The Gazette 1986

GAZETTE

JULY/AUGUST 1986

creature"/ the legal consequences of which have yet to be finally established. 6 It is stated that the bond like the letter of credit is autonomous, i.e., it is regarded as independent of the underlying contract between the buyer and the seller. The only concern of the banks in the case of confirmed letters of credit 7 and confirmed performance guarantees 8 is to ensure that the terms of their mandate and confirmations are complied with. They must ensure in the case of documentary credits the conformity of the documents presented, and in the case of performance and other guarantees, the fact that a demand has been made by the beneficiary of the guarantee. They are not concerned with any contractual disputes between buyer and seller. This is the so-called doctrine of strict compliance. 9 In the Edward Owen case, 2 Lord Denning said: "[A performance bond] has many similarities to a letter of credit . . . It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit." In Howe Richardson Scale Co. -v- Poiimex-Cekop w Roskill L.J. (as he then was) said: "The bank, in principle, is in a position not identical with but very similar to the position of a bank which has opened a confirmed irrevocable letter of credit. Whether the obligation arises under a letter of credit or under a guarantee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contract; the bank here is simply concerned to see whether the event has happened upon which its obligation to pay has arisen." A bank which issues a performance bond upon the instructions of its customer will normally require a counter-indemnity from the customer which provides that the customer will indemnify the bank when the bank pays on any demand in accordance with the terms of the bond. That the courts will not interfere with the terms of such counter-indemnity also is clear from Harbottle -v- National Westminster Bank." In that case, the contracts provided that the plaintiff sellers were to give guarantees confirmed by a bank of 5 per cent, of the price in favour of the buyers. These were in effect to be performance bonds. They were called guarantees simpliciter , but their purpose was to provide security to the buyers for the fulfilment by the plaintiffs of their obligations under the contracts. The machinery was that the plaintiffs instructed the National West- minister Bank, the defendant bank, to confirm the guarantees to certain Egyptian banks, which therefore

became the defendant bank's correspondents in Egypt for this purpose. The Egyptian banks in turn confirmed the guarantees to the buyers. The guarantees were backed by counter-indemnities by the plaintiffs to the defendant bank. The plaintiffs agreed to indemnify the bank in the widest terms and gave authority for payment under the guarantees and to debit the plaintiffs' account accordingly. In respect of two of the guarantees this part of the counter-indemnity was in the following terms: "You are hereby irrevocably authorised and directed to pay forthwith on any demand appearing or purporting to be made by or on behalf of the beneficiary (i.e., the buyers) any sums.up to the limit of your liability which may be demanded of you from time to time without any reference to or any necessity for confirmation or verification on the part of the undersigned, it being expressly agreed that any such demand shall as between the undersigned and you be conclusive evidence that the sum stated therein is properly- due and payable, and you are further authorised to debit any account of the undersigned. . . . " The customers complained about this conclusive evidence provision saying that it might leave them without redress against the bank. But Kerr J. held that this clause was binding on the parties and was not contrary to public policy and would be enforced. This case was approved by the Court of Appeal in the Edward Owen case. 2 The plaintiffs, English suppliers, contracted with Libyan customers that a performance guarantee for 10 per cent, of the contract price should be issued by the defendant English bank and lodged with a Libyan bank. The contract, which was governed by Libyan law, provided that an irrevocable confirmed, or confirmable, letter of credit, payable at the English bank was to be opened in favour of the plaintiffs. After the plaintiffs had given a counter-guarantee to the English bank, the latter on their own responsibility and on the plaintiffs' behalf gave a performance bond for £50,203 to the Libyan bank and confirmed that their guarantee was payable "on demand without further proof or conditions". The Libyan bank then issued a guarantee bond for the plaintiffs for the same sum in favour of the Libyan customers. No letter of credit which complied with the terms of the contract was opened by the customers and the plaintiffs, after telling them that the guarantee given had no effect, accepted their conduct as a repudiation of the contract. At the customers request, the Libyan bank then claimed £50,203 under the guarantee from the English bank. The plaintiffs obtained an interim injunction on their ex parte application to restrain the English bank from paying the Libyan bank. Kerr J. discharged the injunction. The decision of Kerr J. was affirmed on appeal by the plaintiffs. It was held by the Court of Appeal that the performance bond stood on a similar footing to a letter of credit. Lord Denning M.R. said: "A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the

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