I.E. Contractors Ltd v Lloyds Bank Plc

JurisdictionEngland & Wales
Judgment Date12 July 1990
Judgment citation (vLex)[1990] EWCA Civ J0712-9
Docket Number90/0650
CourtCourt of Appeal (Civil Division)
Date12 July 1990
I.E. Contractors Ltd. (formerly GKN Contractors Limited)
Respondents (Plaintiffs)
Lloyds Bank Plc


Rafidain Bank (a Body Corporate)
Appellants (Respondents)

[1990] EWCA Civ J0712-9


Lord Justice Purchas

Lord Justice Staughton


Sir Denys Buckley








Royal Courts of Justice

MR. N. STRAUSS Q.C. and MR. S. NATHAN (instructed by Messrs Landau & Scanlan) appeared on behalf of the Appellants (Second Defendants).

MR. P. CRESSWELL Q.C. and MR. W. BLAIR (instructed by Messrs Linklaters and Paines) appeared on behalf of the Appellants (First Defendants).

MR. C. REESE Q.C. and MR. A. WHITE (instructed by Messrs Clifford Chance) appeared on behalf of the Respondents (Plaintiffs).


The parties to this dispute are first I.E. Contractors Ltd. (formerly G.K.N. Contractors Ltd.), plaintiffs and respondents to the appeal, who contracted in 1978 to build three poultry slaughterhouses in Iraq. I shall call them "the contractors". Then we have the appellants and second defendants in the action, Rafidain Bank ("Rafidain"). They issued performance bonds to the employers under the building contracts. Thirdly, Lloyds Bank plc are respondents and conditional cross-appellants, and were first defendants in the action. They issued what are called counter-guarantees to Rafidain, and in turn received counter-indemnities from the contractors. Lastly I should mention the employers under the building contracts. These were initially the General Poultry Company for the Northern Zone and the General Poultry Company for the Central Zone. In course of time, as is common ground, they were succeeded in each case by a State Establishment for Poultry. Later still it is said that there was a further devolution of their rights and obligations to the State Establishment for Agricultural Design and Construction, but that has been in issue. For present purposes I can refer to all these organisations, or whichever are appropriate at any particular time, as "the employers".


The three performance bonds were for sums totalling I.D.630,659 or approximately £1.68 million sterling. After various extensions they were due to expire on 11th December 1984. On 9th December Rafidain received a demand for payment of the full amount of all three bonds, from the employers. I shall have to consider later the terms of that demand; but the motive for it appears to have been that the contractors had failed to complete performance of the building contracts.


Rafidain did not pay the sums demanded by the employers, then or for a considerable time thereafter. They did, however, on 11th December demand payment in full from Lloyds Bank under the counter-guarantees. These had also been extended, and were due to expire on 26th or 27th December. Lloyds Bank did not pay. The contractors commenced proceedings and sought an interlocutory injunction. One was granted ex parte, but I refused to continue it as a judge at first instance in the Commercial Court (save for the period when an appeal against my decision was pending); my decision was upheld by the Court of Appeal. It is said that Rafidain then paid the sum demanded by the employers; but there is a dispute as to whether they did more than make a book entry. Lloyds Bank have still not paid Rafidain. Whatever their stance may have been earlier, at the present stage they adopt in the main an attitude of neutrality, although on one point they support the argument of the contractors. It may be that they are motivated more by a public-spirited desire to see that we pronounce the law correctly—or at any rate as bankers feel that it ought to be pronounced.


There was a lengthy trial before Leggatt J. in February and March 1989. In the foreground were two issues which turned wholly and solely on the construction of written documents, that is to say (1) whether the employers' demand was, in point of form, appropriate to operate Rafidain's performance bonds, and (2) whether Rafidain's demand was, in point of form, appropriate to operate the counter-guarantees of Lloyds Bank. The judge determined both those issues in favour of the contractors. In consequence he granted declarations that Rafidain did not receive a valid claim under the performance bonds during the period of their validity, and that Lloyds Bank did not receive a valid claim under the counter-guarantees during the period of their validity.


The judge went on to consider (very properly, if I may say so) other issues. These were:

  • (3) whether the State Establishment for Agricultural Design and Construction had succeeded to the rights and obligations of the State Establishments for Poultry, so as to be entitled to make a demand on the performance bonds in their own name, or

  • (4) whether they were acting as agents for the State Establishments for Poultry, or

  • (5) whether Rafidain and Lloyds Bank were estopped from denying the right of the State Establishment for Agricultural Design and Construction to make a demand.


The judge answered those questions:

  • (3) yes,

  • (4) no,

  • (5) no.


Finally there were issues as to

  • (6) currency, and

  • (7) interest.


On both these issues it appears to me that the contractors succeeded.


