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 EWHC 166 (TCC)
(27 January 2016)
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
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.
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 judgments.
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