International Construction Law Review
UNCONDITIONAL BANK GUARANTEES
JULIAN BAILEY
Solicitor, CMS Cameron McKenna, London
1. SCOPE OF THIS ARTICLE
This article addresses two issues:
- What are the essential features of unconditional bank guarantees?
- How does the law respond to alleged abuses of unconditional bankguarantees, where an allegedly unjustified demand for payment hasbeen made?
2. INTRODUCTION
Almost without exception, principals in construction projects require the provision and maintenance of some form of security from their contractor,1
to secure the performance of the contractor’s obligations. The general skew of bargaining power allows principals to insist upon this.2
One reason why principals generally insist upon contractors providing security to them is that it provides an incentive to the contractor to perform all of its obligations under the contract, and to complete the project. Rather than abandoning a partially-completed job and going off to perform more profitable work at another site, a contractor may decide that it is worth its while to complete the project if it has supplied security, and if it wishes to reacquire that security upon completion of the project.
A second reason, and perhaps the more important one, is to ensure that if the contractor does not perform its obligations under the underlying construction contract,3
the principal may exercise a right (i.e. to realise the security) additional to any claim for damages which it has for the contractor’s breach of obligation,4
so as to compensate the principal for that breach, or at least some part of it.
1 And likewise, main contractors require security from subcontractors, for the same reasons. This article focuses principally upon the principal/contractor paradigm.
2 Having said that, it is not unusual to encounter large contractors requiring security for payment from developers of unknown financial standing.
3 Or the contractor otherwise owes money to the principal under the underlying contract, for example, as repayment of moneys advanced by the principal for the contractor’s benefit: see, for example, Wahda Bank
v. Arab Bank plc
[1994] 2 Lloyd’s Rep 411; Pedna Pty Ltd
v. Sitep Societa per Azioni
(Sup Ct NSW, Santow J, 8 January 1997, unreported).
4 As a general proposition: the security does not, in the absence of express words to the contrary in the underlying contract, exhaust the principal’s remedy against the contractor for the breach: see Saffron
v. Société Minière Cafrika
(1958) 100 CLR 231 at 243–244, per
Dixon CJ, McTiernan and Menzies JJ; Newman Industries Ltd
v. Indo-British Industries Ltd
[1956] 2 Lloyd’s Rep 219 at 236, per
Sellers J (QB); Maran Road Saw Mill
v. Austin Taylor & Co Ltd
[1975] 1 Lloyd’s Rep 156 at 158–159, per
Ackner J; E D & F Man Ltd
v. Nigerian Sweets & Confectionery Co Ltd
[1977] 2 Lloyd’s Rep 50; North Western Shipping & Towage Co Pty Ltd
v. Commonwealth Bank of Australia
(1993) 118 ALR 453 at 463, per
Gummow, Hill and Cooper JJ (Full Ct Fed Ct).
Pt 2]
Unconditional Bank Guarantees
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