UK: Guarantees: Strict Compliance Is Not Strictly Necessary

Last Updated: 10 April 2017
Article by Kirsty Barnes and Catherine Phillips

A recent case has highlighted one of the key differences between guarantees and letters of credit: that the doctrine of strict compliance applies to letters of credit but not to guarantees. However, that doesn't mean that a demand under a guarantee can take whatever form the presenter chooses. Below, we have identified the key messages from this case that you may come across in practice.

The decision in MUR Joint Ventures BV ('MUR') v Compagnie Monegasque De Banque (the 'Bank') [2016] EWHC 3107

In this case, a demand guarantee had been provided by the Bank to MUR.  Two demands for payment were sent to the Bank, which were rejected on the grounds that they failed to meet three of the payment criteria, namely;

  1. they were not sent by registered post;
  2. they were signed by a sole representative of MUR; and
  3. the notary did not confirm that the signatory had the power to act on behalf of MUR

Strict compliance

Under English law, the doctrine of strict compliance does not automatically apply to demand guarantees.  It is possible to expressly require strict compliance with the form of demand but, in the absence of very clear drafting, it will not be imposed.

Assessing faulty demands for payment

If a demand for payment does not exactly comply with the terms set out in the guarantee, a good starting point is considered to be;

"What is the promise that has been made by the Bank to the beneficiary and has the beneficiary availed itself of that promise?"

It is generally accepted that a demand should contain sufficient information for a Bank to be able to tell that payment under a guarantee has fallen due.  However, it does not need to follow the precise wording of the guarantee to the letter (as would be required for a letter of credit).  By way of example, in this case it was decided that;

  • the requirement for registered post was a means of ensuring effective (and proven) delivery and not a condition precedent to the demand taking effect.  Given that notices had been sent by a combination of email, fax and courier (first demand) and fax, courier and registered mail (second demand), there was no doubt that the documents had been received by the Bank.  The demand would not fail for this reason.
  • the requirement for a demand to be signed by more than one representative of a presenter can be effective, for example, if a guarantee stipulates that a demand 'should be signed by not less than two' of a presenter's representatives.  However, in the Bank's document, there were inconsistencies in drafting which referred on some occasions to the demand being signed by only one person.  Accordingly, the clause was interpreted as meaning that the demand had to been signed by someone who was legally authorised to represent the presenter.
  • there were also drafting issues with the wording of the clause which the Bank claimed required the notary to confirm that the signatory was duly authorised to sign the demand on behalf of the presenter.  Had the guarantee explicitly required a legal opinion to that effect, the term would have been enforced.  As it was, the court gave the drafting its 'natural meaning' (in accordance with the principles of construction of contractual terms) and concluded that the function of the notary was to identify the signatory and not to pass judgment on the contents of the demand document.

Better to be precise

If the terms and conditions for demanding payment under a guarantee are clear and precise, the courts will apply their natural meaning and enforce them.  However it is worth bearing in mind that there is no automatic requirement for strict compliance with the wording of a guarantee and accordingly a demand that fails to meet its requirements to the letter cannot automatically be disregarded.  

If you have any concerns about whether the Bank is required to make payment in any given situation we would recommend that you take advice and would be pleased to help you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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