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The Unconscionability Exception

restrained the beneficiary from continuing with its demand under the guarantees on the ground that the call was unconscionable in the circumstances of that case.75 The view that a beneficiary of a letter of credit or performance bond may be restrained from demanding or receiving payment under the instrument on the ground that his conduct in demanding pay­ ment is unconscionable within section 51AA has been accepted in subsequent decisions.76 In one case7778Austin J. said, referring to section 51AAof the 1974 Act, that ‘the principle of autonomy applicable to a standby letter of credit, cannot override the statute’. The difficulty that has presented itself is in determining the reach of section 51AA.

(in) Meaning o funconscionable conduct

7.43 For conduct to be unconscionable within section 51AA it must be unconscionable within the meaning of the unwritten law of Australia. The meaning of unconscionable conduct in this sense does not appear to be settled. As Gummow and Hayne JJ. said in Australian Competition and Consumer Commission v. CG Berbatis Holdings Pty L td ff the term ‘uncon­ scionable’ ‘is used as a description of various grounds of equitable intervention to refuse enforcement of or to set aside transactions which offend equity and good conscience. The term is used across a broad range of the equity jurisdiction.’ They said that for example: a trustee who misapplies a trust fund is said to engage in unconscionable conduct; relief against forfeiture and the imposition of monetary penalties is said to reflect the attitude of equity against unconscionable dealing;79 the remedy of rescission may reflect the character­ ization as unconscionable of the conduct of the party seeking to hold the plaintiff to a con­ tract entered into under a unilateral mistake80 or an innocent misrepresentation;81 and the doctrines of estoppel may be said to reflect equity’s desire to overcome the unconscionable conduct involved in resiling from the representation or expectation induced by the party estopped.

7 .4 4 There have been differences of opinion as to whether section 51AA is concerned with specific categories of case where equity provides relief on the ground of unconscionable conduct or whether the provision is concerned with a more general doctrine of unconscionability which applies in all cases where behaviour which can be described as unconscionable plays a part in the relief available. Tire former was preferred by Gyles ]. in one case82 whereas the latter was adopted by French J. in another case.83 In Australian Competition and Consumer Commission

75This applied only in respect of the mobilization guarantees but not the performance guarantees.

76e.g. Orrcon Operations Pty Ltd v. CapitalSteel& Pipe Pty L.td [ 2007'j FCA 1319; Clough Engineering Ltd v.

Oil and Natural Gas Corporation Ltd [2008] FCAFC 136, at [77]; Boral Formwork dr Scaffolding Pty Ltd v. Action Makers Zfe/[2003] NSWSC 557, where Campell J. granted an ex parte injunction restraining the benefi­ ciary’s call because there was a serious issue to be tried about ‘whether the making of the demand for the full invoice value constitutes unconscionable conduct’. See also Commonwealth Bank o fAustralia v. White (Sup Ct of Victoria, 22 October 1999) where Byrne J. said that a bank was entitled and perhaps obliged to refuse payment where there was clear evidence o f‘unconscionable conduct on the part of the beneficiary’.

77 Boral Formwork & Scaffolding Pty Ltd v. Action Makers Ltd |2003] NSWSC. 713; (2003) AT PR 41-953 at [14].

78(2003) 214 CLR 51 at [42].

79Shiloh Spinners Ltd v. Harding [1973] AC 691 at 722.

80Taylor v.Johnson (1983) 151 CLR 422 at 430-433.

81Redgrave v. Hurd (1881) 20 Ch D 1 at 12-13; Marks v. GIO Australia Holdings Ltd (1998) 196 CLR 494

at [117].

82GPG (Australia Trading) Pty Ltd v. GIO Australia Holdings Ltd (2001)117 FCR23 at 77.

83Australian Competition and Consumer Commission v. CG Berbatis Holdings (No 2) (2000) 96 FCR 491 at 501-502.

