Refund GuaranteesJune 2012

Owen McHugh, Legal Director

Introduction

Kinds of Guarantees

Consequences

Distinguishing Features

Cases

Kinds of Refund Guarantee

On demand bond

Surety “see to it” guarantee

NB No standard practice

Label may mislead

On Demand Bond

L/C

Demand (certificate) Pay

Dispute under SBC

- not relevant

Buyer strong

Bank and Builder exposed

Surety ‘see it’ Guarantee

Bank will pay if Builder

(i) is liable to pay

(ii) fails to pay

Dispute under SBC

- very relevant

Buyer still better off but not as strong

Bank and Builder less exposed

Factors Common to on Demand Bonds and Sureties

Statute of fraud requirements

- in writing - signed by or for guarantor

Within the power of guarantor

Signatory has authority to bind

Not contrary to local law

Implications of on Demand Bond

Label

“Primary obligor not as surety”

Unconditional and irrevocable promise to pay

Paget on Banking:

(i) International

(ii) Issued by bank

(iii) “on demand” / “on first written demand”

(iv) No exclusion of defences

Subject to (ICC) Uniform Rules for Demand Guarantees

Certification

Case Law

1. Gold Coast v Ahorros (2002) App Ct

Held: On demand bond

Despite

1. “When the instalment becomes refundable under the SBC” (Arbitration in progress)

2. Clause 5. Variation of SBC will not affect liability under the guarantee

Case Law

1. Gold Coast v Ahorros (2002) App Ct

Tuckey LJ

No standard practice

Paget on Banking indications 1-3 overrode clause 5

Buyer needs money to repay financiers quickly

NB Builder had completed and sold vessels

- but not accounted to Buyer

Case Law

2. Rainy Sky (2011) Supreme Court

Held: Bank was liable where Builder insolvent.

Construction issue; did bank agree to pay “such sums” i.e.

- instalments, or

- sums defined in clause 2 of the guarantee

No dispute that Buyer had a good claim under SBC

Wording ambiguous – most commercial construction

Case Law3. Meritz v Jan de Nul (2011) App Ct

Held: Meritz liable under on demand bond

Despite

1. Insurance Company not a bank

2. “If in connection with the terms of the SBC the Buyer shall become entitled to a refund”

Incorporation of ICC Uniform Rules for Demand Guarantees (1992)

On demand bond means:-

Irrelevant if

- Variation of SBC, or - Buyers claim under SBC disputed/wrong

Only issue is whether demand complies.

Summary

No standard practice.

Gold Coast and Meritz lean towards on demand bond

But note commercial factors.

If on demand bond

- Variation of SBC irrelevant

- Does demand satisfy the terms of the bond?

- Dispute under SBC irrelevant

- Buyers can claim under on demand bond even if claim under SBC not justified

Careful drafting essential.

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