History & Modern Evolution of Transnational Commercial Law

Document-Id: 123316, Please cite as: "https://www.trans-lex.org/123316"

Title

Marxen, Karl, Demand guarantees in the construction industry - A comparative legal study of their use and abuse from a South African, English and German perspective, Nomos 2018

Additional Information

https://doi.org/10.5771/9783845293158

Table of Contents

Chapter Three: Demand guarantees in general legal perspective 3.4 Demand guarantees: major doctrines (independence and documentary compliance)3.4.1 Introduction 3.4.2 Principle of independence 3.4.2.1 Introduction 3.4.3 Principle of documentary compliance 3.4.3.1 Introduction

Content

Chapter Three: Demand guarantees in general legal perspective

3.4 Demand guarantees: major doctrines (independence and documentary compliance)

3.4.1 Introduction

Demand guarantees, similar to letters of credit, are generally built upon two important foundations namely, in the first place, the principle of independence, and secondly the principle of documentary compliance. These two principles are indispensable to payment and security instruments such as these, and crucial factors for their success in international commerce. The two principles are dealt with briefly immediately below and are revisited in more detail later.

3.4.2 Principle of independence

3.4.2.1 Introduction

The principle of independence, also referred to as the principle of autonomy, the principle of abstraction or the doctrine of separation,94 is fundamental in demand guarantees and letters of credit.95 For purposes of this study, it is important to lay out this principle of independence in more detail, as it sets the background against which the broader question of abusive calls on demand guarantees – and potential defences – can be evaluated. The independence principle is best understood when initially ap-

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proached from the position of the beneficiary, and its expectations. Wood noted concisely that “[t]he objective of the beneficiary of the guarantee is to be absolutely certain that it will be paid regardless of objections by the [applicant]”.96 Using Wood’s words as a point of departure, the principle of independence must therefore detach the payment obligation under the instrument (the demand guarantee or letter of credit) from the performance of the underlying contract (for example the construction contract, service contract or contract of sale).

Hence, it is universally accepted that the beneficiary’s claim in terms of a demand guarantee is independent of any entitlement and possible defences arising in connection with the contract between applicant and beneficiary.97 The guarantor’s obligation under a demand guarantee arises solely from the instrument itself, and strictly in line with the terms and conditions set out in this instrument.98 This principle has received much attention in case law.

[...]

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3.4.3 Principle of documentary compliance

3.4.3.1 Introduction

The second important principle in the law of demand guarantees and letters of credit is known as the doctrine of “documentary compliance” or “strict compliance” (in German law “Dokumentenstrenge”).187 The principle of documentary compliance entails that in calling up the guarantee, the beneficiary must comply with all formal requirements prescribed in the instrument itself.188 The tendered documents must comply with the conditions set forth in the instrument, and any discrepancy may lead to the guarantor rejecting the demand and denying payment.189 Hence, Fourie AJA in State Bank of India v Denel SOC Limited stated:

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“A bank issuing an on demand guarantee is only obliged to pay where a demand meets the terms of the guarantee. Such a demand, which complies with the terms of the guarantee, provides conclusive evidence that payment is due.”190

Conversely, the beneficiary will be able to know exactly what is required for the triggering of payment under the instrument. The term “documentary compliance” emphasises a further important general rule regarding the requirements to be met for payment under a guarantee, namely that they are (typically) documentary in nature. In other words, whatever conditions need to be met by the beneficiary, they are typically tied to the presentation of some or other document.191 This principle emerges clearly from the URDG 758 which put it thus: “Guarantors deal with documents and not with goods, services or performance to which the documents may relate”.192 Similarly, the ISP98 stipulates that “[a] standby is an irrevocable, independent, documentary and binding undertaking” and continues to explain that “[b]ecause a standby is documentary, an issuer’s obligation depends on the presentation of documents and an examination of required documents on their face”.193 The URDG, moreover, provides that non-documentary conditions will be deemed “as not stated” by guarantors,194 and the ISP98 that they “must be disregarded”.195 Although these rules are of no assistance in instances where the guarantee has not been issued subject to them, they are clearly indicative of reticence in the guarantee industry of issuing guarantees containing such non-documentary conditions.

94Enonchong “The autonomy principle of letters of credit: an illegality exception?” 2006 LMCLQ 404 (“principle of autonomy”; “independence principle”); Mugasha The Law of Letters of Credit and Bank Guarantees (2003) 24; Broekhuizen (n 10) 95 (“abstracted”); and Coleman (n 46) 223 (“separation”).
95Antoniou “Nullities in letters of credit: extending the fraud exception” 2014 Journal of International Banking Law and Regulation 229 230; McKendrick (n 16) 1079-1082 and 1138-1140; Kelly-Louw (n 44) 56 par 2.5.2.2 (for letters of credit) and 58 (for demand guarantees); Enonchong “The problem of abusive calls on demand guarantees” 2007 LMCLQ 83 84; Enonchong (n 94) 404 (“Among the prin- ciples that are fundamental in the law of letters of credit is the principle of autonomy (also known as the independence principle)”); Hugo “Discounting practices and documentary credits” 2002 SALJ 101 105; and Kaya (n 1) 19 (“Die Abstraktheit des Zahlungsversprechens ist für das Akkreditiv kennzeichnend”). But see also the criticism in Debattista (n 28), especially 302 et seq who argues strongly against the independence principle in demand guarantees.
96Wood (n 67) 371 par 20-016 (alteration and insertion by me).
97Note also that the secured transaction does not necessarily have to be one between the applicant and the beneficiary, for instance in more complex situations with more than three parties involved in the broader transaction.
98Bailey (n 73) 915 (omission and insertion by me); McKendrick (n 16) 1079; Drob- nig (n 12) 807 par 3; and the judgment First Rand Bank v Brera (n 69) par 2 (per Malan JA).
187BGH BGHZ 145 286 293; Graf von Westphalen and Zöchling-Jud (n 26) 189 par 177 et seq; Bertrams (n 11) 136-146 par 10-19 et seq; Kelly-Louw (n 44) 72 par 2.5.2.5 et seq and 89 par 2.5.2.5.4 et seq; Ellinger and Neo (n 82) 117 et seq and 224 et seq; and Wood (n 67) 372-373 par 20-019.
188Again, this shows how important it is to draft a demand guarantee properly. See in this regard Zozaya Irujo “Trade Finance and the Banking Commission of the ICC” 2016 Annual Banking Law Update 71 72 et seq. The drafting of the guarantee is dealt with in par 8.3 below.
189Bernhardt (n 46) 67-68 (with several references and sources in support); and Ellinger and Neo (n 82) 227 par B. However, see also Kelly-Louw (n 44) 73 et seq; and BGH (n 187) 293 (“Einer wörtlichen Übereinstimmung mit dem Urkundeninhalt, wie sie die Revision hier für erforderlich halt, bedarf es indes nur, wenn das ausdrücklich vereinbart wurde”).
190State Bank of India v Denel SOC Limited (n 68) at 9.
191Note that Kelly-Louw (n 44) 64 seems to regard the issue of “documentary” requirements as belonging to the principle of independence, and not to the doctrine of compliance.
192URDG 758 Art6. See also UCP 600 Art5.
193ISP98 rule 1.06 (a) and (d) (Nature of standbys), alteration by me.
194Article 7.
195Rule 4.11 (a) (Non-documentary terms or conditions).

Referring Principles

Trans-Lex Principle: V.2.6 - Autonomy and strict compliance of letters of credit and bank guarantees

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