Экзамен зачет учебный год 2023 / The-independence-principle-of-letters-of-credit-and-demand-guarantees-150-373

II. Where There is Express Provision in the Contract

payment upon the breach itself’.1516Payment under a performance bond is not required upon the

breach itselfeven though the event upon which it is required (complying demand) takes place

against the background of a breach of contract.

In this respect a performance bond differs from a retention money provision although they are

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closely analogous in their commercial purpose. The difference is that in the case of a retention

money clause, the right to retain the money normally arises upon a breach ofcontract and there­

fore the law of penalties is applicable to a retention money clause. For example, in Gilbert-Ash

(Northern) Ltdv. Modem Engineering (Bristol) LtdK the relevant provision in a sub-contract gave

the contractor the right to withhold payment of any money due or becoming due to the sub­

contractor ‘if the sub-contractor fails to comply with any of the conditions of this sub-contract.

The House ofLords expressed the view that the provision was penal.17 It is not surprising that the

law on penalties applied to the provision since the contractors right to retain the money only

arose upon a breach of contract by the sub-contractor. By contrast, in the case of a performance

bond, the beneficiary’s right to receive payment arises upon the happening ofan event other than

a breach of contract.

Secondly, in terms of authority, the idea that a term allowing the beneficiary to retain money

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paid under the performance bond is a penalty does not appear to have attracted judicial

support. Thus in the Cargill case itself it was argued on appeal that Morison J. was wrong to

hold that a term in the underlying contract providing for a forfeiture of the performance bond

was penal in effect. A number of reasons were advanced in support of that contention. First,

the provisions in the contract were not penal since they simply allowed for forfeiture of

moneys already provided by the account party pursuant to a well-recognized tripartite

commercial arrangement. Secondly, such commercial arrangements would be undermined

by the introduction of the doctrine ofrelief from penalties. And, thirdly, therewas no reported

authority directed to an analogous situation which supported the judge’s view. Potter L.J.,

with whose judgment Swinton Thomas L.J. agreed, said that these ‘arguments may well have

force’.1819However, since he agreed with the judge on the principal issue of construction, he left

the penal clause question undecided.

Furthermore, in Sepoong Engineering Construction Co Ltd v. Formula One Administration

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LtdN a case concerned with a standby letter of credit, where there was an express term in the

underlying contract allowing the beneficiary to retain all sums paid under the instrument, the

Commercial Court enforced the term without any objection that it was a penalty. Sepoong

I l l Where There is no Express Provision

the [account party’s] non-performance of the contract. If [the beneficiary] receives too much,

that can be rectified later at an arbitration.’

However, the leading case on this point is CargillInternationalsA v. Bangladesh Sugar &Food

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Industries Согр.гъ Hie underlying contract was for the sale of a cargo of sugar. The seller

arranged for a bank to provide a letter ofguarantee. The contract of sale contained a provision

that the guarantee was liable to be forfeited to the buyer if the seller failed to fulfill any of the

terms of the contract or if any loss or damage occurred to the buyer due to any default of the

seller. There was another term to the effect that if the seller failed to keep to the arrival period/

time, the buyer would be entitled to recover liquidated damages at two per cent of the con­

tract value of the undelivered goods for each month or part of a month during which delivery

was in arrears or to terminate the contract and forfeit the guarantee. A dispute arose between

the parties as to whether the vessel’s late arrival at the port of discharge and the fact that an

overage vessel was used was due to the sellers or the buyer’s default. On the assumption that

the sellers were in breach in one or both respects, a preliminary issue for the court was

whether, if the buyers made a call on the full amount of the guarantee they would be entitled

to retain all the moneys received or only such amount as was equal to the amount of the loss

suffered by them. Morison J. held that the beneficiary was only entitled to retain the amount

of the money equal to their loss. That decision was approved by the Court of Appeal, first in

Comdel Commodities Ltd v. Siporex Trade SA2526 and, a few months later, in the appeal of die

Cargillcase itself.27

Since the beneficiary is liable to repay any surplus in the absence ofclear words to the contrary in

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the underlying contract, the question which arises is whether he is liable to repay it to die bank

or to the account party. This has been a hotly contested issue.28

1. Beneficiary’s Liability to the Bank

In IIG v. Van Der Merwe2^ Lewison J. observed that a passage in one textbook30 supported

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the view that it is the issuer (the bank) that is entitled to recover any overpayment directly

A further policy reason against implying a term into the performance bond is that it would be

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inconsistent with the independence principle, since it links the scope of the bank’s rights

and obligations under the performance bond to the beneficiary’s entitlement under the

underlying contract. In the case of the instrument in Uzinterimpex JSC v. Standard Bank

Pic36 Moore-Bick L.J. said that an implied term ‘linking the scope of the [issuer’s] obligation

under the guarantee to the receipt of funds by the [beneficiary] from other sources would

be inconsistent with the nature of the instrument’.37 This is because, as explained above,38

the bank’s liability is entirely distinct from the relationship between the beneficiary and the

account party under the underlying contract. Therefore, the bank is concerned only with the

presentation of a valid demand. If such a demand is made the bank becomes liable to pay in

accordance with the instrument. It is not concerned with the amount of damages to which

the beneficiary is entitled as a result of the account party’s breach of contract.39

