In Sea Emerald SA v Prominvestbank - Joint Stockpoint Commercial Industrial & Investment Bank - Lawtel 19.8.08 the Commercial Court gave a reminder of the importance of ensuring that the person signing a guarantee upon which you may seek to rely has authority to do so.

In this case the Defendant bank provided a guarantee to the Claimant buyer in respect of the obligations of a shipyard under a shipbuilding contract dated 9.12.93. The guarantee, which was signed by the head of a department of the bank in the region where the yard was located, was a refund guarantee under which the bank guaranteed the repayment to the buyer of any sum owed by the builder under the contract. Disputes between the buyer and the yard arose, and in November 2006 the buyer obtained an arbitration award requiring the repayment of US$17,258,750.6. The shipyard was insolvent and did not pay, and the present action was by the buyer against the bank for the enforcement of the guarantee.

The bank argued by way of defence that the person who signed the guarantee had not been authorised to give it; even if the guarantee was valid, it had been discharged by reason of a variation in the underlying agreement; and the claimant’s claim for the most part fell outside the scope of the guarantee.

The Court held that the head of the department had no authority to enter into the guarantee and that the claim would be dismissed. The case highlights the issues to consider.

  1. It found that there was no actual authority under the bank’s articles (governed by Ukraine law). The expression "effect settlements connected with clients' export and import operations in the form of... other formats used in international banking practice" in the articles was not broad enough to encompass issuing a refund guarantee, but referred to letters of credit etc.
  2. there was no specific conferring of authority by the bank;
  3. the bank had not ratified the guarantee because it had not been shown that senior officers of the bank were aware of its terms and were content to accept them; and
  4. there was no ostensible authority in that it was not usual for persons in the position of the head of the department to have authority to issue guarantees and
  5. there was no holding out by the bank.

The judge ruled that the bank employee, who has since died, who signed the guarantee “had no authority to enter into the guarantee on behalf of the bank” and, in those circumstances, dismissed the claim.