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v. CG Berbatis Holdings Pty Ltdw the High Court of Australia did not decide which of the views is correct and did not resolve the questions concerning the reach of section 51AA, since the dispute in that case fell within ‘that well-established area of equitable principles con­ cerned with the setting aside of transactions where unconscientious advantage has been taken by one person of the disabling condition or circumstances of the other’. However, in

Tanwar Enterprises Pty Ltd v. CauchiZbwhich was concerned with relief against forfeiture in the context of a contract for the sale of land, the High Court of Australia, after mentioning the specific categories of case where relief may be based on unconscionable conduct such as a breach of trust, said that the question whether a particular case amounts to a breach of trust is determined by reference to well-established principles. The court then continued: ‘It is to those principles that the court has first regard rather than entering into the case at that higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large’.8687Applied54 in the context ofsection 51 AA this seems to favour the narrow view that the unconscionable conduct prohibited under that provision is limited to conduct for which the court would give a remedy under those well-established principles.

This is consistent with the approach adopted in Australian Competition and Consumer 7.45

Commission v. Samton Holdings Pty Ltd%1by the Full Court of the Federal Court of Australia. The Full Court identified five categories of case in which the court will intervene on the ground of unconscionable conduct. It said88 that under the rubric o f‘unconscionable con­ duct’ the court will:

(i)Set aside a contract or a disposition resulting from the knowing exploitation by one party of the special disadvantage of another. The special disadvantage may be con­ stitutional, deriving from age, illness, poverty, inexperience, or lack of education or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other;

(ii)Set aside as against third parties a transaction entered into as a result of the defective comprehension by a party to the transaction, the influence of another and the want of any independent explanation to the complaining party;

(iii)Prevent a party from exercising a legal right in a way that involves unconscionable departure from a representation relied upon by another to his or her detriment;

(iv)Relieve against forfeiture and penalty;

(v)Rescind contracts entered into under the influence of unilateral mistake.

84(2003) 214 CLR 51 at [45Н46].

85(2003) 217 CLR 315.

86Ibid., at [20].

87(2002) 117 FCR301.

88Ibid., at [48].

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the approach of the courts. In Alex Focas Pty Ltd v. Skodaexport Co Ltd?9decided before the decisions of the High Court and the Federal Court relating to the scope of unconscionable conduct, BatJ., in the Supreme Court ofVictoria, tookawide view of what could constitute unconscionable conduct under section 51AA. He referred, inter alia, to Stern v, McArthur908 where Deane and Dawson JJ. said fraud, mistake, accident, or surprise do not exhaust the scope of unconscionable behaviour and that the general notion is that which has long been identified as underlying much of equity’s traditional jurisdiction to grant relief against unconscientious conduct, ‘namely, a person should not be permitted to use or insist upon his legal rights to take advantage of another’s special vulnerability or misadventure for the unjust enrichment of himself’.91 He concluded that even if a person is acting within his rights he may still engage in unconscionable conduct and that even if a person believes, wrongly, that he is acting within his rights he can thereby engage in unconscionable conduct. Accordingly he held that where mobilization and procurement guarantees were given to secure repay­ ment of advances, the beneficiary’s conduct in demanding payment for the full amount of the guarantees in circumstances where the greater part of the advances had been repaid was unconscionable. He therefore granted an injunction restraining the beneficiary from demanding payment in excess of the amount truly outstanding on the advances made.92

7.48In Samton, where the five categories were identified, the Full Court9394said that it was not necessary for it to decide on the correctness of the decision in Alex Focas. However, more recently the Federal Court appeared to follow the Samton categories as defining the bound­ aries of unconscionable conduct under the statute for purposes of the exception to the independence principle. Thus in Clough Engineering Ltd v. Oil and Natural Gas Corporation Ltd?* where it was alleged that a beneficiary’s conduct in calling on a performance bond was unconscionable, the Federal Court noted that none of the categories of unconscionable conduct identified in Samtom applied. The court concluded that accordingly the unconscio­ nable conduct exception did not apply.95 In other words, the court in Clough Engineering appeared to treat the list in Samton as exhaustive. Such a view would limit the reach of section 5 1AA to an extent that would render it almost useless in the context of an exception to the principle of independence, since in many cases any unfair or abusive conduct involved in a demand for payment would not be covered by the Samton categories.

