Performance guarantees are effectively obligations to pay on demand within the terms of the guarantee, irrespective of the rights and wrongs of any dispute between beneficiary and principal under the terms of their separate contract, subject only to fraud.
Lord Denning said: ‘It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honor the credit . . To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank.’
. . and ‘So, as one takes instance after instance, these performance guarantees are virtually promissory notes payable on demand. So long as the Libyan customers make an honest demand, the banks are bound to pay and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.
All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice.’
Lord Denning MR
[1978] 1 All ER 976, [1978] 1 QB 159, [1977] 3 WLR 764, [1978] 1 Lloyds Rep 166
England and Wales
Citing:
Approved – R D Harbottle (Mercantile) Limited v National Westminster Bank Limited 1978
The plaintiffs had entered into contracts of sale with Egyptian buyers. Each contract provided that the plaintiffs would establish a guarantee confirmed by a bank in favour of the buyers. The guarantees were widely expressed, and secured payment on . .
Cited by:
Cited – Manx Electricity Authority v J P Morgan Chase Bank CA 3-Oct-2003
The claimant sought to appeal an order striking out its claim against the defendant under a performance bond. The defendant denied that the demand was valid, saying it did not allege a current breach of the contract.
Held: The point upon which . .
Cited – Marubeni Hong Kong and South China Ltd v Ministry of Finance of Mongolia CA 13-Apr-2005
A letter was written by the Mongolian Ministry of Finance guaranteeing payment for textile plant and machinery to be supplied to a Mongolian company. A letter from the justice minister confirmed the authority of the finance minister to sign the . .
Lists of cited by and citing cases may be incomplete.
Banking
Leading Case
Updated: 02 November 2021; Ref: scu.186574