Ostfriesische Volksbank EG v Fortis Bank

A guarantee must be construed strictly, particularly as to time limits, but construction must also avoid an absurd or commercially ineffective result. A demand complying with the guarantee’s specified service requirements preserved the guarantee before expiry. A later dispute notice triggered the requirement for supporting evidence; that evidence did not have to be supplied before the original expiry date. Where the guarantee remained operative for an indefinite period, a term could be implied requiring the supporting evidence to be provided within a reasonable time. Reasonableness was assessed retrospectively in light of the circumstances known when the period had elapsed.

The claimant bank sought €1 million under an advance payment guarantee issued by the defendant bank. The guarantee related to a shipbuilding contract and required a demand supported by a declaration of rescission. If the builder disputed the rescission within eight banking days, a decision from Lloyd’s Register of Shipping was required. The claimant made a timely demand, but the dispute notice and Lloyd’s decision occurred after the stated expiry date.

The defendant argued that the guarantee had expired because the Lloyd’s decision had not been supplied by that date. Alternatively, it argued that the claimant had breached an implied obligation to provide the decision within a reasonable time.

1. Construction. The guarantee was subject to strict construction of its time deadlines. The court could consider the factual matrix at the time of contracting, but not the particular way in which later events unfolded. A commercial contract should be construed to avoid absurdity where the language permitted that conclusion, applying [1985] AC 191 and [2009] 4 All ER 677.
2. The expression “valid claim” in the expiry provision did not bear a meaning different from “valid demand”. It referred to a demand served in the stringent manner required by paragraph 7. Once such a demand had been received before 15 March 2009, the guarantee continued in force. A dispute notice served within eight banking days after receipt of the demand triggered the requirement for a Lloyd’s decision, whether the notice was served before or after the expiry date. Requiring the decision to be supplied by 15 March would produce an absurd and commercially ineffective result.
3. Implied obligation. The claimant was under an implied obligation, arising as a matter of business efficacy, to provide the Lloyd’s decision within a reasonable time after receiving notice of the dispute. The court could fix the reasonable period retrospectively by considering all circumstances then known, following the approach in paragraph 15 of [2005] EWCA (Civ) 239.
4. The claimant was not in breach. Before the dispute notice was communicated, the necessary arrangements with Lloyd’s had been completed. Thereafter, the claimant acted reasonably while dependent on an independent and reputable third party. The delay in obtaining and re-addressing the decision was therefore reasonable.
5. Judgment was given for the claimant.