Off the Beaten Track – The URDG 758 Bypass – JD Supra

Introduction

Like Count Dracula emerging from his lair and draining his victims, the COVID-19 virus manifested itself in early 2020, with the world left in the tight, cold, and unyielding grip of the ensuing pandemic. Millions were infected, too many lost their lives, and in the midst of it all, many business bled out, and ended up ceasing their operations. (See: Coronavirus pandemic deals fatal blow to struggling businesses) More corporate casualties are expected to emerge from the COVID-19 pandemic in the coming months as temporary relief measures run their course, project parties are no longer able to perform their obligations, and plugs are pulled on projects which are no longer viable.

While there may be an increased incidence of calls on demand guarantees (such as performance bonds and advance payment guarantees) linked to project terminations, more of these instruments may also be issued as governments try to revive the economy by increasing spending on infrastructure development. Already, the India government is looking to increase infrastructure spending to revive economic growth and bolster employment. (See: With growth in mind, finance ministry asks infrastructure ministries to ramp up spending)

The Uniform Rules for Demand Guarantees No. 758 (URDG 758) is a set of voluntary contractual rules published by the International Chamber of Commerce (ICC) with the aim of creating a standard set of international banking practice applicable to the operation of demand guarantees. It is binding on parties who agree to adopt them, and common examples of demand guarantees which incorporate them include bid bonds, advance payment guarantees and performance guarantees.

In this year alone, 2 cases have clarified the application of URDG 758, including its application to the exclusion of national law.

While existing demand guarantees which incorporate the URDG 758 can benefit from the additional clarity provided by these 2 cases on how the rules are applied, and users of such demand guarantees moving forward can consider their adoption for more certainty in their contractual dealings in this area - the proposition in these cases to exclude the application of national law, if adopted by Singapore courts, could potentially allow parties to bypass existing defences available under Singapore law relating to calls under such guarantees.

The more recent of the 2 cases, Leonardo S.p.A v Doha Bank Assurance Company LLC [2020] QIC (A) 1 (Leonardo 2020), will be dealt with in more detail below.

The claimant, Leonardo S.p.A (Leonardo) had contracted with the Qatar Armed Forces (QAF) to provide QAF with a low-level radar system. Leonardo, in turn, entered into a subcontract with PAT Engineering Enterprises Co WLL (PAT) for PAT to provide engineering, procurement and construction of infrastructure works and plants to support the low level radar system (the Sub-Contract). PAT was required to provide an advance payment guarantee (APG) and a performance bond (PB) to Leonardo under the Sub-Contract, and PAT procured the defendant bank (Doha Bank) to issue them. Leonardo later terminated the Sub-Contract and made demands under the APG and PB, which Doha Bank rejected. Both the APG and PB were subject to the URDG 758.

Notably, the Appellate Division of the Civil and Commercial Court of the Qatar Financial Centre (the Appellate Division Courts) set out the following core principles which are applicable to demand bonds and guarantees incorporating the URDG 758:

Following the iteration of above core principles, the court then posited in obiter that since the URDG 758 is intended to be an instrument underpinning international trade and commerce and to harmonise international demand guarantee practice, it is important that the URDG 758 is not interpreted by adoption of rules of national law (at [39]).

The court came to the conclusion that [n]ational case law, however eminent, is no longer relevant on issues where the law and practice are set out in a code (at [43]), and that [t]hose engaged in international trade, commerce and finance should be entitled to rely on the terms of URDG 758 interpreted without having to have in mind national case law which predates it (at [44]). The court further stated that [m]oreover, if a dispute arises, it is far more cost effective and speedy to proceed by reference to the principles set out in URDG 758 in the way we have described rather than by reference to case law. (at [44])

Echoes of similar principles - Tecnicas Reunidas Saudia for Services and Contracting Co. Ltd. v The Korea Development Bank [2020] EWHC 968 (TCC)

In this recent decision of the English High Court of Justice Queens Bench Division (Technology and Construction Court), which similarly dealt with a defendant banks refusal to pay pursuant to a demand made under an advance payment guarantee subject to the URDG 758, the court in obiter dicta, echoed the point made in Leonardo 2020, stating that [t]he URDG is an internationally recognised set of rules which are contributed to and revised from time to time by a group of international users, including banks, so as to provide clarity and certainty to the creation and the performance of demand guarantees (at [47]). As such, the court took the view that it would be wrong to reduce the URDG 758 to a set of standard conditions and apply the principles of interpretation which would have otherwise been applicable under national law (at [48]). They should not be regarded as ordinary terms and conditions, but international rules which govern all relevant demand guarantees (at [56]).