By various notices of appeal and respondents' notices, all of issues (1) to (7) have been raised again in this court. However on 7th July 1989 Mr. Registrar Adams ordered that issues (1) and (2) should be heard and determined first, leaving the other issues to be decided subsequently if that should prove necessary. This has certainly made our task a good deal easier, although it is open to question whether in the long run it will promote the economical and efficient disposal of the dispute as a whole. We have been assisted by arguments, both skeleton and oral, of the highest quality.


The background


Both the issues which we have to consider depend, as I have said, on the interpretation of written documents. Those documents are not in any standard form which the English courts have considered before. So there can be little chance of our finding an authoritative solution in the books. But the general nature of performance bonds has been considered many times in the last twelve years, and the decisions give some guidance as to what, in the view of English law, the parties are likely to have intended. So too the general practice of bankers may give some guidance, even though it is not alleged, or at any rate proved, to have amounted to a binding custom. These matters may perhaps appropriately be treated as part of the background, matrix or surrounding circumstances. But it must never be forgotten that the task of the court is to construe the documents which were used in this case, and not any others.


It was common ground that the construction contracts and the performance bonds were governed by the law of Iraq, and the counter-indemnities given by the contractors to Lloyds Bank by the law of England. There was no agreement as to which system of law governed the counter-guarantees. But that is not of great significance, as there is agreed to be no relevant difference between English and Iraqi law as to the interpretation of contracts. Only on one point will Iraqi law be relevant.


The first principle which the cases establish is that a performance bond, like a letter of credit, will generally be found to be conditioned upon the presentation of one or more documents, rather than upon the actual existence of facts which those documents assert. If the letter of credit or bond requires a document asserting that goods have been shipped or that a contract has been broken, and if such a document is presented, the bank must pay. It is nothing to the point that the document is untruthful, and that the goods have not been shipped or the contract not broken. The only exception is what is called established or obvious fraud. This doctrine had been laid down in recent years by cases too numerous to mention. The justification for it is said to be that bankers can check documents, but do not have the means or the inclination to check facts, at any rate for the modest commission which they charge on a letter of credit or performance bond. There has been no suggestion that the fraud exception applies in this case.


We were told, and I am quite prepared to accept, that some performance bonds are payable merely upon a demand being made, without requiring the presentation of any other document or the assertion of any fact (unless the demand itself contains an implied assertion that the money is due). It was suggested that even an oral demand would be sufficient; but I would hesitate long before construing a performance bond as having that effect.


On the other hand there is no reason why a performance bond should not depart from the usual pattern, and be conditioned upon the existence of facts rather than the production of a document asserting those facts. It might be inconvenient for the bank, but it is a perfectly lawful contract if the parties choose to make it.


These considerations featured in the case of Esal (Commodities) Ltd. v. Oriental Credit Ltd. [1985] 2 Lloyd's Rep. 546. There the bond provided:

"We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance…"


There were three possible meanings for that wording: (i) that no more than a written demand was required, (ii) that the demand must assert a failure to perform the contract, or (iii) that there must in fact have been a failure to perform.



To continue reading

Request your trial
60 cases
1 firm's commentaries
  • On-Demand Bonds: Is Substantial Compliance Enough?
    • South Africa
    • Mondaq Southafrica
    • 16 December 2015
    ...and an on-demand bond. Paraphrasing Staughton LJ in the English decision of IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank ([1990] 2 Lloyd's Rep 496 (CA)), the Judge stated ...there is less need for a doctrine of strict compliance in the case of performance bonds. She went on to say......
2 books & journal articles
    • Singapore
    • Singapore Academy of Law Journal No. 2000, December 2000
    • 1 December 2000
    ...Ltd v Lloyds Bank plc[1990] 2 Lloyd’s Rep 205, at 207 (decision reversed by the English Court of Appeal on a point of fact: [1990] 2 Lloyd’s Rep 496). 2 I E Contractors Ltd v Lloyds Bank plc [1990] 2 Lloyd’s Rep 205, at 207; Kvaerner Singapore Pte Ltd v UDL Shipbuilding (Singapore) Pte Ltd[......
  • The Documentary Nature of Demand Guarantees and the Doctrine of Strict Compliance (Part 2)
    • South Africa
    • South Africa Mercantile Law Journal No. , May 2019
    • 25 May 2019
    ...Hooley) Paget’sLaw of Banking 12 ed (2003) (hence ‘Paget’sLaw of Banking’) at 733.108[1986] 2 Lloyd’s Rep 146 (QBD (Comm)).109[1990] 2 Lloyd’s Rep 496 (CA) at 501.110See Warne & Elliott op cit note 1 at 281.111See Paget’sLaw of Banking op cit note 107 at 733.THE DOCUMENTARY NATURE OF DEMAND......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT