Lukoil Mid-East Ltd v Barclays Bank Plc

Whether a demand under an on-demand guarantee satisfies any formal requirements depends on the proper construction of the guarantee itself. General presumptions favouring documentary conditions cannot displace clear wording. A demand need not state an irrelevant fact where the guarantee separately provides that the fact cannot affect the guarantor’s liability and waives notification of contractual amendments. The court should read the instrument as a whole and avoid a commercially absurd construction unless compelled by clear words. An interpretation which would make a performance guarantee virtually unusable is unlikely to be correct.

Lukoil Mid-East Ltd sought summary judgment against Barclays Bank plc for US$7,115,034 under an on-demand bank guarantee issued in support of Baker Hughes Asia Pacific Ltd’s obligations under a drilling contract.

Barclays rejected Lukoil’s demand because it did not state that no amendment to the underlying contract had affected the timely performance of the works. Barclays contended that such a statement was a condition of a valid demand. Lukoil argued that the guarantee required only a written demand and that the relevant contractual amendments were expressly made irrelevant to Barclays’ liability. The central issue was the proper construction of the guarantee read as a whole.

1. The court held that the formal requirements for a demand under a performance bond or on-demand guarantee are determined by construction of the particular instrument. Authorities concerning differently worded guarantees provide general principles but do not determine the meaning of the present guarantee.

2. The documentary presumption identified in I.E. Contractors v Lloyds was of limited assistance. It supported the principle that the bank must be able to determine from the demand, on its face, whether its obligation is triggered, but it did not establish that the disputed statement was required here.

3. Clause [5] clearly provided that contractual amendments would not relieve Barclays from its responsibilities and that Barclays waived notification of them. Consequently, an amendment affecting timely performance was irrelevant to whether Barclays’ obligation was triggered. Requiring Lukoil to state that no such amendment had been made would contradict that clause and would serve no legitimate or principled purpose.

4. The construction advanced by Barclays would also make the guarantee virtually useless. Given the contractual variation machinery and the scale of the underlying works, it was almost inconceivable that no change would affect timely performance. The court therefore rejected that construction as commercially absurd in the absence of clear words compelling it.

5. The court concluded that the disputed words in clause [4] did not impose a requirement that the demand contain the alleged statement. It further indicated that those words could properly be treated as surplusage for the purposes of making a demand. Lukoil’s application succeeded and Barclays’ counter-application failed.