Challenging calls under on-demand securities: the fraud exception

A recent decision of the Qatar International Court, applying English law principles, has ordered revocation of a demand under an on-demand guarantee on grounds of fraud. English law takes a robust approach to enforcement of on-demand securities and will only injunct demands alleged to be fraudulent in the clearest of cases. This decision shows how evidence of contradictory positions taken by a beneficiary can be used to mount a successful challenge based on fraud.

The fraud exception

English law allows only very limited grounds on which to challenge calls under on-demand securities issued by banks or other financial institutions. Such instruments are said to be “the lifeblood of international commerce” (RD Harbottle v National Westminster Bank). Where a valid demand has been made and there are no conditions in the underlying contract preventing a demand, a clear case of fraud will need to be shown if the procuring party is to prevent payment under such an instrument.

The requirements imposed by the English courts for the granting of interim relief in such cases are particularly high. A merely arguable case of fraud is not sufficient. Rather, it must be “clearly established … that the only realistic inference is … that the beneficiary could not honestly have believed in the validity of its demands” (Alternative Power Solution Ltd v Central Electricity Board). These English law principles have been accepted by the Qatar International Court (the “QIC”) as providing the “best source of law” for the fraud exception under Qatar Financial Centre (“QFC”) Law: Obayashi Qatar LLC v Qatar First Bank LLC and Leonardo SpA v Doha Bank Assurance Company LLC.

Given the strictness of the fraud exception under English law, it is no surprise that examples of its successful invocation are seldom. Those rare cases where it has been upheld often involve statements by the beneficiary directly undermining its ability to make a call under the instrument in question.

In HLC Engenharia E Gestao de Projectos SA v ABN Amro Bank NV, the fraud exception was satisfied where a performance bond assignee had called the bond notwithstanding the original beneficiary had written stating that it did not consider the contractor to be in default and that a call under the bond was not justified. Similarly, in Tetronics (International) Ltd v HSBC Bank Plc an additional on-demand guarantee was issued on the faith of beneficiary assurances that it was not aware of any circumstances giving rise to a demand under the guarantee. A demand for the full amount of the guarantee made less than two months later was found to be fraudulent in the face of such assurances.

A recent decision from the QIC provides a further example of the fraud exception being upheld on the basis of contradictory statements from the beneficiary.

Thales QFZ LLC v Aljaber Engineering WLL

Thales was sub-contracted by Aljaber to install security systems for the New Hamad Port Project, which Aljaber was carrying out for the State of Qatar. Pursuant to the terms of the sub-contract, Thales procured an on-demand Performance Guarantee (the “Guarantee”) from BNP Paribas in favour of Aljaber for 10% of the sub-contract price.

The parties fell into dispute part-way through the works over payments claimed by Thales. Thales suspended work and eventually purported to terminate the sub-contract on 20 February 2023. It subsequently commenced proceedings before the QIC, arguing that the sub-contract had been validly terminated and claiming payment of monies owed upon termination. Aljaber filed a Defence and Counterclaim in the proceedings on 3 November 2024, denying any entitlement to payment and disputing that the sub-contract had been validly terminated. Aljaber requested an order that Thales be compelled to maintain the Guarantee until completion of the sub-contract works and their acceptance by Qatar.

Four days prior to filing its Defence and Counterclaim, on 29 October 2024, Aljaber demanded payment of the full Guarantee amount from BNP Paribas. Its demand asserted that Thales was “in breach of its obligations under the underlying relationship as it has failed to perform the works under the contract. As a result, the contract has been terminated”.

Thales applied to the QIC for an urgent interim injunction, relying on Aljaber’s Defence and Counterclaim to show that its demand was fraudulent. The injunction was granted initially on an ex parte or “without notice” basis, and then subsequently maintained at a return hearing with both parties present.

The court relied on the fact that the Defence and Counterclaim asserted the sub-contract had not been terminated and claimed that the Guarantee be maintained until completion of the works, whereas the basis of the demand issued four days earlier was that the sub-contract had been terminated. The court also relied on the long delay between Thales’ purported termination and the demand. That a demand was only made after Thales had commenced proceedings indicated, in the court’s view, it had been pressed merely to gain a tactical advantage in the litigation. These facts “justified the inference, at least on a prima facie basis, that the author of the letter of demand must have known that the allegation that the subcontract had been terminated was untrue.”

Aljaber did not submit any evidence at the return hearing and did not attempt to explain how the demand had been made honestly. Instead, it relied only on legal arguments, which the court rejected. The absence of any explanation from Aljaber meant, in the court’s judgment, that the fraudulent nature of the demand “had been established as a fact”.

Conclusions and implications

This case provides a rare example of the fraud exception being upheld in practice. Although the court cited the Leonardo and Obayashi cases, which in turn reflect the English law position, the court’s application of the fraud exception seems to have been reasonably broad-brushed. As noted above, the English law requirement is that the only realistic inference from the facts is that the beneficiary could not have honestly believed in its demand. This inference must also be “clearly established” at the interim hearing. Absent any mention of an inference of fraud being the only realistic option, it is unclear whether the QIC judge in this case had these requirements in mind. The judge appears also to have been applying a prima facie standard of proof initially, although the matter was later said to be established in the absence of an explanation by Aljaber.

One point not considered in the judgment is the materiality of Aljaber’s statement in the demand that the sub-contract had been terminated. The terms of the Guarantee are not quoted in the judgments, but there is no suggestion that the Guarantee required Aljaber to allege termination in any demand under the Guarantee. On one view, Aljaber could be expected to have a large claim against Thales regardless of whether the contract had been terminated (given that Thales had left site). As noted by the English Court of Appeal in NIDCO v Santander, “It cannot be fraudulent to make a demand one is entitled to make.” Aljaber might therefore have sought to argue that the alleged fraud only pertained to its statement about the termination of the sub-contract, which was not a tenet affecting its entitlement to make a demand under the Guarantee.

More generally, this case shows that challenges to calls under on-demand securities on grounds of fraud are most likely to succeed where a party is able to evidence statements made by the beneficiary inconsistent with its demand. Such evidence can provide a platform for a without notice application to be brought, putting the beneficiary on the back foot and effectively forcing it to explain its demand.

References:

RD Harbottle v National Westminster Bank [1978] QB 146

HLC Engenharia E Gestao de Projectos SA v ABN Amro Bank NV [2005] EWHC 2074 

Alternative Power Solution Ltd v Central Electricity Board (Mauritius) [2014] UKPC 31

National Infrastructure Development Company Ltd v Banco Santander S.A. [2017] EWCA Civ 27 

Tetronics (International) Ltd v HSBC Bank Plc [2018] EWHC 201 (TCC)

Leonardo SpA v Doha Bank Assurance Company LLC [2019] QIC (F) 6

Obayashi Qatar LLC v Qatar First Bank LLC [2020] QIC(F) 5

Thales QFZ LLC v Aljaber Engineering WLL [2024] QIC(F) 53 

Thales QFZ LLC v Aljaber Engineering WLL [2024] QIC(F) 55