In a recent decision, the High Court enforced a demand guarantee against a guarantor who claimed that sums due had not been demanded in accordance with the guarantee's terms, including because an incorrect delivery method had been used:MUR Joint Ventures BV v Compagnie Monesque De Banque [2016] EWHC 3107 (Comm).

The decision underlines the importance of ensuring the terms of a guarantee are clear and precise, in particular as to what is required in order to make an effective demand for payment under the guarantee. Where the demand is to be accompanied by documents and those documents are to take a particular form, the guarantee should make that clear. Where there are other requirements, such as a specified delivery method, the guarantee should leave no room for doubt as to whether or not these are intended to be mandatory. In this case, the court concluded that a requirement for registered post was merely directory, and there was no question that the demand had in fact been received by the guarantor. Accordingly, the demand was effective.

From the perspective of the party making demand under a guarantee, however, it is advisable to comply strictly with any requirements set out in the documents. That is the best way to avoid a dispute arising in the first place.

Andrew Cooke, a senior associate in our disputes division, considers the judgment below.

Background

The claimant ("MUR") was party to a joint operating agreement with Monaco Seatrade SAM ("Seatrade") in relation to the chartering and operations of a bulk carrier ship. The defendant bank (the "Bank") guaranteed the due and payable obligations of Seatrade under the agreement up to a maximum amount of US$500,000.

The Bank's obligation to pay under clause 1 of the guarantee arose:

"forthwith upon written demand sent to the bank by way of registered mail… Such demand must be signed by duly authorised legal representatives of MUR certifying in writing that [Seatrade] has defaulted in its obligation to make the Guaranteed Payment concerned; that the amount claimed under this guarantee is due."

Clause 2 of the guarantee provided that for the purpose of identifying the legal authorised representatives of MUR, MUR would provide to the Bank (with the demand) certified copies of MUR's Extract of Registry and the signatory's passport. The demand "should be authenticate as well as representative's powers of MUR by a notary and duly apostilled…"

MUR issued a demand on 18 August 2015. It was signed by a director of MUR and sent to the Bank by courier, fax and email but not registered post. The demand included a copy of the accounts under the joint operating agreement, based on which MUR had confirmed that an amount of $876,305 was due from Seatrade and had not been paid. The demand letter was notarised and apostilled, together with a copy of MUR's Extract of Registry and its director's passport. The notary confirmed that the signature on the demand was that of the director but specifically excluded any assessment of the director's power to sign the demand.

The Bank passed the demand to Seatrade. Seatrade asserted that the demand was defective for various reasons including because it had been signed by one director, not "representatives" plural. The Bank did not pay.

MUR sent a second demand on 14 September 2015. This demand was signed by the same director and sent to the Bank by courier, fax and registered mail. Updated accounts were enclosed with the demand, together with the same notarised and apostilled documents as had been included with the first demand. When the Bank again refused to pay, MUR brought proceedings.

Decision

The judge (Mr Justice Cranston) referred to the doctrine of strict compliance which applies to letters of credit, where a bank can refuse payment if the documents required under it do not comply strictly with its terms – even in ways that may appear trivial or insignificant.

The principle of strict compliance did not, he said, necessarily apply to demand guarantees. In that context, the authorities make clear that it is a matter of construction of the guarantee's terms as to whether the guarantor can insist upon strict compliance.

It was common ground before the judge that, in this case, the guarantee's terms contained errors of grammar and syntax; the key issue, though, by the time of trial, was whether clause 2 of the guarantee required the notary to authenticate the power of the director to sign on behalf of MUR. The Bank argued that it did, and with good reason – MUR was a Dutch company and the Bank was a Monegasque bank with no presence in the Netherlands, and so lacked the capability properly to assess whether any demand issued by MUR had been signed by an authorised signatory (which was a matter of Dutch law). The Bank argued that MUR should have served with the demands a statement from a Dutch notary confirming that he or she had investigated the authority of the director and confirmed that he could act on behalf of MUR.

The judge disagreed. He construed clause 2 of the guarantee to require only that MUR must provide a demand letter, and certified copies of its Extract of Registry and signatory's passport, all of which were to be notarised and apostilled. The judge reached that view predominantly because the terms "identifying" and "authenticate" used in the guarantee were more apt to apply to an assessment of the genuineness of the demand, rather than its content, substance or effect. MUR had complied with this requirement.

The judge noted that, as a general principle, the terms for demanding payment under a demand guarantee should be clear and precise. If the Bank had required MUR to provide a Dutch law opinion as to the signatory's powers to make the demand on MUR's behalf, it should have ensured that the guarantee said so expressly. The judge held that MUR had in fact complied with the requirements that a reasonable reader would have understood the agreement to specify.

On the issue of whether clause 1 of the guarantee required "representatives" (plural) of MUR to sign, the parties agreed at trial that the guarantee was internally inconsistent – it referred to the plural in clause 1 and the singular in clause 2. The judge concluded that the number of signatories was not a matter of importance. Had it been important, the clause would have been clearer, for example referring to signature by "not less than two" representatives.

Finally, the judge held that the failure to send the first demand letter by registered post was not fatal to it taking effect. He found that the requirement for registered post was directory, not mandatory. The guiding principle, he said, was of effective presentation of a demand. The importance of registered mail is that the communication is signed for by the recipient, which precludes any suggestion that it was not received. Here there was no question as to whether the demand and its enclosures were received by the Bank. In these circumstances, the first demand was effective.

Comment

Banks and other institutions that offer guarantees to their customers need certainty as to when their obligation to pay is engaged. This case may therefore cause concern in interpreting requirements in a guarantee as directory rather than mandatory. That said, the decision turns on the particular words used by the parties and in the context of the judge needing to interpret a document containing a number of errors and inconsistencies.

In any event the needs of the guarantor can be met by ensuring that the language of the guarantee is clear and precise, including by exhaustively listing the documents that must be enclosed with a demand, and any other mandatory requirements. This will effectively produce a checklist for the benefit of both parties. It is then important, of course, for the beneficiary of the guarantee to satisfy that checklist when making demand. In that way, litigation may be avoided altogether.