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Qatar case sheds light on how national laws interact with the URDG

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This article considers a new case decided by the Court of Appeal in Qatar which is of interest to those conducting business internationally. It is reportedly the first appellate decision in Qatar in connection with demand guarantees and the operation of Article 24 of the Uniform Rules for Demand Guarantees (URDG) no 758.

What was the case about?

Doha Bank issued two bonds – an advance payment guarantee and a performance bond - to secure the obligations of the principal to the beneficiary (Leonardo SpA).  The beneficiary paid the principal an advance payment of £12.2m but became concerned about performance and terminated the contract. The beneficiary then demanded £10.5m under the advance payment guarantee and £4.07m under the performance bond. The issuing bank tried to defend the calls.

What were the issues which the Court had to decide?

The court was dealing with bonds which were demand guarantees governed by the URDG no 758.  

The issuing bank said that the beneficiary had failed to make a prior claim in writing on the principal and so was not entitled to make a demand under the bonds.

The Court also had to consider the meaning of Article 24 of the URDG which obliges an issuer who rejects a demand to give notice setting out each and every ground for rejecting a demand. Article 24 also provides a consequence in that the issuer is prevented from relying on any ‘new’ grounds other than those set out in the rejection notice.

What was the outcome?

The first instance court and Court of Appeal decided that there was no need for a beneficiary to have made a prior claim in writing on the principal.  In this case, even if there had been such a requirement, the issuing bank could not rely on that as a defence because it had not given that as a ground for rejecting the demand. Article 24 required the issuer to specify the reasons for rejecting a demand and an issuer could not introduce new grounds of defence subsequently because of the preclusion principle set out in the URDG. The purpose of Article 24 was for a beneficiary to understand every discrepancy for which the demand had been rejected.

The international position

In this jurisdiction, we recognise that on-demand instruments are autonomous and will be construed in accordance with their terms. The court in Qatar described these bonds, in the same way, referring to them as the ‘lifeblood of commerce’ whose purpose was to ‘provide security for payment which can be called on promptly’.  

In Singapore, the legal position is slightly different as there is an additional defence to such a call, namely ‘unconscionability’. In the Qatari case, at first instance, the issuer additionally sought to defend the demands on the basis that the beneficiary was seeking to profit from its own wrong and was acting unconscionably contrary to the principles set out by the Singapore Court of Appeal in JBE Properties v Gammon [2010] SGCA 46. The first instance judge rejected the issuer’s contentions that the demands were dishonest or unconscionable so neither first instance nor appellate courts had to decide whether the Singaporean legal principle of ‘unconscionability’ would apply in Qatar. That remains an open question.

Hence, the case is of interest for those conducting international business, especially but not only in the middle east. Interestingly, the court said that as the URDG provided a clear code of principles to be applied, it would be unnecessary to refer to existing national case law where the dispute concerned an international set of principles.

What are the particular implications of this case for a surety?

When issuing bonds: It is a reminder that in this jurisdiction, you need to decide whether to incorporate the URDG no 758 into an on-demand bond or on-demand guarantee which you are issuing (note: different sets of rules apply to different instruments). If you decide to incorporate it, then you also need to consider whether to exclude any Articles. Those of you who attended the Gateley Surety Academy seminar on the URDG will recall that we went into detail in relation to this.

When dealing with claims: Different rules apply depending on whether the on-demand bond incorporates the URDG or not. If the URDG, including Article 24, is incorporated, then you need to observe the time limits for dealing with demands and if a demand is rejected, ensure that every reason is specified in accordance with the URDG. 

Case reference:  Leonardo SpA v Doha Bank Assurance Company LLC [2020] QIC (A) 1 

More information

If you need help or advice, please don’t hesitate to get in touch with our experts listed below or any member of the surety team.

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