The Gazette 1986

GAZETTE

JULY/AUGUST 1986

creature"/ the legal consequences of which have yet to

be finally established.

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

and confirmed performance

guarantees

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.

In the

Edward Owen

case,

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."

Howe Richardson Scale Co.

-v-

Poiimex-Cekop

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.

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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