7.49In Orrcon Operations Pty Ltd v. Capital Steel&Pipe Pty Ltd96the Federal Court was prepared to find that conduct was unconscionable even though it fell outside the Samton list. In that case the unconscionable conduct alleged was that the beneficiary of a letter of credit had sup­ plied defective goods and he was aware at the time he presented documents for payment that the goods supplied were not in conformity with the underlying contract. The court observed that ‘[i]t is not immediately apparent that the facts alleged by Orrcon [the applicant] fall

89[1998] 3V R 380.

90(1988) 165 CLR489.

91Ibid., at 526.

92The claimant’sapplication to the Court ofAppeal for further interlocutory injunctions pending the deter­ mination of an appeal was refused. Further interlocutory injunctions pending application for special leave to appeal were refused: (1996) 70 ALJR983. Special leave to appeal from the decision of the Court ofAppeal was refused by the High Court on 14 February 1997. The appeal itselfwas later discontinued.

93(2002) 117FCR301 at319.

94[2008] FCAFC 136.

95Ibid., at [77].

96[2007] FCA 1319.

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within one of the five categories identified in Samton. In one sense one can say that it is unconscionable or unconscientious to enforce legal rights oppressively or in bad faith but on one view of the authorities the real question is whether there is oppression or bad faith because the circumstances fall within one of the well-known cases in which equity will inter­ vene on the ground that the conduct is unconscionable or unconscientious.’97 The court accepted that such conduct could amount to unconscionable conduct within section 5 IAA and that that could be the basis of an injunction restraining payment under a letter of credit. However, it was held that the level or nature of the knowledge established in that case was not sufficient to constitute unconscionable conduct within the statutory provision.

2. Singapore

A. Recognition of the exception

Originally the Singapore courts followed the traditional non-interventionist position of 7.50

English law and held that the fraud exception was ‘the sole exception’ to the principle of autonomy.98 Where the beneficiary made a call in circumstances where there was no fraud the position was that ‘the bank must pay, regardless of how unfair that might be to the account party’.99 However, in order to deal with the increasing problem of abusive calls on demand guarantees, the idea of an unconscionability exception was floated in the Singapore courts in the first half of the 1990s. At first there was some hesitation and uncertainty about it.100 However, in the second halfof the 1990s the Singapore Court ofAppeal expressly recognized unconscionability as a separate exception to the principle of independence of demand guarantees.10112

In (HII, Pte Ltd v. Unitrack Building Construction Pte Ltd,'02 for example, a construction 7.51 contract required the contractor to procure a performance bond for a sum equal to 10 per

cent of the contract price. The bond was obtained. Subsequently, the contract price was revised downwards but the bond amount was not reduced. A dispute later arose between the parties and the employer attempted to call on the bond. The court granted an injunction restraining the call even though there was no fraud. The Singapore Court of Appeal held that it was unconscionable for the employer to call on the bond which was 10 per cent of the original price when the price was later revised downwards. In allowing the court to inter­ vene on the ground of unconscionable conduct the Singapore Court of Appeal made it clear that it was making a conscious and deliberate decision to depart from the position of

97Ibid., at [64].

98Bocotra Construction Pte Ltd & Others v. Attorney General (No 2) [1995] 2 SLR 733.

99American Home Assurance Co v. Hong Lam M arine Pte Ltd [1999] 3 SLR 682, at [42], p erson s Pung HowC.J.

