Note

Only the Initiator had submitted documents related to this decision.

This decision was rendered without the participation of the Respondent.

Parties

Initiator: Bank S (Second counter-guarantor)

Respondent: Bank I (First counter-guarantor)

Background and transaction

On 9 December 2011 the Respondent issued a counter guarantee (via SWIFT MT760) subject to URDG 458 (field 40C) in favour of the Initiator, instructing the Initiator to procure a Guarantor bank to issue an Advance Payment Guarantee in favour of the Beneficiary. The amount for the Guarantee was USD 36,517,244 and the expiry date of the Guarantee was 30 November 2012. The expiry date of the counter guarantee issued in favour of the Respondent was 22 December 2012. The SWIFT message included the wording of the guarantee to be issued by the Guarantor bank within quotes. The quoted wording of the guarantee did not show any rule to apply but included the following: "This guarantee shall be governed by and construed in accordance with laws of England".

The counter guarantee obligation was undertaken by the Respondent as follows: "In consideration of your issuing your guarantee as above, we, [...Respondent...], hereby establish our irrevocable counter guarantee in your favour and undertake to pay to you any sum not exceeding in total an amount of USD 36,517,244 (say US dollars thirty six million five hundred and seventeen thousand two hundred and forty four only) after receipt by us of your demand through authenticated SWIFT message (or tested telex) quoting the guarantee reference number and issuing date of our counter guarantee and stating that you have received a written demand for payment under your guarantee in accordance with its terms".

On 12 December 2011 the Initiator issued a counter guarantee (SWIFT MT 760), subject to URDG (without showing the publication number in field 40C) in favour of the Guarantor bank instructing the latter to issue its own advance payment guarantee in favour of the Beneficiary according to the relevant text inserted into the counter guarantee. The instructions to the Guarantor bank specified that this advance payment guarantee was to be for an aggregate maximum amount of USD 36,517,244 and with 30 November 2012 as the expiry date. The expiry date of the counter guarantee issued by the Initiator was 12 December 2012. At the end of the message of the counter guarantee the Initiator stated "This guarantee [meaning the counter guarantee] is subject to uniform rules for demand guarantees, ICC publication n. 458" which clarified the intent to apply such version of URDG rules. The guarantee did not show any rule to apply.

The counter guarantee obligation was undertaken by the Initiator consistent with the counter guarantee it had earlier received from the Respondent.

On 13 December 2011 the Guarantor bank issued its advance payment guarantee in favour of the local beneficiary for the same amount of USD 36,517,244. This guarantee was expressed to remain in full force up to 30 November 2012, with the last date for lodgement of claim thereunder being 4 December 2012. There was no mention of applicable rules and the statement appearing in the text received by the Initiator "This guarantee shall be governed by and construed in accordance with laws of England" was not shown in the advance payment guarantee issued by the Guarantor bank.

The guarantee obligation undertaken by the Guarantor bank stated: "We [...bank...]hereby irrevocably and unconditionally guarantee and undertake, subject to no other condition to pay to you, the above named owner, upon your written request in accordance with the agreement, any sum or sums up to the aggregate amount of this guarantee as amended from time to time. We as guarantor, will effect payment forthwith upon receipt of your written demand without proof (including any proof that such demand is in accordance with the agreement), conditions, grounds or reasons for such demand for the sum specified therein notwithstanding any contestations, claims demands or objections made by the civil contractor or any other third party ..."

The advance payment guarantee was subsequently amended several times (value and expiry date) with final details as below:

On 3 November 2014 the Beneficiary submitted a claim in writing to the Guarantor bank for payment of USD 11,688,378.24 under its advance payment guarantee. On the same day, the Guarantor bank claimed the same amount from the Initiator and the Initiator in turn claimed from the Respondent.

Between 3 November and 7 November 2014:

• the Initiator sent several reminders to the Respondent demanding immediate payment;

• at the Respondent's request, the Initiator sent the Respondent a copy of the guarantee issued in favour of the Beneficiary and stated that this did not have any impact on the validity of its claim under the counter guarantee issued by the Respondent;

• the Guarantor bank and the Initiator informed the Respondent that the balance value of the counter guarantee was USD 8,923,410.36.

On 10 November 2014:

• the Respondent informed the Initiator that they were still checking their claim in order to decide whether to honour or not and requested for the Beneficiary's demand under the guarantee quoting URDG 458 article 21;

• the Initiator in turn requested the Guarantor bank to provide a copy of the Beneficiary's demand;

• both the Guarantor bank and the Initiator replied respectively to the Initiator and the Respondent that the provision of the copy of the Beneficiary's claim was not a precondition for payment.

