Lloyd's Maritime and Commercial Law Quarterly
The problem of abusive calls on demand guarantees
Nelson Enonchong*
The problem of abusive calls on demand guarantees is well known to lawyers around the world. However, efforts to deal with this problem by means of international Conventions such as the UNCITRAL Convention on Independent Guarantees and Stand-by Letters of Credit have been less than successful. Consequently, in many jurisdictions the problem is dealt with through domestic law. This paper examines the response of English law to the problem. It observes that the principal tool used by English law to protect against abusive calls is the fraud exception to the principle of independence. However, that exception, as applied in England, is so narrow in scope that it leaves a protection gap. To fill that gap, courts in other jurisdictions such as the United States, Australia and Singapore have adopted extra measures, including additional exceptions to the principle of independence. The paper therefore addresses the question whether and to what extent English law should recognize further exceptions to the principle of independence as devices with which to combat abusive calls
.
I. INTRODUCTION
A bond in the nature of a guarantee which requires, as a precondition for payment, proof of default and loss has been known to English law for well over a century.1
However, as Lord Jauncey of Tullichettle has observed, “[i]n recent years there has come into existence a creature described as an ‘on demand bond’ in terms which the creditor is entitled to be paid merely on making a demand for the amount of the bond”.2
This “new creature”3
has been so successful that, within a few years of its coming into existence, it has become “part of the essential machinery of international trade”.4
It is now widely recognized in international commerce and is the subject of international instruments such as the International Chamber of Commerce (ICC) Uniform Rules for Demand Guaranty
* Barber Professor of Law, University of Birmingham.
1. Eg, Calvert
v. London Dock Co
(1838) 2 Keen 638; Trade Indemnity Co Ltd
v. Workington Harbour and Dock Board
[1937] AC 1.
2. Trafalgar House Construction (Regions) Ltd
v. General Surety and Guarantee Co Ltd
[1996] 1 AC 199, 206.
3. Edward Owen Engineering Ltd
v. Barclays Bank International Ltd
[1978] QB 159, 169; [1978] 1 Lloyd’s Rep 166, 170. The on demand bond is also known as a performance bond, performance guarantee, demand guarantee, first demand guarantee or independent guarantee. See gen., M Coleman, “Performance Guarantees” [1990] LMCLQ 223; R Bertrams, Bank Guarantees in International Trade
, 3rd edn (2004).
4. State Trading Corp of India Ltd
v. ED & F Man (Sugar) Ltd
[1981] Com LR 235, 236, per
Lord Denning MR.
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