It is not surprising, therefore, that the idea of an implied term into the performance bond has

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not found favour with the courts.40

C. Quistclose implied term

Another argument which has been advanced in favour of the view that the paying bank is

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entitled to recover from the beneficiary is an implied term based on the decision in Barclays

Bank Ltd v. QuistcloseInvestments Ltdl4142In that case, it was decided that where money was paid

by A to В with the common intention that it should not become part of B’s assets but should

The preferred view is that, in the absence of a clear term to the contrary in the underlying

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contract, the beneficiary is liable to repay any overpayment to the account party rather than

the bank.48 Indeed, it has been held that the account party is entided to recover the overpayment

even where he has not yet reimbursed the bank.49 The reason why the law favours recovery by

the account party is because a performance bond is normally provided, as a requirement of

the underlying contract, at the request of the account party and ultimately at his cost.

Therefore, it is right that if there is a surplus in the hands of the beneficiary, which the benefi­

ciary is not entitled to retain, he should repay it to his contractual counter-party, the account

party, rather than to the bank.

But what is the reason why the law favours recovery by the account party rather than allow­

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ing the beneficiary to retain the surplus where the contract is silent on the issue of overpay­

ment? One reason is because recovery is necessary to achieve a balance ofcommercial fairness’

between the parties.50 At the stage when the beneficiary demands payment, the balance of

fairness is heavily in favour of the beneficiary because the independence principle jealously

guards his right to receive payment. It is well known that at this stage the English courts

adopt a restrictive approach to applications by account parties for injunctive relief.51 It is

recognized that this restrictive approach favours the beneficiary and can even lead to abuse

by the beneficiary. However, the law tolerates the risk of abuse at this stage on the basis that,

after payment, there will be an opportunity, at a later stage, to redress any imbalance through a

final accounting between the parties in arbitration or litigation. In other words, the commer­

cial advantages which the performance bond gives the beneficiary at the payment stage are

justified on the basis that ‘in the absence of some clear words to a different effect, when the

bond is called, there will, at some stage in the future, be an “accounting” between the parties

in the sense that their rights and obligations will be finally determined at some future date’.52

Although there are policy reasons why it is the account party who is entitled to recover any

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surplus from the beneficiary, in the absence of clear terms in the underlying contract, the

Claims Against the Beneficiaryfo r Overpayments

be based’.53 Some have recognized the account party’s right of recovery but have stated that

the precise legal route by which the right to recover arises probably does not matter.54 It is

suggested that there would be greater clarity and certainty in the law if a precise legal route

were established. A number of suggestions have been advanced as providing the legal route

by which the account party’s claim arises. These include: agency, restitution, breach of con­

tract, term implied in the performance bond, and term implied into the underlying contract.

It is submitted that, with the exception of the idea of a term implied into the underlying

contract, the suggested legal routes are not well-founded.

A. Agency

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The agency analysis is that since the payment to the beneficiary is made by the bank, the

issuer, as agent for the account party, it is the account party not the bank who is entitled to

any surplus.5556But this view is doubtful. Although in a case where the account party instructed

the paying bank directly, the bank is in some respects a special agent of the account party, it

is not clear that when the bank makes payment to the beneficiary it does so as agent of the

account party. It would appear that, in keeping with the independence principle, the bank’s

payment to the beneficiary is as a primary obligor in accordance with its own contractual

obligations to the beneficiary. The position is afortiori in a multi-bank transaction, where the

issuer of the performance bond (the paying bank) has not been instructed directly by the

account party. This is the case where, for example, the paying bank is acting on the instruc­

tions of a bank that has been instructed by another bank that has in turn been instructed by

the account party’s bank, which itselfhas been instructed by the account party. In such a case,

it is difficult to say that the paying bank at the end of the chain of banks is the agent of the

account party. In United Trading Corporation SA и AlliedArab Bank Ltd?6for example, the

account party was required under a contract of sale to procure the buyer’s bank (Rafidain

Bank) to issue a performance bond to the buyer (the beneficiary). The account party

instructed its bank, in return for a counter-guarantee given by the account party. The bank

instructed another bank, Barclays Bank International Ltd (BBI), in return for a counter­

guarantee given by the account party’s bank to BBI. BBI in turn instructed Rafidain to issue

the performance bond in return for a counter-guarantee given by BBI to Rafidain. It was

held by the Court ofAppeal that any money paid by BBI to Rafidain under the BBI counter­

guarantee was not the account party’s money; it was BBI’s money which BBI was paying

pursuant to its contractual obligations to Rafidain. Similarly, it can be said that any money

paid by Rafidain to the beneficiary was not the account party’s money; it was money paid by

Rafidain under its contractual obligations to the beneficiary.

