Last month we reported on a TCC decision which considered the requirements for making and rejecting a demand under an advance payment bond subject to the URDG. Very similar issues have now been considered by the Appellate Division of the Civil and Commercial Court of the Qatar Financial Centre, with a strong panel of judges. The decision also considers issues with the “stepping down” of the bond and allegations that an amount more than the outstanding portion of the advance payment had been demanded.
Leonardo S.p.A v Doha Bank Assurance Company LLC
Leonardo entered into a contract with the Qatar Armed Forces (“QAF”) for the provision of a low-level radar system in July 2015. Leonardo then subcontracted certain engineering, procurement and construction activities to PAT Engineering Enterprises Co WLL (“PAT”) in March 2016. The subcontract required the provision by PAT of performance and advance payment bonds (the “Guarantees”), which PAT procured from the Doha Bank Assurance Company LLC (“DBAC”). The Guarantees were subject to the Uniform Rules on Demand Guarantees 758 (“URDG”).
Leonardo terminated the subcontract in May 2018 and called the advance payment bond. DBAC rejected the demand. In August 2018 Leonardo issued further demands on both Guarantees and, again, DBAC rejected the demands. Issues arising between the parties included whether Leonardo’s claim satisfied the documentary requirements of the Guarantees, whether DBAC’s notice of rejection was sufficient to cover its objections and whether the amount called under the advance payment bond exceeded the limit of the bond and/or was genuinely believed to be due to Leonardo.
Leonardo commenced proceedings against DBAC in the Civil and Commercial Court of the Qatar Financial Centre. The case was initially heard by a panel of three judges comprising a former judge of the English Technology and Construction Court, a former Lord President of the Scottish Court of Session and a former judge of the New Zealand Court of Appeal. Leonardo succeeded at first instance and the case was appealed to the Appellate Division and heard by a separate panel of judges comprising a former Lord Chief Justice of England and Wales and two senior barristers from England and Singapore. Overall, therefore, Leonardo’s claims were considered by a range of senior judges and barristers from the across the common law world.
General approach to interpreting the URDG
Considering the application of the URDG the Appellate Division identified three core principles. The first of these, which underpins the rest, is set out in Article 5(a) of the URDG: Guarantees are independent and autonomous obligations which are not subject to claims or defences arising out of the underlying relationship.
Secondly, as set out at Article 6 of the URDG, guarantors are concerned with documents, rather than with goods, services or performance of the underlying contract: “Article 6 is an application of Article 5. The guarantor is only concerned with the issue of whether the documents presented conform with the terms and conditions of the guarantee and not whether the goods and services conform with the underlying contract.”
Thirdly, a requirement for strict compliance such that if documents presented do not strictly comply with the requirements of the guarantee the presentation will be non-complying, even if the discrepancy has no practical effect.
Considering the purpose of the URDG, the Appellate Division found that the intention of these provisions is to provide commercial certainty and that “as URDG 758 is intended to be an instrument underpinning international trade and commerce and to harmonise international demand guarantee practice, it is important URDG 758 is not interpreted in a literalistic manner or by adoption of rules of national law.” Emphasising this point, the court noted that “national case-law, however eminent, is no longer relevant on issues where the law and practice are set out in a code”.
Article 7 of the URDG and non-documentary conditions
DBAC, in rejecting Leonardo’s demand on the Guarantees argued that, on the terms of the Guarantees, Leonardo needed to have made a written claim to PAT prior to calling the Guarantees. This was based on a provision in the Guarantees stating that the Guarantee covered any sums up to the guaranteed limit that “Leonardo might have to claim in writing from PAT”. However, the Guarantees did not expressly state that confirmation or a copy of such a claim was to be included within a demand. DBAC argued that such a requirement was to be implied, relying on certain English cases to this effect.
In response, Leonardo relied on Article 7 of the URDG, which provides that:
“A guarantee should not contain a condition other than a date or the lapse of a period without specifying a document to indicate compliance with that condition. If the guarantee does not specify any such document and the fulfilment of the condition cannot be determined from the guarantor’s own records or from an index specified in the guarantee, then the guarantor will deem such condition as not stated and will disregard it …”
The Appellate Division rejected DBAC’s arguments finding that the requirement for a claim in writing was a non-documentary condition under Article 7. In the court’s view: “It would have been simple to have set out a documentary requirement, if one had been intended. This was not done. We therefore conclude that the words can be disregarded, as Article 7 contemplates, in considering what was required when a demand was made.”
Article 24 of the URDG and notices of rejection
Leonardo also argued that, irrespective of the merits of the Article 7 issue, DBAC was precluded from relying on such objections since it had failed to raise the relevant defence in its notice of rejection of Leonardo’s demand under Article 24 of the URDG.
Article 24 of the URDG provides that (emphasis added):
“d. When the guarantor rejects a demand it shall give a single notice to that effect to the presenter of the demand. The notice to that effect shall state:
i. that the guarantor is rejecting the demand, and
ii. each discrepancy for which the guarantor rejects the demand.
e. The notice required by paragraph (d) of this article shall be sent without delay but not later than the close of the fifth business day following the day of presentation.
f. A guarantor failing to act in accordance with paragraphs (d) or (e) of this article shall be precluded from claiming that the demand and any related documents do not constitute a complying demand.”
