The claimant, a French company, entered into two contracts with a Spanish company (A), according to which the Spanish company undertook to supply material to be incorporated into a project in Africa, which was the subject of a contract between the claimant and a Japanese company (C). The respondent, a Spanish bank, issued two performance guarantees on behalf of Company A in favour of the claimant, as required by the supply contracts. The guarantees provided that the respondent would pay the claimant upon the latter's first written demand, notwithstanding any objection by the supplier. The claimant called the guarantees on account of alleged defects in the material supplied by Company A. The respondent refused to pay, on the grounds that the claimant's demand was not in compliance with Article 20 of the ICC Uniform Rules for Demand Guarantees. Thereupon, the claimant initiated arbitration proceedings to obtain payment of the guarantees. The respondent contended that the problems arising from the supply contracts were the responsibility of the claimant, not Company A, whose responsibility had terminated with delivery of the supplies to the claimant in Spain and the claimant's inspection and acceptance of those supplies. After first determining that the guarantees were valid and effective when they were called, the sole arbitrator then turned to the main issue-their legal nature.

'2. Having so established the validity of the guarantees, the main issue that needs to be addressed refers to the legal nature of the guarantees issued by the Respondent, namely whether they are indeed independent and autonomous undertakings or rather accessory commitments.

The Claimant states in its reply that both parties construe the guarantees in question as on demand bond.

This is not true.

In its first paper the Respondent in fact states expressly that the expression "on first written demand" should not be interpreted out of the context. In particular, the Respondent maintains that this expression should be placed in connection with the previous phrase-i.e. that the guarantee is issued for the correct and punctual accomplishment of the seller's obligation under the order-"which deals with the obligations of the seller as a result of the contract, and only when this obligations [sic] are not complied with will the guarantor be obliged".

In relation to this, the Respondent insists that the demand "is supported by a description of the alleged non-compliance and some document not directly issued by the beneficiary".

Parties therefore disagree on the nature of the guarantees in question.

Very little elaboration has however been given by either parties to this issue, which in my opinion, is the key issue of the case.

It is undisputed under the French law that the question whether a guarantee is a first demand guarantee-i.e. an undertaking totally independent of the underlying transaction-is a question of fact that needs to be solved in each individual case.

A recent decision of the Cour de cassation (Cass. Com., 9 Dec, 1997, arrêt 2477 D; see also Cass. Civ. 13 March 1996, Rev. Droit banc. et bourse, 1996, p. 123 and Cass. Com., 13 Dec. 1994, D. 1995, Jur. p. 209) has expressly stated that the expression "payable on first demand" does not make in itself the guarantee independent if the context of the guarantee itself shows that it is in fact accessory to the obligations arising out of the underlying contract.

Other decisions of lower courts and some authors have in the past stated that the presence of such expression constitutes an irrefutable presumption that the guarantee is of first demand type and therefore independent of the underlying transaction.

This conclusion however has been criticised by the prevailing doctrine that has rightly pointed out that only the law can provide, in specific cases, for irrefutable presumptions.

Being then a question of fact, in my opinion it is necessary to check if the overall tenor of the guarantees, regardless the reference to a payment on first demand, can lead to the conclusion that they are indeed independent commitments of the guarantor, subject as such only to the exceptio doli limit.

In the opinion of the Respondent it appears that the reference to the "due, punctual and correct performance of the Vendor's obligations under the Purchase" Orders makes the guarantees contingent upon the non fulfilment of the contractual obligations, which was neither stated in the claim by the Claimant when calling the guarantee nor actually took place. According to the Respondent such contractual obligations were properly performed and the calling of the guarantee by the Claimant was thus fraudulent.

Needless to say if there was indeed fraud on the part of the Claimant all questions on the legal nature of the guarantees would be pointless, in light of the "fraus omnia corrumpit" principle. The Respondent could simply and lawfully refuse payment.

This being said, it is my opinion that the reference to the correct performance of the contractual obligations, contained in the first part of both letters of guarantee, does not make the guarantees dependent upon the non performance of the underlying contract.

According to the prevailing interpretation under the French law, the reference to the contractual obligations, secured by the guarantee, and their performance does not make the guarantee conditional, but rather serves only the purpose of identifying the guarantee and defining the amount due by the guarantor.

On the other hand, according to a widespread authority (see Vasseur, Stoufflet, Martin-Delierneux and others), even the express provision in the guarantee of the obligation of the beneficiary to declare the non performance of the contractual obligations is perfectly compatible with a true first demand guarantee.

It is, again, a question of fact.

This being the legal framework, it can be safely stated that the guarantees in question are typical first demand guarantees where no burden other than a written demand for payment is placed upon the beneficiary. The Respondent has in fact undertaken to pay unconditionally and notwithstanding any contestation on the part of the Vendor.

This is indeed the substance of a typical first demand guarantee.

