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Construction firms who operate globally should consider a
recent ruling in Qatar which centres on application of the rules for demand
guarantees. Theresa Mohammed and Tamsin Lim explain.
There is clearly going to be an economic aftermath of
covid-19 felt internationally, and project delays during lockdown may result in
disputes, costs overruns and insolvencies later this year. Companies are
therefore advised to review the forms of security open to them.
For companies operating abroad, particularly in the Middle
East, the Leonardo v Doha Bank Assurance Company case in Qatar is significant.
It provides guidance on the function of the Uniform Rules for Demand Guarantees
(URDG), a set of contractual rules created by the International Chamber of
Commerce applying to on-demand bonds and guarantees.
In March 2016, Leonardo entered an engineering subcontract
with PAT Engineering Enterprises to provide a low-level radar system to the
Qatar Armed Forces. PAT was required to provide guarantees under the terms of
its subcontract: an advance payment guarantee (APG) and a performance bond. It
provided these via Doha Bank Assurance Company in April 2016.
Leonardo became dissatisfied with PAT’s performance and
terminated its subcontract in May 2018. Leonardo made several demands on the
guarantees over the course of 2018 but was rejected each time.
A dispute regarding the validity of Leonardo’s demands was
referred to the Qatar International Court in 2019, resulting in judgement in
favour of Leonardo. The bank appealed
the judgement unsuccessfully. The appeal court considered the validity of
Leonardo’s demands under the guarantees and the validity of the bank’s rejection
of Leonardo’s demands. It considered:
- Interpretation – whether Leonardo’s demands complied with the guarantees’ terms as required by the URDG;
- Preclusion – whether the bank was precluded from challenging Leonardo’s demands on the basis that they did not comply under URDG article 24;
- Excessive demand – whether the demand on the APG was excessive and therefore invalidated by URDG article 17.
In its judgement, the court reviewed the three core
principles underpinning the URDG: autonomy, where a guarantee is insulated from
the underlying contract; documents, where only the documents dictate the
parties’ rights and obligations; and compliance, where the documents presented
must strictly adhere to the terms of the guarantee.
The court noted these principles were aimed at the
commercial importance of certainty and predictability. Parties engaged in
future disputes should be entitled to rely on the URDG rather than historic
national case law. The court anticipated that this approach would be adopted by
Against this backdrop, the court considered the three issues
in the appeal.
On interpretation, it held that the issue could and should
be determined solely by reference to the terms of the guarantees and the URDG.
Neither required Leonardo to have made a claim in writing against PAT before
making its demands on the bank, nor attach a copy of that written claim to such
demands. The demands therefore complied with the terms of the guarantees.
Next, the court ruled that the bank was precluded from
relying on its assertion that the demands should have been supported by a prior
claim against PAT in writing. This was because it had not provided notice of
that ground for rejecting the demands when it served notice denying liability.
Finally, on the excessive demand issue, the court said the limit
of the APG had not been reduced and so the resulting demand was not excessive.
This ruling sheds light on how an international court may
interpret demand guarantees. Guarantors will have to establish a clear breach
of an express documentary term of the guarantee to challenge demands.
Beneficiaries may now have more certainty that a demand under a guarantee will
be paid out.
Theresa Mohammed is a partner and Tamsin Lim a solicitor at Trowers & Hamlins