100In Bocotra Construction Pte Ltd & Others v.Attorney General (No 2) [1995] 2 SLR 733 although the Court ofAppeal mentioned unconscionability, it did so in terms that were rather ambiguous since it said that the court could intervene in the case of‘fraud or unconscionability’. This resulted in some uncertainty in the High Court. Thus, whereas in Min lh ai Holdings Pte Lad v. Sunlabel Pte Ltd andAnother [1999] 2 SLR 368 Lai Kew Chai J. proceeded on the basis that there unconscionability was a separate exception, in New Civilbuild Pte Ltd v. Guobena Sdn Bhd & Another [1999] 1 SLR 374 Lee, J.C. rejected the idea that unconscionability was a separate ground on which to restrain a cal! on a demand guarantee. But shortly after in Sin Kian Contractor Pte Ltd v. Lian Kok Hong [1999] 3 SLR 732, Lim Teong Quwee J.C., after reviewing the authorities, including the New Civilbuild decision, concluded that unconscionability was a separate exception.

101GHLPte Ltdv. Unitract Building Construction Pte Lad \1999] 4 SLR 604.

102[1999] 4 SLR 604.

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English law10314which was understood to allow such judicial intervention only on the ground of fraud. The availability of a separate unconscionability exception was later confirmed by the same court in Samwoh Asphalt Premix PTE Etd v. Sum Cheong Piling PTE L tdw where it was stated that ‘[i]n Singapore, unconscionability on the part of the beneficiary in calling for payment on a performance guarantee is a separate and distinct ground from fraud for seeking injunctive relief’.105

B. Meaning of unconscionable conduct

7.52One of the weaknesses of an unconscionability exception is that the concept of unconscio­ nable conduct is difficult to define. In the Dauphin Offshore case106 the Singapore Court of Appeal did not think it ‘possible to define “unconscionability” other than to give some very broad indications such as lack of bona fides. What kind of situation would constitute uncon­ scionability would have to depend on the facts of each case. This is a question which the court has to consider on each occasion where its jurisdiction is invoked. There is no pre-determined categorization.’ In one case107 the Singapore court attempted to explain the concept by saying that unconscionability ‘involves unfairness, as distinct from dishonesty or fraud, or conduct of a kind so reprehensive or lacking in good faith that a court of conscience would either restrain the party or refuse to assist the party. Mere breaches of contract by the party in question would not by themselves be unconscionable.’ However, as the Singapore Court of Appeal explained in another case:108 the statement that unconscionability involves unfairness does not mean that every instance where there is unfairness amounts to unconscionability. Unfairness per se does not always constitute unconscionability. Unfairness is only a factor, albeit an important factor, in considering whether particular conduct is unconscionable.

7.53In the Dauphin Offshore case, although the Singapore Court of Appeal did not think that it was possible to define unconscionability, it gave some instances ofwhere a demand was held to be unconscionable. This included the case where the beneficiary made a demand based on a breach of contract where the breach was induced by the beneficiary’s own default.109 Another instance mentioned in the Dauphin Offshore case was that in M in Thai Holdings Pte Ltd v. Sunlabel Pte L td 110 where the underlying contract was for the supply of white rice from China. The seller could not supply the rice because of severe flooding which China had not experienced in the last 100 years. The buyer, the beneficiary of the demand guarantee, was informed of the flooding and the supplier’s claim that this was covered by a force majeure clause in the contract. It was held that in those circumstances the buyer’s demand for payment under the guarantee was unconscionable and an injunction was granted restraining the beneficiary from demanding or receiving payment under the guarantee.111 A further example of unconscionable conduct is where the amount demanded is excessive. This may

103GHLPte Ltdv. Unitrack Building Construction Pte Ltd[ 1999] 4 SLR 604 at [16J and [22].

104[2002] BLR 459.

105Ibid., at [II].

106Dauphin Offshore Engineering & Trading Pte Ltd v. The Private Office ofH R H Sheikh Sultan bin Khalifa

[2000] 1 SLR 657 at 668.

107Raymond Construction Pte Ltd v. Low Yang Tong (11 July 1996).