DBAC had served a notice of rejection within time but this did not extend to the objection discussed above based on the making of claims in writing to PAT. DBAC argued that, provided a notice was given within time, it could be amplified at a later date to include further objections. The Appellate Division rejected this suggestion, noting that the commercial rationale of Article 24 was to provide the beneficiary with clarity as to the grounds of rejection and to avoid unfair practices whereby grounds of rejection are notified “in a piecemeal fashion over an extended period in order to leave as little time as possible to cure the discrepancies before expiry” (quoting Affaki and Goode).
DBAC had cited the limited 5 day period in support of its argument that amplification should be allowed, but the Appellate Division held that the period was not short and was consistent with the commercial intent of such instruments and “the fact that the applicable principles are set out in a clear code [i.e. the URDG] which can be readily understood without reference to case law.”
Stepping down of the advance payment bond
DBAC contended that the amount demanded under the advance payment bond was excessive since the full amount of the advance payment was no longer owing. PAT relied on an invoice it had submitted which (prior to termination) Leonardo had accepted as due. However, the bond required DBAC to be presented with an invoice “approved, certified and signed” by Leonardo’s project representative. The Appellate Division applied this requirement strictly: “It was not sufficient that it could be shown that as between Leonardo and PAT that the amount had been agreed. There had to be a presentation of the document specified to the DBAC, as what mattered … was not what had transpired between the parties to the subcontract, but what was specified as the condition for a reduction.”
At first instance, DBAC sought to overcome this technical issue by relying on a defence of unconscionability as developed in Singapore (and in some Australian jurisdictions). DBAC complained that Leonardo was seeking to benefit from its own wrong by making a demand under the advance payment bond which did not recognise the value of unpaid work carried out by PAT prior to termination. While the court did not consider unconscionability to be made out on the facts, given the clear wording of the bond, it expressed doubts as to whether the doctrine should be imported into the law of the Qatar Financial Centre in any event. The court noted that there had not been a wide acceptance internationally of the doctrine in relation to on-demand instruments. The court also found persuasive three policy reasons against adoption of the doctrine: (i) the vagueness and imprecision of the concept of unconscionability; (ii) the likelihood that it would result in more frequent judicial interference of on-demand instruments; and (iii) the likelihood that it would involve the courts in matters of dispute essentially relating to the underlying contract.
DBAC had also alleged fraud at first instance, claiming that it was not plausible for Leonardo to have a genuine belief that the amounts demanded were due at the date of the demand, especially given PAT’s agreed invoice. However, PAT’s right to payment was conditional upon payment to Leonardo by QAF, which had not happened. The termination of the contract was also likely to lead to significant claims and cross-claims. In the court’s view, DBAC had “failed to appreciate that a realistic inference to be drawn was that the claimant’s demands were genuine but that the underlying Contract was in dispute”.
Conclusions and implications
This is an important case for those considering on-demand securities under international construction contracts. Given the composition of the court at both levels, the reasoning adopted is likely to be persuasive in many common law jurisdictions and in both civil and common law jurisdictions in relation to the URDG issues.
The court’s findings as to the URDG accord with a recent decision of the Technology and Construction Court in England which we reported on last month (see our Law-Now on that case here).The present case goes a step further in finding that Article 24 also precludes a notice of rejection from being amplified to include an objection not specifically included in the original notice. The impact of these findings will be felt most by those administering demands within banking institutions. The 5 day period allowed by Article 24, whilst not unworkable, may prove to be tight. Given the inability to raise new objections after this time, adequate procedures should be put in place by such institutions to make sure that a thorough review of any demand is made immediately upon receipt.
The court’s rejection of an implied documentary requirement when considering Article 7 is also of note. As discussed in our previous Law-Now, previous English cases had on occasion required a compliant demand to include reference to non-documentary conditions. It was unclear whether such an implied requirement would satisfy the requirement in Article 7 for a bond to “specify a document to indicate compliance with that condition”. The decision in the present case suggests that such an implied requirement is unlikely to satisfy Article 7. The court’s observation that it would have been “simple to have set out a documentary requirement, if one had been intended” is likely to apply to most non-documentary conditions.
The court’s analysis (both at first instance and on appeal) as to the “stepping down” issues will be of considerable significance to those considering demands under advance payment bonds. Whilst “stepping down” mechanisms in the underlying contract will often be automatic, this poses difficulties for an on-demand instrument, where the bank needs to know the value of the bond with certainty at any point in time, based on documents. This can easily lead to arguments that the value of the bond is out of step with the true position in the underlying contract, as was the case here. Whether a beneficiary may still call the full amount of the bond in such circumstances will be fact sensitive, but the present case suggests that considerable latitude exists within the concepts of fraud and even unconscionability.
The first instance court’s inclination against the adoption of an unconscionability defence will also be of interest to English lawyers. Unconscionability has been rejected as a defence in the English cases (for example, in NIDCO v Santander) but not yet at an appellate level. The first instance court’s identification of the policy reasons against such a defence is likely to be persuasive in future English proceedings given the composition of the court including a retired TCC judge and a former Lord President of the Scottish Court of Session.
National Infrastructure Development Co Ltd. v Banco Santander S.A  EWHC 2990 (Comm).
Leonardo S.p.A v Doha Bank Assurance Company LLC  QIC (F) 6.
Leonardo S.p.A v Doha Bank Assurance Company LLC  QIC (A) 1.