On 12 November 2014:

• the Respondent requested again a copy of the Beneficiary's claim;

• the Initiator sent a copy of the Beneficiary's claim to the Respondent;

• the Initiator paid the amount of USD 11,688,378.24 under his counter guarantee to the Guarantor bank;

• the Guarantor bank credited the same amount to the account of the Beneficiary;

• the Initiator advised the Respondent that payment had been made and again requested the Respondent to honour its claim under the counter guarantee.

On 13 November 2014:

• the Initiator twice advised the Respondent that payment had been made and again requested the Respondent to honour its claim under the counter guarantee;

• the Respondent informed the Initiator that it had been intimated about an order of status quo of the High Court. (The court order was not attached. The Initiator stated that the restraining order notice was only on the Applicant bank and not on the Respondent).

On 17 November 2014:

• the Initiator received a Notice of Court order of Hearing dated 12 November 2014 for the Initiator to appear in the High Court on 16 September 2015 and a Notification of Presentation of Proofs;

• the Initiator received a notice from the Respondent (by SWIFT dated 14 November, delivered after working hours, so received on the next working day 17 November 2014) stating that it had received an injunction issued by the High Court refraining it from effecting payment under the counter guarantee. (The notice did not include a copy of the injunction so this panel assumes that the injunction was served on the Respondent on or around 17 November 2014.)

On 18 November 2014:

• the Initiator received the High Court Notification of Assisting the execution of the Judicial verdict (dated 18 November 2014) directing the Initiator to suspend payment to the Guarantor bank;

• the Initiator received the High Court Civil Order dated 14 November 2014 restraining order directing all parties (Applicant, Respondent and Initiator) to stop payment of Guarantees / Counter guarantees.

On 9 December 2014:

• the High Court passed an order stating that the Guarantor did nothing wrong in honouring the guarantee and making the payment to the Beneficiary on 12 November 2014.

Issues

1. Had the Respondent failed to honour the valid claim made by the Initiator on 3 November 2014 for US$11,688,378.24 under the Counter Guarantee dated 9 December 2011, within a reasonable time as per URDG 458?

2. Given the Court order of the High Court dated 9 December 2014, was it justified for the Respondent to delay the payment to be made to the Initiator when it was clear that the Order did not apply to the Respondent and the Initiator as they were not party to the proceedings before the High Court and considering the fact that the order of the High Court had specified that only the parties to the proceedings were to maintain status quo?

3. Did the Respondent allow an unreasonably long time, which enabled the applicant to obtain a restraining order from the Court on 14 November 2014 after the Initiator, and the Guarantor bank honoured the commitments on 12 November 2014? Was such delay a violation of URDG 458 article 10, which requires that the Guarantor has to examine the demand under the guarantee within a reasonable time, especially in view of the fact that the claim had been made by the Beneficiary on 3 November 2014?

4. Was the Respondent obliged to pay the Initiator the demand under the Counter Guarantee mentioned hereinabove, along with any applicable delayed payment interest and costs?

Analysis

Question 1:

A) Applicable rule: The counter guarantee issued by the Respondent in favour of the Initiator was subject to URDG 458 as stated in SWIFT MT 760, field 40C and repeated at the end of same message.

B) The claim: The counter guarantee issued by the Respondent in favour of the Initiator contained a condition for the claim as follows: "We hereby establish our irrevocable counter guarantee in your favour and undertake to pay to you any sum not exceeding in total an amount of USD 36,517,244 (say...) after receipt by us of your demand through authenticated SWIFT message (or tested telex) quoting the guarantee reference number and issuing date of our counter guarantee and stating that you have received a written demand for payment under your guarantee in accordance with its terms". This condition, to be respected for a valid request of payment, is in line with URDG 458 sub-article 20 (b) which states that " Any demand under the Counter Guarantee shall be supported by a written statement that the Guarantor has received a demand for payment under the guarantee in accordance with its terms and this article". The claim made by the Initiator via SWIFT MT 799 dated 3 November 2014 contained the date and the reference number of the Respondent's counter guarantee and the statement that the Initiator received a "written demand dated 3 November 2014 for immediate payment of USD 11,688,378.24 in accordance with its terms". The claim was valid.