The Respondent also objects that the Claimant in its summon for payment should at least have stated that the underlying obligations had not been fulfilled and in what respect.

The objection is however unfounded. As said before, such a declaration, in order to be construed as a pre-requisite for claiming payment, must be expressly provided in the guarantee. No such provision is contained in the text of the guarantees in question.

On the other hand, the need for such declaration, contrary to the Respondent's opinion, cannot be derived from art. 20 of the ICC Uniform Rules on Demand Guarantees (ICC Publication No. 458), since these Rules are not applicable to the guarantees in question. As the Claimant has rightly pointed out, for these Rules to be applicable an express reference thereto according to art. 1 of the Rules would have been necessary. No such reference can be seen in the Letters of Guarantee, which are therefore "governed in all respects by the laws of France" (para. 5 of both guarantee letters).

The ICC Uniform Rules on demand Guarantees, and indeed all ICC Rules, are contractual in nature and are therefore applicable to individual transactions only if, and to the extent that, an express reference to their application is made by the parties. ICC Rules are not, as yet, contrary to the Respondent's assumption, part of the international law and they can be taken into consideration only when incorporated into individual transactions.

Also groundless is the reference to the UNCITRAL Convention on independent guarantees and stand-by letters of credit, which has not yet entered into force for lack of the required number of ratifications (art. 28 of the Convention).

In conclusion, the guarantees in question are to be construed as typical first demand guarantees, governed by the French law, that the Beneficiary is entitled to claim without being required to make any statement as regards the non fulfilment of the Vendor's contractual obligations. A simple written demand for payment, such as that made by the Claimant, suffices.

3. However, the independent nature of first demand guarantees does not overcome fraud. If the claim for payment is fraudulent, then the guarantor can and must refuse payment, despite any commitment to pay unconditionally and without objections. As French courts have repeatedly stated abuse and fraud prevent the application of the principle of autonomy in the area of guarantees (see Cass. Com. 11 Dec. 1985, D. 1986, p. 216, note Vasseur).

In the Respondent's opinion "we are facing a clear attempt to defraud with an end to achieve unjustified wealth" since:

a) the responsibility of [Company A] terminated upon delivery of the supplies in Spain, and said delivery was inspected and accepted by [Claimant] at the plant of [Company A];

b) [Company B], an international recognised company, upon inspection of the work in [State X], detected damage due to poor unloading, handling and assembly and all this is the sole responsibility of [Claimant];

c) [Company C], the Employer, with faxes dated July 15 and 19, 1996 accepted all supplies, including those made under the orders secured by the guarantees.

The Claimant, on its part, turns down as ill founded the Respondent's allegations, stating that:

a) [Company C], on June 5, 1995 did in fact refuse to accept the [supplies];

b) Defaults in materials supplied by [Company A] were first observed in year 1994 and notified to it by [Claimant] in a fax on November 22, 1994. The guarantees' expiration dates were in fact extended in order to allow [Company A] to repair the materials, but this was never done, thus forcing [Claimant] to call the guarantee;

c) [Company D], acting as an independent expert, demonstrated conclusively that major problems existed with the [supplies], resulting in part from material defects which were [Company A]'s responsibility . . .

Before going into this matter, it has to be stressed that although the Arbitrator has no jurisdiction on the underlying contract, but only on the guarantees, the fraud exception must still be examined in relation to the contract itself to check whether such alleged fraud or abuse indeed occurred and, if so, if it was also manifest.

According to the French law if there is fraud or abuse it has in fact to be "manifest fraud" or "manifest abuse" (see Cass. Com. June 20, 1987, D. 1987, 177).

This however leads to another question, i.e. when is fraud or abuse manifest.

It is a question of fact, but French courts and doctrine are unanimous in defining manifest fraud or abuse to be fraud and abuse that "stares one in the face" (crèvent les yeux), that is to say neither requires any specific discovery or verification, but should "burst forth before one's eyes" prima facie. It has in particular been stated that the fact that, even if apparently established, the principal has fulfilled all of its obligations is not sufficient. Certainty, in other words, is required.

This being said, as regards the concept of fraud, a well-known Cour de cassation decision (Com. Dec. 11, 1985, above) stated that fraud implies a true machination, manoeuvres destined at making the principal pay for what it does not owe, whereas manifest abuse exists in the case where, as said before, there is absolutely no doubt that the principal has fulfilled all of its obligations.

Documents submitted by both parties do not allow to achieve any certainty that the call was fraudulent. Some contradictions in fact exist amongst such documents.

. . . . . . . . .

Documents submitted by the parties and referred to above show that some kind of dispute or incomprehension has in fact arisen between the parties, but do not show any clear and manifest attempt of fraud on the part of the Claimant-Beneficiary, as requested by French courts for a legitimate refusal of payment by the first demand guarantor.'