Lukoil, an oil and gas company, entered into an agreement with Baker Hughes Asia Pacific Limited in 2011 to drill and complete 23 production wells in an oil field in South East Iraq. The estimated contract price was $142,300,680. As security for the performance of the contract, Baker Hughes provided an on-demand bank guarantee, in the form of a bond for $7,115,034 (five per cent of the contract price) issued by Barclays Bank in favour of Lukoil.
Baker Hughes failed to deliver on its performance of the contract so, shortly before the expiry of the bond, Lukoil presented a written request to Barclays Bank for the sum under the bond. The relevant terms were as follows:
- paragraph 4 stated amongst other things that it was a condition of Barclays being responsible for payment ‘that no amendment has been made to the Contract impacting the timely performance of the Works’; and
- paragraph 5 stated ‘that no amendments nor addenda to the Contract, nor any contractual documents made by you and [BH] shall relieve us from our responsibilities under this Guarantee, and we hereby waive the right to be notified of such amendments or addenda.’
Upon receipt of Lukoil’s written request, Barclays Bank refused to honour the guarantee, claiming that Lukoil ought to have expressly included within its written request that ‘no amendment had been made to the contract impacting the timely performance of the works.’
Lukoil issued proceedings through summary judgment, claiming the sum under the bond.
Barclays Bank made a cross application for summary judgment, arguing that the call on the bond was defective because of its failure to expressly confirm its compliance with paragraph 4 of the guarantee.
While the court considered that the condition placed in paragraph 4 could have had the effect that Barclays intended it to have, it rejected Barclays’ proposal by reference to the fact that there was no express requirement in the bond that a demand under it must include a statement that no amendment has been made to the contract impacting the timely performance of the works. Furthermore, paragraph 5 of the guarantee was inconsistent with the requirement for Lukoil to notify Barclays Bank of any amendments to the contract.
The court suggested that accepting Barclay’s submissions would mean that, for Lukoil to serve a valid on-demand bond, it would be required to expressly communicate any and every amendment that affects the timely performance of the contract, despite such information being irrelevant to Barclays Bank’s obligations to make payment under the bond.
The court found this submission to be illogical, given that in a project of this size, there would no doubt be numerous instances where changes would be required, which would affect the timely performance of the contract. As such, it would be unreasonable to expect Lukoil to notify Barclays of every amendment affecting timely performance.
Mr Justice Stuart-Smith concluded in his judgment that ‘the court will not willingly endorse or adopt an interpretation that is commercially absurd.’ The court therefore rejected Barclay’s cross-application for summary judgment on the basis that Lukoil’s call was not defective, and awarded Lukoil the sums called for under the bond.
This judgment provides useful guidance to clients concerning the court’s approach to implied and express terms when establishing a promise under a bond. Clients should ensure that bonds entered into are clearly and carefully drafted and comprehensively negotiated. As Staughton LJ said, citing Goddard LJ in Rayner (JH) & Co Ltd v Hambros Bank Ltd  KB 37, it is ‘a question of construction of the bond. If that view of the law is unattractive to banks, the remedy lies in their own hands.’
In this case, the court found that the whole bond when read in context was virtually incoherent, because of the inconsistencies between the clauses. Mr Justice Stuart-Smith therefore decided that the condition in paragraph 4 was of no effect, and was possibly a leftover bit of drafting that was useless in this present document.
There is an important lesson to be learnt here relating to consistency, and linked to that, ensuring that one understands the meaning and consequence of each contract provision. It is also a reminder of the court’s preference for express over implied terms.
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.