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It is true, of course, that in a performance bond the issuing bank gives its undertaking to pay

at the ultimate request of the account party but the undertaking which the beneficiary of a

performance bond requires and which the issuing bank gives is an undertaking to pay as

ILL Where There is no Express Provision

It is submitted that the Scottish court was right to reject the agency rationale in Spiersbridge

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Property Developments Ltd v. M uir Construction Ltd.51There, it was contended that the bank

had paid the beneficiary as agent of the account party because the bank’s undertaking in that

case began with the words ‘On behalfof’ the account party. The court rejected that argument

and held that the words ‘on behalfof ’ in this context meant no more than ‘at the request o f

or ‘on the instructions o f’.

B. Breach o f contract

The account party’s entitlement to recover is sometimes explained on the basis of breach of

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contract by the beneficiary in demanding too much from the bank. Some commentators5758

have said that ‘[a]s the making ofan excessive demand is, basically, a breach of the beneficiary’s

underlying contract’, the amount ought to be regarded as received in breach of that contract

and therefore the account party is entitled to recover it as damages for breach of contract. This

explanation is open to doubt both in terms of principle and as a matter of authority.

A demand for payment under a performance bond is not a demand made in breach of con­

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tract simply because the amount demanded (and received) is or turns out to be more than

the beneficiary’s actual loss. Whether a demand for payment under a bond is in breach of the

underlying contract depends on the terms of the underlying contract. But a demand for the

amount stated in the underlying contract and specified in the bond is not a demand in breach

of contract simply because the amount received turned out to be more than the beneficiary’s

actual loss. The underlying contract will normally not stipulate that the beneficiary is allowed

to demand no more than the amount of his actual loss, since in most cases the full extent of

the beneficiary’s loss will not be known at the time of a demand for payment. In the absence

of a provision in the underlying contract restricting the beneficiary’s demand to the amount of

his actual loss, it is difficult to see how a demand for the amount stipulated in the underlying

contract and reflected in the bond will be a breach of the underlying contract by reason only

that the beneficiary’s actual loss turned out to be less than the amount received. Since such a

demand is not a breach of the underlying contract, the theory of breach of contract cannot

explain the account party’s entitlement to any surplus in the hands of the beneficiary.

The breach of contract theory is not only insecure in principle, it lacks support in authority;

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there is no reported case which supports it. The Australian cases of Australasian Conference

Association Ltd v. Mainline Construction Pty Ltd (in liquidation)5960and Wood Hall Ltd v. The

Pipeline Authority59are sometimes advanced as providing support for the breach of contract

Claims Against the Beneficiaryfo r Overpayments

be based’.53 Some have recognized the account party’s right of recovery but have stated that

the precise legal route by which the right to recover arises probably does not matter.54 It is

suggested that there would be greater clarity and certainty in the law if a precise legal route

were established. A number of suggestions have been advanced as providing the legal route

by which the account party’s claim arises. These include: agency, restitution, breach of con­

tract, term implied in the performance bond, and term implied into the underlying contract.

It is submitted that, with the exception of the idea of a term implied into the underlying

contract, the suggested legal routes are not well-founded.

A. Agency

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The agency analysis is that since the payment to the beneficiary is made by the bank, the

issuer, as agent for the account party, it is the account party not the bank who is entitled to

any surplus.55 But this view is doubtful. Although in acase where the account party instructed

the paying bank directly, the bank is in some respects a special agent of the account party, it

is not clear that when the bank makes payment to the beneficiary it does so as agent of the

account party. It would appear that, in keeping with the independence principle, the bank’s

payment to the beneficiary is as a primary obligor in accordance with its own contractual

obligations to the beneficiary. The position is afortiori in a multi-bank transaction, where the

issuer of the performance bond (the paying bank) has not been instructed directly by the

account party. This is the case where, for example, the paying bank is acting on the instruc­

tions of a bank that has been instructed by another bank that has in turn been instructed by

the account party’s bank, which itselfhas been instructed by the account party. In such a case,

it is difficult to say that the paying bank at the end of the chain of banks is the agent of the

account party. In United Trading Corporation SA v. Allied Arab Bank Ltd,56for example, the

account party was required under a contract of sale to procure the buyer’s bank (Rafidain

Bank) to issue a performance bond to the buyer (the beneficiary). The account party

instructed its bank, in return for a counter-guarantee given by the account party. The bank

instructed another bank, Barclays Bank International Ltd (BBI), in return for a counter­

guarantee given by the account party’s bank to BBI. BBI in turn instructed Rafidain to issue

the performance bond in return for a counter-guarantee given by BBI to Rafidain. It was

held by the Court of Appeal that any money paid by BBI to Rafidain under the BBI counter­

guarantee was not the account party’s money; it was BBI’s money which BBI was paying

pursuant to its contractual obligations to Rafidain. Similarly, it can be said that any money

paid by Rafidain to the beneficiary was not the account party’s money; it was money paid by

Rafidain under its contractual obligations to the beneficiary.

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It is true, of course, that in a performance bond the issuing bank gives its undertaking to pay

at the ultimate request of the account party but the undertaking which the beneficiary of a

performance bond requires and which the issuing bank gives is an undertaking to pay as