108Eltraco International v. CGH Development (2000) 4 SLR 290 at [29] and 130].

109Royal Design Studio v. Chang Development Pte Ltd [1990] SLR 1116; [1991] 2 MLJ 229, where the demand for payment was based on delays in construction that were caused by the beneficiary’s own default in

failing to make timely payments on interim certificates issued by the architect. 110 [1999] 2 SLR 368.

1,1 An appeal to the Court of Appeal, heard on lOMarch 1999, was dismissed.

178

112e.g. Eltraco InternationalPte Ltd v. CGH DevelopmentPte Ltd [2000] 4 SLR 290, where the beneficiary’s demand for the payment of the full amount of US$2.43m under a performance bond was held to be excessive and to that extent unconscionable, an injunction was granted restraining the beneficiary from demanding or receiving more than US$600,000.

113GHLPte v. Unitrack Building Construction Lie Ltd [ 1999 ] 4 SLR 604 at [28]. Ihis appears to be based on the contemplation of the parties that the amount of the performance bond will be revised to reflect the revision of the contract sum. However, in Hiap Tian Soon Construction PteLtd v. Hold DevelopmentPteLtd [2003] 1 SLR

667 at 685 the Singapore High Court appeared to go further by holding that where the original contract price is revised downwards the sum payable under a performance bond ‘is subject to revision unless the parties have agreed that that amount is to be unaffected by any changes in the original contract sum’. Emphasis in the original.

114 GHL Pte v. Unitrack Building Construction Pte Ltd [1999] 4 SLR 604 (where the original contract price was reduced by 65%). See also Hiap Tian Soon Construction Pte Ltd v. Hola DevelopmentPte Ltd [2003 ] 1 SLR 667 at 684-685 (where the original contract price was reduced by 20%).

stipulated amount on the occurrence of a specified event and the performance bond was issued to secure the account party’s performance of the payment obligation. It was not unconscionable for the beneficiary to demand full payment of the specified amount under the performance bond.

116Bocotra Construction v.A-G (No2) [1995] 2 SLR 733,747C, where the Singapore Court ofAppeal stated that ‘a high degree of strictness applies, as the applicant will be required to establish a clear case of fraud or unconscionability in the interlocutory proceedings’. See also Dauphin OffshoreEngineering dr Trading v. Private Office ofHRHSheikh Sultan bin Khalifa bin ZayedAlNahyan [2000] 1 SLR 657 at [57].

117cf. Star-Tram FarEast v. Norske-Tech [1995] 3 SLR 631,643A.

118 McConnell Dowell Constructions (Aust) Pty Ltd v. Sembcorp Engineers and Constructors Pte Ltd [2002] 1 SLR 199 at [74], following CHL v. Unitrack [1999] 4 SLR 604 and Chartered Electronics Industries v. Development Bank ofSingapore Аля![1999] 4 SLR655.

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certain cases the application for an injunction based on unconscionable conduct has failed because the strong prima facie test was not satisfied.119

3. Malaysia

7.56 Traditionally the Malaysian courts have followed the ‘hands off’ approach of English law by adopting the position that fraud is the only exception to the principle of independence of letters of credit and demand guarantees.120 It was recognized that this position of the law made it easy for an unscrupulous beneficiary to exploit an account party by means of an abusive call.121 So after the recognition of an unconscionability exception in Singapore, some Malaysian judges at the level of the High Court started to follow the Singapore approach by accepting an unconscionability exception.122 A notable example is the decision in The Radio & General Trading Co Sdn Bhd v. Wayss &Freytag (Malaysia) Sdn Bhd)23where an injunction was granted, in the absence of fraud, on the ground that the demand was plainly inequitable’.

