International Construction Law Review
ON-DEMAND BONDS: A REVIEW OF ITALIAN AND ENGLISH DECISIONS ON FRAUDULENT OR ABUSIVE CALLING
GIUSEPPE BROCCOLI
Partner at BDA Studio Legale, Milan
AND
LAUREN ADAMS
Barrister, Atkin Chambers, London
INTRODUCTION
Irrevocable undertakings made by a bank or commercial provider to pay a named beneficiary on the beneficiary’s simple demand have a well-established presence in the world of international commerce. With the courts’ protection, these undertakings, whether under the guise of irrecoverable letters of credit, guarantees or bonds, were widely used essentially to insure a party from losses arising from the non-performance of the other party in a contract. They are considered the “lifeblood of international commerce”1. Historically, the English courts have been strongly in favour of upholding and enforcing banks’ irrevocable obligations to pay, though the Italian courts’ approach did not conform to this practice until relatively recently.
In international construction projects, such irrevocable undertakings to pay a named beneficiary are now being used widely2 in the form of the on-demand performance bond. Their popularity in the international context has increased in spite of the palpable unfairness for the contractor when an on-demand bond is called incorrectly (ie where “the underlying transaction has not been broken”3) or, according to recent Italian courts decisions, when the
1 See RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] 1 QB 146 at 155; [1977] 3 WLR 752; [1977] 2 All ER 862 at 870, Edward Owen Engineering Ltd v Barclays Bank International Ltd (CA) [1978] 1 QB 159 at 171, Britten Norman Ltd (in Liquidation) v State Ownership Fund of Romania [2000] Lloyd’s Rep Bank 315 and Group Josi Re Co SA v Walbrook Insurance Co Ltd [1995] 1 Lloyd’s Rep 153; [1995] 1 WLR 1017; [1994] 4 All ER 181 at 202.
2 Oxus Gold plc (formerly Oxus Mining plc) v Templeton Insurance Ltd [2006] EWHC 864 (Comm) at paragraph 213.
3 Bankers’ Law, Volume 1 No 1 – Performance bonds.
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