Summary: On the true construction of an on-demand guarantee, there was no need for the subsequent demand to recite that a certain condition had been fulfilled as it had no bearing on the bank’s liability.

Lukoil Mid-East Ltd v Barclays Bank Plc[2016] EWHC 166 (TCC) (27 January 2016)

Background

In 2011 Lukoil Mid-East Ltd (‘Lukoil’) engaged Baker Hughes Asia Pacific Limited (‘BH’), under a contract (the ‘Contract’) worth $142.3m, to drill and complete 23 production wells in an Iraqi oil field. As security, BH provided Lukoil, with an irrevocable, unconditional, on-demand bank guarantee for around $7m (the ‘Guarantee’) issued by Barclays Bank Plc (‘Barclays’). Article 23 of the Contract provided for BH to pay Lukoil liquidated damages for BH's delay in achieving any of the Key Milestones by the Key Dates set out in the Contract.

In 2015, following an alleged breach of Article 23 by BH, Lukoil made a written request to Barclays demanding the sum due under the Guarantee. This was rejected by Barclays on the grounds that the condition in Clause 4 of the Guarantee “that no amendment has been made to the Contract concluded between [Lukoil] and [BH] impacting the timely performance of the Works under the Contract” was not mentioned in the demand as fulfilled. By the time Lukoil received this rejection, the Guarantee had expired and Lukoil began proceedings against Barclays.

Decision

He went on to add that ‘in circumstances where Stuart-Smith J, sitting in the Queen’s Bench Division, upheld the demand. He was critical of the drafting of the Guarantee claiming that it was ‘verging on incoherent’. As the Guarantee did not explicitly state that such a statement was required, the court looked at the document as a whole, emphasising that they would not adopt a commercially absurd interpretation ‘unless compelled to by very clear words’.

The court highlighted the tensions between Clause 4 (referred to above) and Clause 5 of the Guarantee which stated that “no amendments nor addenda to the Contract, nor any contractual documents made by you and [BH] shall relieve us [Barclays] from our responsibilities under this Guarantee, and we hereby waive the right to be notified of such amendments or addenda.”

Accordingly, if amendments were immaterial to Barclays’ liability, the effect of their argument would be to “require Lukoil to declare something that was irrelevant to Barclays' obligation and which was unnecessary to enable Barclays to know whether its obligation to pay had been triggered. For that reason alone, [the judge considered] that Barclays' interpretation lack[ed] any commercial or principled legal justification”. In addition, it would be almost inconceivable that, in the course of a huge construction contract such as the Contract, there would be no changes to the scope of the works that would impact on timely performance. So it would be almost inconceivable that, on Barclays' construction, Lukoil would ever be able to make the statement that was required to constitute a valid demand.

Kiran Arora says:

It is critically important that what is required to be recited in any demand is clear on the face of the on-demand guarantee. If this is ambiguous or there is a failure to faithfully track what is required in the demand, this can lead to unnecessary litigation or, worse, the invalidity of an otherwise proper demand. This case demonstrates both the importance of precise drafting and also the ability of the English Courts to understand the commercial context within which they must make legal judgements.