Intervention by the courts in calls on demand guarantees can often result in unpredictable outcomes, more so if the courts in a particular jurisdiction overlays the rules under its national laws over the application of URDG 758. Potentially, this may result in different outcomes in different jurisdictions, thereby undermining the purpose behind using a set of uniform rules such as the URDG 758 in the first place.

As demand guarantees are often used in cross-border projects involving parties from different jurisdictions, a set of rules which do not take into account the national laws of any particular jurisdiction ensures that these rules can apply uniformly and consistently to the users of URDG 758 no matter where they are from or which governing law or courts they choose, which provides certainty to the contractual relations between the parties and ultimately benefits their users.

However, if national laws are to be excluded from demand guarantees incorporating URDG 758, what does this mean for defences against calls on demand guarantees established by national law?

Prior to Doha Banks appeal, the courts in the First Instance Circuit (Leonardo S.p.A v Doha Bank Assurance Company LLC [2019] QIC (F) 6 (Leonardo 2019)) had rejected the 2 defences put forth by Doha Bank for its rejection of the claimants demands under the PB and APG, first being that the demands made by Leonardo were fraudulent, and the other being that Leonardo was seeking to profit from its own wrong and was acting unconscionably. The author notes that these two exceptions raised by Doha Bank coincide with the existing exceptions under Singapore law against calls on demand guarantees.

In the First Instance Circuit, the court recognised the fraud exception to the enforcement of demand guarantees, but found that the evidence did not support the defendants contention that the demand was fraudulent (at [85]).

Citing both Singapore Court of Appeal decisions (at [98]-[99]) in JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 and BS Mount Sophia v Join-Am Pte Ltd [2012] 3 SLR 352, the courts in the First Instance Circuit noted that while the defence of unconscionability was recognised by the Singapore courts, it was not similarly available under English law (Leonardo 2019 at [97]), and in fact, that there is no wide acceptance of this doctrine internationally (at [93]). While the court did not find it necessary to determine whether the defence of unconscionability was available under the laws of the Qatar Financial Centre or Qatari domestic law, it noted that on the facts that this defence would not be made out even if it were recognised in Qatar (at [103]). Both of the above defences were not raised on appeal.

The obiter statements made by the Appellate Division Courts in Leonardo 2020 on not taking into account the rules of national law in the application of URDG 758 may be in response to the defences raised by Doha Bank before the courts in the First Instance Circuit, and even if this were not the case, those statements could arguably extend to defenses under each jurisdictions national law against demands made under those guarantees. In fact, they could extend to other aspects of national laws which may operate to override the rules under URDG whether in relation to calls under those guarantees or otherwise, or on a broader level, to apply in the context of other standard rules and practices such as The Uniform Customs and Practice for Documentary Credits (UCP), 2007 Revision, ICC Publication No. 600 in relation to letters of credit these broader issues are however, not the focus under the present article.

It is interesting to note that notwithstanding the statements on exclusion of national law in Leonardo 2020, fraud was recognised as a defence in the First Instance Circuit, although fraud can be considered to be based on national case law. That being said, to exclude fraud as a defence would appear bizarre as well.

To the extent that Singapore law currently recognises the defences of fraud and unconscionability against calls on demand guarantees, it remains to be seen whether, in dealing with demand guarantees that incorporate the URDG 758, the Singapore courts will agree with the courts in Leonardo 2020 that [n]ational case law, however eminent, is no longer relevant on issues where the law and practice are set out in a code (at [43]) to the extent that users of demand guarantees can bypass these defences by incorporating URDG 758 in their demand guarantees.

As the world prepares for a new normal under the shadow cast by COVID-19, project participants may need to also adjust to the possibility that national laws may no longer continue to offer their protective shield against, among others, calls on demand guarantees incorporating URDG 758 (keeping in mind that the ambit of national laws extends beyond defences against such calls). Nevertheless, as a general approach, excluding the application of national laws to such demand guarantees may well be the right step off the beaten path towards uniformity, consistency and contractual certainty.

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Off the Beaten Track - The URDG 758 Bypass - JD Supra