Bank Fails to Avoid Guarantee Liability

February 16, 2017

Bank Fails to Avoid Guarantee Liability

The sums of money involved in international trade are so vast that without bank guarantees to underpin contracts, the wheels of commerce would cease to turn. However, as one High Court case vividly revealed, banks normally insist that all the formalities are met to the letter before such guarantees can be enforced.

The case concerned a contract between two companies A and B in respect of the joint operation of a bulk sea carrier. Company B's payments under the contract were guaranteed by its bank and, when those payments were not received, company A sought to enforce the guarantee and claimed $500,000 from the bank.

The bank denied liability on the basis that neither of company A's two demands for payment complied with the formal requirements of the guarantee. It was submitted that the demands did not include the required authentication or authorisation of the power of the person who signed them on behalf of company A. The first demand was also said not to have been sent by registered post as required under the guarantee. The bank submitted that the three-year term of the guarantee had expired without receipt of a valid demand and that, in the circumstances, no liability arose.

The Court noted that it is settled law that, when it comes to letters of credit, banks are entitled to demand strict compliance with formalities and to refuse payment on what might seem trivial or insignificant grounds. However, the full rigour of that doctrine did not necessarily apply to demands made on guarantees.

In ruling the bank liable to meet its obligations under the guarantee, the Court found that the notarised signature of a single director of company A was sufficient to meet the requirements of the guarantee. The requirement that any demand be signed by at least two representatives of the company was not essential and the condition that demands had to be sent by registered post was also directory, not mandatory. There had never been any doubt that the bank had received the demands, or that company A was thereby seeking payment under the guarantee.