Author: Gillian Birkby
English law works on the basis of precedent – previous judgments are relied on to work out what the law is on any particular issue. So what happens when, over the years, there are more and more judgments on an issue, each giving an interpretation of slightly different wording?
Sometimes a judgment includes statements which could be seen as having a wider application than the document in dispute, which will then be taken as a precedent in future cases. This can add up to a heavy burden of case law, difficult for lawyers to deal with, never mind businessmen, who are only interested in recording the deal they have agreed.
Bonds, guarantees and similar security documents have been with us for hundreds of years, so it is not surprising that they have accumulated a heavy weight of interpretation. The latest case on this subject involved an argument about whether a document was an on demand guarantee, or whether it was a performance guarantee. The defendant, a Greek bank, argued that it was a performance guarantee and that the conditions for payment had not yet arisen.
The construction in question was a ship and the performance guarantee was for the due and punctual payment of the second payment instalment of around $10 million. The guarantee said that the second instalment was due on the cutting of the first 300 metric tonnes of steel and written notice of this was to be given to the bank by a certificate, countersigned by the buyer. That could have been satisfactory except that the criterion for payment in the building contract was different and required only the cutting of the first steel plate. In addition, the exact wording of the guarantee was different from that required by the building contract and which was set out in a schedule to it.
The problem with the guarantee was made worse by the fact that the document used some wording which made it look like a performance guarantee and some which made it look like an on demand guarantee.
The judge in the High Court had given what the Court of Appeal described as an “exhausting” judgment which analysed 20 previous judgments on a similar issue. Treading lightly over these cases and approving the views of the standard textbook on banking, the Court of Appeal said it was better to be guided by the “general tenor” of previous cases, rather than diving into the details of them.
So who won? The Court of Appeal said that the document was an on demand guarantee and the bank had to pay. This sidestepped the question of whether it mattered that the document was in a different form from the schedule to the building contract and what amount of steel had to be cut in order to trigger payment.
It is not unusual for businessmen to express themselves using different words to mean the same thing; it is part of the richness of the English language. However, it can prove expensive if the parties have to go to court (in this case as far as the Court of Appeal) so that a judge can decide what the words mean.
Gillian Birkby, Partner, Fladgate LLP (firstname.lastname@example.org)