7.57 However, that view did not take root in Malaysia. It was swiftly rejected in subsequent cases,12415including the decision of the Malaysian Court of Appeal in EEC Contractors (M) Sdn Bhd v. Castle Inn Sdn Bhdn 5 where it was stated that the ‘only exception is in the case of fraud’.126 After referring to English authorities, the court made it clear that ‘in order to justify any injunction to stop payment there must be clear evidence of fraud . . . Bad faith or unconscionable conduct by itself is not fraud’.127 With this decision the rising tide in favour of an unconscionability exception in Malaysia was reversed.128 More recently the High Court judges have returned to the traditional position that fraud is the only excep­ tion and have dismissed applications to restrain a demand or payment on the ground of unconscionability.129

7.58 However, the pressure from some High Court judges for the recognition of an unconsciona­ bility exception has not completely evaporated. It resurfaced in one recent case130 where a

119e.g. Dauphin Offshore Engineering & Trading Pte Ltd v. The Private Office o f HRH Sheikh Sultan bin Khalifa bin ZayedAlNahyan [2000] 1 SLR657 at [57].

120Notably the decision o f the Malaysian Supreme Court in Esso I ’etroleum Malaysia Inc v. Kago Petroleum

Sdn Bhd[}995\ 1 ML] 149.

121Sri Palmar Development & Construction Sdn Bhd it Transmetric Sdn Bhd [1994] 1 CLJ 224.

122e.g. Bains Harding (Malaysia) Sdn Bhd v.Arab-Malaysian Merchant Bank Bhd[\996] 1 MJL425 (injunc­ tion granted because the demand was made ‘in bad faith and in an unconscionable manner’); Cygal Berhad v. Bandar SubangSdn Bhd[ 1998] 650 MLJU i, 11, where it was said that the court could intervene on the basis

of fraud ‘or unconscionable conduct’.

123[1998] MLJ 346, revdon appeal, Civil Appeal No. W-02-415-1996, 31 January 2001.

124TransfeldProjects (M) Sdn Bhd v. Malaysian Airline System Bhd [2000] 7 ML] 583, [1999] 428 MLJU 1; Murni Builders Sdn Bhd v. Legends G olf& Country Resort Bhd [ 1999] 441 MLJU 1, esp. at 29-30.

125[2000] 3 MLJ 339.

126Ibid., at 359.

127Ibid., at 361.

128Although some High Court judges continued to grant injunctions restraining calls on the ground of unconscionability without referring to the decision of the Court ofAppeal in the LEC Contractors case. See, e.g.

Siemens Integra Transportation System Sdn BhD v. EKD Construction Sdn BhD [2003] MLJU 475, relying on another High Court decision in Perkasa Duta Sdn Bhd v. Perbadanan Kemajuan Negeri Selangor [2002] 2 CLJ 307.

129 Pasukhas Construction Sdn BhD v. M TM Millenium Holdings Sdn Bhd [2009] 8 MI.J 1 (injunction refused); Jtramas Technology Sdn Bhd v. AmBank (M) Berhad [2009] MLJU 0855 (injunction refused).

130 Pasukhas Construction Sdn BhD v. M TM Millenium Holdings Sdn Bhd [2009] MLJU 0277.

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judge who had dismissed an application for an interim injunction based on unconscionabil­ ity granted an injunction restraining payment pending appeal. The injunction pending appeal was granted because the judge took the view ‘that the unconscionability principle is a sound principle’ and that on the evidence in that case the conduct of the beneficiary could be said to be prima facie unconscionable. He made it clear that the only reason why he refused the interim injunction was because he was bound by authority. He said that there are merits in the claimant’s appeal to the Court of Appeal and said that the unconscionability principle should be tested in the Court of Appeal and the Federal Court. He observed that ‘our legal principles should be allowed to be developed by our superior Courts so that our laws would be abreast with those of other jurisdictions in the Commonwealth’.

