Advance payment bonds: non-documentary conditions and rejection notices under the URDG

United Kingdom

A decision of the English Technology and Construction Court published last week has considered a disputed demand made under an advance payment guarantee provided to secure performance of an international construction project. The decision concerns the interpretation of non-documentary conditions in on-demand guarantees and makes important findings as to the operation of the URDG in relation to such conditions and the formalities required for a valid rejection notice.

Técnicas Reunidas v Korean Development Bank

Técnicas Reunidas (“TR”) entered into a subcontract agreement with Sungchang & Abdullah Al-Shaikh Contracting Co Ltd (“Sungchang”) for the performance of electro-mechanical works as part of the construction of a gas project in Saudi Arabia.

The subcontract required TR to provide an advance payment to Sungchang which was secured by an on-demand guarantee (the “Guarantee”) given by the Korean Development Bank (“KDB”) on behalf of Sunchang. BNP Paribas SA acted as advising bank from its branch in Spain. The Guarantee was governed by English law and subject to the ICC Uniform Rules for Demand Guarantees (“URDG”).

TR terminated the subcontract and called the Guarantee alleging various breaches by Sungchang, including that Sungchang had abandoned the site and the subcontract works. KDB rejected TR’s demand, relying on a condition in the Guarantee (termed the “HSBC condition”) that the advance payment had to be paid into a numbered account held with HSBC Bank: “it is a condition for any claim and payment under this Guarantee to be made that the funds paid as advance payment subject to the terms of the subcontract must have been received by the subcontractor on its account no.[…] held with HSBC Bank”).

KDB argued that TR was not entitled to call the Guarantee as TR had paid the advance payment to an account (with the correct account number) held by the Saudi British Bank (“SABB”, at the relevant time a 40% subsidiary of HSBC bank) and therefore it had not fulfilled the HSBC condition, which required it to make payment to an account held with HSBC bank. 

The court found in favour of TR principally on the basis that the proper interpretation of the HSBC condition was that the account intended was the account held by the SABB to which the funds had been paid. Significant considerations in this regard were the fact that HSBC did not operate a retail bank in Saudi Arabia (where Sungchang was based), that SABB was a related company to HSBC and that HSBC did not have an account with the number stipulated in the HSBC condition (whereas SABB did).

The court also proceeded to consider two alternative arguments raised by TR based on the URDG which are of more general relevance.

Non-documentary conditions and Article 7 of the URDG

Article 7 of the URDG provides that (emphasis added):

“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 except for the purpose of determining whether data may appear in a document specified in and presented under the guarantee do not conflict with data in the guarantee.”

The court held that, as the Guarantee did not specify a document which TR was required to submit to demonstrate that the advance payment had been paid into the correct account, the HSBC condition was a non-documentary condition which should be disapplied pursuant to Article 7 of the URDG.

Rejection formalities and Article 24 of the URDG

Article 24(d) 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 b 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.

TR presented its demand in person but, when KDB rejected TR’s demand, it did so initially by way of a SWIFT message sent to BNP (the advising bank). The rejection was notified to TR the following day, outside the five business day period allowed by Article 24.

The court held (again obiter in light of the decision already made on interpretation) that, on the basis of Article 24(d) of the URDG, KDB’s rejection of TR’s call for the Guarantee should have been sent to TR as it was the “presenter”. The rejection was therefore out of time and KDB was precluded from claiming that the demand was non-compliant.

Conclusions and implications

This is a significant case in a number of respects. Advance payment bonds are commonly used on international construction projects and often stipulate conditions as to the making of the advance payment. The care taken by the court in interpreting what appears to have been a straight-forward mistake in the description of a bank account shows the need for employers to make sure that any requirements as to payment are heeded. Had the advance payment in this case been made to an entirely different account to that stated in the Guarantee, the HSBC condition is unlikely to have been fulfilled even if the alternative account had been nominated by Sunchang.

Of perhaps greater significance is whether such conditions as to payment are capable of applying at all where they are not included within the documentary requirements stipulated by the bond. Where the URDG are not incorporated, previous English cases (such as IE Contractors v Lloyds Bank) suggest that conditions which do not expressly carry documentary requirements may nonetheless give rise to an implication that the fulfilment of the condition needs to be confirmed in a compliant demand. For a more detailed discussion of this line of cases, see our Law-Now on another recent case here.

Where the URDG does apply, a tension may arise between these cases and the requirement in Article 7 for any operative conditions to “specify” documentary requirements. Will an implied requirement be sufficient for these purposes? As the court in this case noted, Article 7 is premised on the assumption that conditions may be included within a bond which fall to be disregarded because they do not specify documentary requirements. If every such condition were held to imply a documentary requirement, Article 7 could never have any effect.

The court’s decision under Article 24 is also of note, indicating that the strict application of that provision will be given effect to by the English courts. Banks should ensure that the correct “presenter” of a demand is identified and not merely assume that a rejection sent to the notifying bank will be sufficient. Although not making a difference to the result in this case, the point could in other cases require a bank to make payment under a non-compliant demand, which in turn may complicate recovery from its client and under any cross-indemnities.

* CMS acted for the successful party in this case.

References:

IE Contractors v Lloyds Bank [1990] 2 Lloyd's Rep 496.

Técnicas Reunidas v Korean Development Bank [2020] EWHC 968 (TCC).