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Complying with on demand guarantees

The High Court recently enforced an on demand guarantee in the case of MUR Joint Ventures BV v Compagnie Monegasque De Banque [2016] EWHC 3107…

The High Court recently enforced an on demand guarantee in the case of MUR Joint Ventures BV v Compagnie Monegasque De Banque [2016] EWHC 3107 (Comm). This was irrespective of the fact that the guarantor claimed that the demand requests were not valid as they did not strictly comply with the terms set out in the guarantee.

Background

The Guarantee was issued by Compagnie Monegasque De Banque (the “Bank”) pursuant to a joint operations agreement between MUR Joint Ventures BV (“MUR”) and Monaco Seatrade SAM (“Seatrade”) (the “Guarantee”). The Guarantee was for a maximum of US$500,000 and covered the obligations that became due and payable in accordance with the agreement between MUR and Seatrade. MUR alleged that sums fell due and were unpaid and subsequently made a demand under the Guarantee.

MUR issued its first demand on 18 August 2015. This demand was signed by a director of MUR and sent by courier, fax and email. The demand was notarised and apostilled and sent with a copy of MUR’s Extract of Registry, the director’s passport and a copy of the accounts which confirmed the outstanding debt to be US$876,305.

On receipt, the Bank passed the demand to Seatrade, whose solicitors provided various reasons why the demand was defective. These reasons included the fact that: the demand was to be signed by “duly authorised legal representatives of MUR” but only one had signed; the demand was supposed to be sent by registered post but was sent by courier, email and fax; and the notary had not given any confirmation that the signatory had sufficient power to act on behalf of MUR.

A second demand request was sent on 14 September 2015. This demand sought to make good on the alleged defects and was sent by courier, fax and registered post. This demand set the total outstanding debt at US$1,197,117. When the Bank still did not pay, proceedings were issued.

Decision

The court considered that the rules of strict compliance that applied when presenting documents under a letter of credit did not automatically apply to demand guarantees. It focused instead on the terms set out in the guarantee in order to decide whether the requirements of the demand notice had been suitably complied with.

Both parties agreed that the Guarantee contained errors of grammar and syntax but it was held that it was not incomprehensible. As such, the fact the demand had been signed by only one signatory was not considered important and, as such, the demand was deemed to be compliant in this respect.

The requirement of the notary to authenticate the power of the signatory was a key issue. The Bank argued that it had no knowledge of Dutch corporate law and was unhappy that the notary had caveated that it had undertaken no investigation as to the authority or competence of the signatory. The Bank had understood that the purpose of the notary was to authenticate the powers of the signatory. However, the court held that this was not the case and that the notary was under no duty to provide a legal opinion confirming the power of the signatory. The court noted that had this been the intention, the Guarantee should have stated it expressly.

With regard to the delivery of the notice, whilst the first demand was not sent by registered post, as specified, there was no suggestion that the notice had not been duly received by the bank. Therefore, it was decided that the first demand notice was effective and payable.

What are the implications of this case?

This case is a reminder that finance documents ought to be clear and precise. Any specific requirements should be expressed clearly and demands or other notices should be issued in accordance with the terms of the agreement. If performance of any part of the contract is determined by an overseas law, are you sure that you understand what this law says?

Whilst the court here has taken a commercial approach to ascertain the parties’ intentions, courts will only do this in the absence of clear wording on the face of the contract. It is not good practice to leave issues to be determined at the court’s discretion, as it is not certain how this will be exercised in any particular case.

Emily Garrett-Levy is a solicitor in our corporate team and may be contacted on 0207 822 7135 or email emily.garrett-levy@weightmans.com.