difficult for the French Gourde Cassation to recognize a further exception to the principle of autonomy based on the idea of abuse of rights. Thus in the leading case of Societi Telecoise v. Union Mediterraneenne de banque,133 the Cour de Cassation allowed an appeal against the decision of the Paris Court of Appeal refusing to grant a stop order against payment under a demand guarantee on the ground that although the demand in that case was manifestly abusive, the abusive character of the demand did not amount to fraud. The Courde Cassation stated that abuse of right was a separate and additional ground on which payment under a demand guarantee could be restrained by injunction. Although the beneficiary may have an absolute and unqualified right to demand payment under the demand guarantee, in certain

1312000 Ohio App. LEXIS 5402, 43 UCC Rep. Serv. 2tl 964 (2000) (Ohio Ct. App. November 20, 2002).

132See, e.g., P. Malaurie, L. Aynes, and P. Stoffel-Munck, Droit Civil: Les Obligations (2nd edn, 2005) paras 119-122. See also Charmont, Tabus de droit’, RTDC 1902, 113; Rotondi, ‘Le role et la notion de Tabus de droit’, RTDC1980,66.

133Com. 20 January 1987, JC P 1987, ed. E, II 14882, obs. J. Stouflet.

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cases the courts will intervene where the exercise of that right is abusive although the conduct of the beneficiary in demanding payment does not amount to fraud.

7.61Following the decision of the Courde Cassation recognizing abusive demand as an additional exception separate from the fraud exception, courts have been able to intervene on the ground of abusive demand in a number of cases. Thus, in one case,134 where a demand guar­ antee had been issued as a tender guarantee and the eventual contract was not concluded due to the fault of the beneficiary (employer), it was held that in such a case a demand for payment by the beneficiary was manifestly abusive and that the bank ought to have refused to pay once it had been made aware of the situation. In another case,135 a call by the issuing bank under its counter-guarantee issued by the account party’s bank had been held to be manifestly abusive on the basis that the issuing bank did not intend to pay the beneficiary under its demand guarantee and intended to raise against the beneficiary the defence that the guarantee had expired. However, care should be taken in finding that a demand is abusive. For example, the mere fact that the issuing bank intended to raise a defence against the ben­ eficiary of the performance bond does not mean that the defence will succeed. So, it may make commercial sense for an issuing bank that has received a demand under its perfor­ mance bond to call on the counter-guarantee of the instructing party even though the issuing bank intends to raise a defence against the beneficiary. This may be the case, for example, where the counter-guarantee is due to expire so that the issuing bank cannot wait for the conclusion of any litigation with the beneficiary before demanding payment under the counter-guarantee when it will be too late.

7.62Since the courts recognize an exception based on abusive demand, if a bank pays with full knowledge of facts establishing that a demand is abusive, the bank will not be entitled to reimbursement under its counter-indemnity. In Banque Indosuez v. Ste Entrepose,ni the account party, who was bidding for a contract for the construction of a gas pipeline in Bangladesh, instructed a bank to issue a tender guarantee to the employer. Under the guar­ antee the bank undertook to pay the beneficiary if the account party withdrew its offer during a stipulated period or if the account party, having received a notice of acceptance of its offer during the stipulated period, failed or refused to sign the contract when asked to do so. The account party was awarded the contract but the employer attempted to impose a new term, different from those stated in the documents calling for tenders, giving the employer the right to terminate the contract unilaterally. The account party, who found this unaccept­ able, broke off the negotiations and the beneficiary called on the guarantee. The account party provided the bank with all the information relating to the conduct of the beneficiary. However, the bank paid and sought reimbursement from the account party. The Corn de Cassation upheld the decision of the Court ofAppeal that the bank, which had been informed of die situation, should have refused to pay on the ground that the employer’s demand was manifestly abusive as it was based on the account party’s refusal to agree to a term not

•'contained in the tender document.

'Merieux c Banque Francaise du Commerce Exterieur, Tib. Com. Lyon, 3 July 1991, D. 1993

\AT Banque Privee, Paris 22 January 1991, D. 1991. Somm. 200.

\\T-997, D. off. 1998, 107, obs. A.-R.;/C/>1998, ed. E, 1781, obs. S. Hanna.

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