Article

Factual Summary: Owner, a Russian company, hired Contractor, a Turkish company, to design and build a retail and office building in Moscow. Contractor hired Subcontractor to work on the façade for a fixed price of $36,304,345.15 plus VAT. Contractor agreed to make an initial advance payment of 30% of the fixed price, a second advance payment of 10% of the fixed price, and then a series of current or monthly progress payments against measured amounts of work. The advance payments were to be reflected by means of deductions from each progress payment. Subcontractor's performance was assured by two unconditional and irrevocable guarantees in favor of Contractor. These totaled over $13 million and were to be issued by an "international first class bank". Subcontractor obtained two advance payment guarantees for $13.5 million and a performance guarantee for $1,815,218 issued by Italian banks. All three guarantees were subject to English law and exclusive English jurisdiction.

In order to draw under the advance payment guarantees, the demands were required to state that:

1. [Applicant/Subcontractor] has failed to fulfill its obligations to the Contractor under the Subcontract;

2. accordingly [Beneficiary/Contractor] is entitled to receive payment of the Advance Payment.

When Owner terminated its contract with Beneficiary/Contractor, Beneficiary/Contractor demanded payment under the advance payment guarantees and the performance guarantee from the respective Guarantors. Beneficiary/Contractor then gave notice to Applicant/Subcontractor and terminated the Subcontract. Guarantors dishonored Beneficiary/Contractor's demands, alleging fraud.

Beneficiary/Contractor sued Guarantors for wrongful dishonor and sought summary judgment against them. The Judge granted summary judgment in favor of Beneficiary/Contractor.

Legal Analysis:

1. Fraud. Beneficiary/Contractor argued that in England, Guarantors had "no real prospect of successfully defending the claim and there [was] no other compelling reason why the case should be disposed of at trial." Alleging that Beneficiary/ Contractor had committed fraud by making a demand to receive payment it did not honestly feel to be correct, Guarantors argued that they were excused under the fraud exception.

As indicated, the text of the demand contained the term "accordingly". The Judge asked whether the term "accordingly" used in context signifies that is the beneficiary obligated to state or to have reason to believe that it has either suffered damage in the amount claimed or is entitled to applicant's repayment of the price paid in advance?

The Judge answered these questions with the following: "Whilst the word 'accordingly' implies a connection between breach by [Applicant] and the liability of the [Guarantors], there was such a connection on [Beneficiary/Contractor's] approach in that the liability of the banks to pay arose on the demand following what [Beneficiary/Contractor] had stated to be a breach by [Applicant/Subcontractor]." The word, "accordingly", does not impose on the beneficiary an obligation either to state or to have reason to believe that it had suffered damage in the amount claimed nor an obligation that it was entitled to repayment by the applicant of the price paid in advance.

2. Termination; Independent Undertaking. The Judge observed that in the event Guarantor could establish that Beneficiary had no honest belief that the demands were valid, it would then have had to prove that subsequent admittedly valid demands had terminated. The Judge noted that Jack, Documentary Credits 9.14 suggests "It is arguable that a fraudulent demand is a breach of an implied condition." The Judge, however, rejected this argument, stating: "They were unconditional and irrevocable guarantees. I do not consider that an irrevocable guarantee can be terminated by the guarantor in the manner suggested. The guarantor's only defense to a claim on the guarantee arises when the demand is made fraudulently."

Text: The text of the Advance Payment Guarantee, as reproduced in the opinion, stated:

We, the undersigned [Guarantor] ..................... hereby unconditionally and irrevocably guarantee to pay without delay to [Beneficiary/Contractor] within 5 (five) business days upon presentation by [Beneficiary/ Contractor] to us of the first and any subsequent written demands duly signed by [Beneficiary/ Contractor's] authorised signatory (the Demand(s)) any sums specified in such a ................. (the "Guaranteed Amount").

The Demand shall state that:

1. [Applicant/Subcontractor] has failed to fulfil its obligations to the Contractor under the Subcontract;

2. accordingly [Beneficiary/Contractor] is entitled to receive payment of the Advance Payment.

Payment to [Beneficiary/Contractor] of the amount contained in the Demand shall be without the need for proof or conditions, and irrespective of the validity, and effects of the abovementioned Subcontract and waiving all rights of objection and defence arising therefrom. The Demand(s)s shall be conclusive evidence of our liability and of the amount of the sum or sums which we are liable to pay to the Contractor, notwithstanding any objection made by the Subcontractor or any other person.

More than one demand may be made hereunder prior to the Expiry Date ....Our maximum aggregate liability under or [in] connection with this Guarantee shall not exceed the Guaranteed Amount which amount shall be decreased by the amount as being recouped by way of deduction from the Subcontractor's monthly invoices upon presentation to us of the relevant invoices duly signed and stamped by [Beneficiary/Contractor].

The text of the Performance Guarantee, as reproduced in the opinion, was described in the opinion as "in very similar terms":

[T]he demand was to state:

1. [Applicant/Subcontractor] has failed to fulfil its obligations to the Contractor under the Subcontract;

2. accordingly the Contractor is entitled to receive payment under this Guarantee.

The clause providing that more than one demand may be made was in the same terms but ended by saying:

............Our maximum aggregate liability under or in connection with this Guarantee shall not exceed the Guaranteed Amount which amount shall be reduced by any partial amounts already paid by us under this Guarantee.

[JEB/kmw]

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