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March 13, 2017

Strict compliance and on-demand guarantees

The High Court recently held that the doctrine of strict compliance does not automatically apply to on-demand guarantees. Greg Standing, partner and head of the retail and finance automotive sector group at Gowling WLG, takes a closer look at how this could impact the leasing industry

By Greg Standing

The High Court recently held that the doctrine of strict compliance does not automatically apply to on-demand guarantees. Greg Standing, partner and head of the retail and finance automotive sector group at Gowling WLG, takes a closer look at how this could impact the leasing industry

The High Court has recently held that the doctrine of strict compliance does not automatically apply to on-demand guarantees in the way it applies to letters of credit – where payment can be refused following even an apparently trivial non-compliance.

Whether demand has been properly made under the guarantee will be determined by construing its terms.

Brief facts

In the Commercial Court case dated December 2016 of MUR Joint Ventures BV v Compagnie Monegasque de Banque, the claimant demanded payment of $500,000 plus interest under an on-demand guarantee (the Guarantee) issued by the defendant bank (the Bank) to secure the obligations of a company (Seatrade) under a joint operations agreement (the Agreement) with the claimant in relation to the chartering and operation of a bulk carrier.

Clause 1 of the Guarantee set out the Bank’s obligation to pay “forthwith upon written demand sent to the bank by way of registered mail… Such demand must be signed by duly authorised legal representatives of MUR certifying in writing that [Seatrade] has defaulted in its obligation to make the Guaranteed Payment concerned; that the amount claimed under this guarantee is due.”

Clause 2 of the Guarantee provided that when “identifying the legal authorised representatives, the [claimant] 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… should be authenticated as well as representative’s powers of MUR by a notary and duly apostilled…”

Seatrade failed to pay under the Agreement and the claimant issued two demands under the Guarantee.

Both demands were signed by V, a director of the claimant, and contained various notarised and apostilled documents confirming that the signature on the demand was that of V, but specifically excluding any assessment of either V’s authority to sign the demand or of its content.

The first demand was sent to the Bank by courier, fax and email only.

The issue

The Bank passed the first demand to Seatrade which raised various defects in it and the Bank refused to pay. The Bank went on to deny liability, alleging that neither demand complied with the requirements of the Guarantee in that:

They did not comply with clause 2 as they did not include authentication from a notary that under Dutch law the director had the power to act on the claimant’s behalf. It argued that the claimant was a Dutch company and it was a Monegasque bank, and as such it was unable to assess itself whether the demand from the claimant had been signed by an authorised signatory, which was the reason for requiring this authentication.

The demand was to be signed by ‘representatives’ but only one director had signed.

The first demand had not been sent by registered mail as stipulated in the Guarantee.

The High Court’s findings

The High Court held that the basic principle was that the language of the provision has to be given its natural meaning, save in exceptional circumstances.

It also considered the application of the doctrine of strict compliance which applies to letters of credit and under which the issuing or confirming bank can refuse payment if the documents required under it do not comply strictly with its terms – even in trivial or insignificant ways.

It held that the doctrine did not necessarily apply to on-demand guarantees in the same way. Generally speaking, on-demand guarantees were conditional on the presentation of documents rather than upon the actual existence of the facts those documents asserted.

The court found that the language of clause 2 gave it the narrow purpose of identifying and authenticating the genuineness of the demand and the identity of the signatory rather than the contents or substance of the demand. The claimant had complied with these requirements.

As a general principle, the terms for demanding payment under an on-demand guarantee should be clear and precise.
If certain documents have to be presented or requirements met when the demand is made, that should be clearly stated in the guarantee.

If the Guarantee had required a Dutch law opinion as to the director’s authority to make the demand on the claimant’s behalf, it should have said so expressly. It did not and there should not be a strained interpretation to produce that result. Moreover, the defendant’s experts had accepted that the director’s signature was binding on the claimant.

The parties agreed that the wording of the Guarantee was internally inconsistent as to whether multiple signatories were required but the court determined that that was not a matter of importance on the face of the Guarantee. As the Guarantee did not provide that it had to be signed by no less than two signatories, two signatories could not be interpreted as an essential requirement needing strict compliance. What was important was that the demands were authorised by the claimant, which they were.

The court also found that the requirement to send the demand by registered mail was directory, not mandatory, and the failure to do so was not fatal.

The guiding principle of a notice clause is one of effective presentation of a demand. The importance of registered post was that once signed for by the recipient, it precluded any suggestion that it had not been received. Here, there was no question as to whether the first demand had been received by the Bank.

Presentation of the first demand was effective and judgment was given in the claimant’s favour.

Comment

The decision suggests that a broader approach may be taken to on-demand guarantees than to letters of credit. Whether the degree of compliance required is strict, or not so strict, is a question of construction.

It remains crucial to ensure that the terms of a guarantee are clear and precise and that all terms are strictly complied with when demand is made in order to avoid the sort of dispute (and associated legal cots) that arose in this case. 

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