The Guarantee provided that:
1. "…the Bank's obligation under this Guarantee to make a Guaranteed Payment [up to a maximum of US$500,000] shall arise forthwith upon written demand sent to the bank by way of registered mail to the above mentioned bank's address. Such demand must be signed by duly authorised legal representatives of MUR certifying in writing that the Charterer has defaulted in its obligation….
2. For the purpose of identifying the Legal authorised representatives, the Beneficiary shall provide to the Bank, together with the request for payment, certified copies of MUR's Extract of Registry and the passport of the signatory signing the request for payment; the request of payment should be authenticate as well as representative's powers of MUR by a notary and duly apostilled..."
The first demand was sent with a covering letter on 18 August 2015. The demand was signed by a director of MUR and sent by courier, fax and email (not registered mail) to the Bank. It was received by the Bank. Included was a demand letter dated 11 August 2015 signed by the same director, a copy of the director's passport and an extract from the company register. These documents had been notarised and apostilled. The notary expressly excluded any opinion as to the director's legal authority to sign.
The Bank did not pay in response to the first demand, asserting that the demand was not compliant with the requirements of the Guarantee which required that the demand be signed by authorised representatives (in the plural) and that it be sent by registered mail.
MUR sent a further demand on 14 September 2015. This demand was signed by the same director, duly notarised and apostilled and accompanied by the same supporting documentation, also notarised and apostilled. This demand was sent by courier, fax and registered mail. The Bank once again refused to pay and MUR issued proceedings.
The court held that MUR's initial demand was effective and that the authorisation and authentication requirements had been complied with.
The court considered the rules of strict compliance applicable to a letter of credit stating that "it is hallowed law that payment can be refused under a letter of credit for what may seem to the presenter to be trivial or insignificant". The court went on to state that "strict compliance does not necessarily apply to demand guarantees": it should be a matter of construction as to whether the circumstances intended to trigger the obligation to pay had been met and properly documented to the Bank.
Both parties agreed that there were grammatical inconsistencies within the wording of the relevant clause in the Guarantee, particularly with regard to the issue of whether there was a requirement for representatives, as distinct from a single representative, to sign the demand. The clause was found to be poorly drafted, but it was not incomprehensible.
There was also dispute about the role of the notary, and whether this amounted to anything more than identifying the signatory on the demand. The Bank argued that MUR had failed to demonstrate the legal authority of the director to bind the company and that the express exclusion by the notary on this point resulted in a defective notice.
The court did not agree. It held that the relevant provisions of the Guarantee required the demand be signed by a duly authorised person, and that the notarisation (clause 2 of the Guarantee) merely related to the identification of that person. The court held that the purpose of clause 2 was a narrow one of "identifying" the duly authorised person. The Court was persuaded by MUR's argument that "authenticate" is a term appropriate to documents and their authenticity; it was not "appropriate terminology for a judgment about contents or substance". All that was required by the clause was that there should be notarisation and apostillisation of the demand, the company register and the passport of the signatory.
Finally, the Court held that the requirement to send the demand by registered mail was directory and not mandatory. The Court held that the importance of registered mail was to ensure that the recipient received the documentation and precludes any suggestion to the contrary. In this case, there was no question that the demand and its attachments were received by the Bank and therefore the first demand was effective.
Whilst the instant judgment distinguishes the degree of compliance required by demand guarantees (or performance bonds) and suggests a more commercial approach to construction, it may be that further clarification is required from the Court of Appeal before a consistent approach can be settled upon. In this judgement the court placed reliance on the Court of Appeal decision in IE Contractors Ltd v Lloyds Bank Plc which stated that "there is less need for a doctrine of strict compliance in the case of performance bonds, since … they are used less frequently than letters of credit, and attract attention at a higher level in banks".
However, more recently, Teare J, commented that "for my part I would respectfully doubt that there is less need for a doctrine of strict compliance in the field of performance bonds than in letters of credit". More recently again, the Privy Council has noted that "the principles governing letters of credit are as much applicable to letters of indemnity of the present nature, as well as other forms of on demand guarantee”.
The most prudent approach, as always, is to ensure clear drafting and make every effort towards strict compliance to ensure a demand is met.