C) Payment of the counter guarantee: As the Initiator had complied with the terms and conditions of the counter-guarantee by sending a complying statement of claim within the validity of the counter-guarantee, the payment obligation of the Respondent under its counter guarantee was duly triggered on 3 November 2014. URDG 458 article 10 states: a) "A guarantor shall have a reasonable time within which to examine a demand under a guarantee and to decide whether to pay or to refuse the demand. b) If the guarantor decides to refuse a demand he shall immediately give notice thereof to the beneficiary by teletransmission, or, if that is not possible, by other expeditious means." There is no definition of "reasonable time" under URDG 458. However, so far as the reasonable time issue is concerned, the ICC Banking Commission Opinion R 504 (in "Collected Opinions of the ICC Banking Commission 1995-2001") states that "On the basis that a guarantee under URDG 458 would consist of a demand and possibly a statement as required by article 20, a reasonable time for the processing thereof would be within three banking days from receipt. This position reflects that which has been openly stated in the International Standby Practices (ISP98) for a product, standby letters of credit, which often calls for similar documentation both in volume and content. This may, however, be subject to any local court decisions regarding reasonable time." In addition, taking into account that the current version of URDG, Publication no. 758 article 20 states that "the guarantor shall, within five business days following the day of presentation, examine the demand and determine if it is a complying demand", this panel holds the view that the period from 3 November 2014 up to 17 November 2014 (the date when the Initiator was informed that the Respondent received the High Court order refraining it from effecting payment under the counter guarantee) exceeded the reasonable time mentioned in URDG 458 sub-article 10 (a) , being a total of 10 banking days.

Question 2

This question went beyond the competence of DOCDEX Rules article 1 (Publication no. 853 E), which covers only ICC rules. The interpretation and the effects of Court orders are under the law of the place where the Court order is issued. Accordingly, the panel expressed no opinion on this question. Having said that, as stated in Analysis 1 above, the panel reiterated the view that the Respondent had already exceeded the "reasonable time" as per URDG 458 article 10 when it notified the Initiator in respect of the High Court order on 13 November 2014, being a total of 8 banking days after 3 November 2014.

Question 3

The reasonable time issue was addressed under question 1 point C. This panel would like to highlight that the only document that the Respondent should examine in order to determine whether it was obligated to honour the claim made under the counter guarantee was the Initiator's request, and not any other document such as the Beneficiary's request or correspondence.

Based on the above analysis, the Respondent failed to act in accordance with URDG 458 sub-articles 10 (a) and (b) because it neither provided for payment nor gave any notice of refusal within a reasonable time. It was therefore obligated to honour the Initiator's demand. The Respondent could either refuse the demand within a reasonable time if the demand was discrepant or effect payment; there was no third option.

This panel was not in a position to adjudicate whether the Respondent delayed the payment in order to enable the applicant to obtain a restraining order from the Court. However, as the Initiator only received the High Court Notification of Assisting the Execution of the Judicial verdict on 18 November 2014, six days after the Initiator honoured the Guarantor bank's demand on 12 November 2014, the relevant Court order had no bearing on the Initiator's right to claim reimbursement from the Respondent.

It is well established that a bank guarantee subject to URDG 458 is separate from, and independent of, the underlying contract as stated in URDG 458 sub-article 2 (b). Accordingly, any dispute on the underlying contract had no bearing on the payment obligations of the issuing bank. Once the Initiator honoured the complying demand under the counter guarantee issued by it and made a complying demand under the counter guarantee issued by the Respondent, the Initiator is fully entitled to be paid by the Respondent notwithstanding that an injunction might be subsequently issued attempting to prohibit the beneficiary from obtaining payment under the advance payment guarantee issued by the Guarantor bank.

Question 4

See conclusion below.

Conclusion

The Initiator duly submitted a complying demand on 3rd November 2014 and the Respondent neither issued a notice of refusal within the reasonable time as required by URDG 458 sub-articles 10 (a) and (b), nor provided for payment.

According to the unanimous view of the panel and based on best banking practice as represented by URDG 758 article 20, the reasonable time after 3rd November 2014 expired on absolute latest 10 November 2014, i.e. 5 working days after 3rd November 2014. According to URDG 458, the Respondent was obligated to pay the drawing amount plus any applicable interest and costs claimed by the Initiator under the Respondent's counter guarantee.

It was up to the governing law and jurisdiction to rule about any possible suspension or derogation from the obligations undertaken by parties.

This decision was rendered unanimously.