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Bank’s Contract Guarantee ‘Virtually Incoherent’ Says Judge

Bank guarantees underwrite many major contracts and oil the wheels of international commerce. However, the High Court has criticised as ‘virtually incoherent’ one such guarantee issued by a high street lender in respect of an oil drilling contract.

The bank had irrevocably and unconditionally guaranteed company A’s performance of a contract to drill and complete 23 production wells in Iraq. The other contracting party, company B, subsequently made a call for more than $7.1 million under the guarantee on the basis that company A had failed to achieve any of the key contractual milestones or to meet a demand for liquidated damages.

The bank rejected company B’s call on the basis that it did not expressly state that no amendments had been made to the contract which had impacted on the timely performance of the works. The bank argued that such a statement was a condition precedent and that it was not obliged to pay out under the guarantee, which had expired in the interim.

In rejecting those arguments, the Court found that the interpretation of the guarantee favoured by the bank would lead to a commercially absurd result. When viewed as a whole, the guarantee was all but incoherent and the Court did not shrink from finding that the particular clause in issue had no effect. It was mere surplus wordage which was quite possibly no more than a historic relic. Company B was granted summary judgment on the guarantee.