Owen (Edward) Engineering Ltd v Barclays Bank International Ltd

JurisdictionEngland & Wales
JudgeTHE MASTER OF THE ROLLS,LORD JUSTICE BROWNE,LORD JUSTICE GEOFFREY LANE
Judgment Date20 July 1977
Judgment citation (vLex)[1977] EWCA Civ J0720-1
Docket Number1997 E. No. 1065
CourtCourt of Appeal (Civil Division)
Date20 July 1977
Edward Owen Engineering Limited
Plaintiffs
(Appellants)
and
Barclays Bank International Limited
First Defendants
(Respondents)
and
Umma Bank
Second Defendants

[1977] EWCA Civ J0720-1

Before:

The Master of the Rolls

(Lord Denning)

Lord Justice Browne and

Lord Justice Geoffrey Lane

1997 E. No. 1065

In The Supreme Court of Judicature

Court of Appeal

On Appeal from the High Court of Justice

Queen's Bench Division

(Mr. Justice Kerr)

MR. C. ROSS-MUNRO, Q.C. and MR. P. GROUND (instructed by Messrs. Lough Belcher, Solicitors, Newbury) appeared on behalf of the Plaintiffs (Appellants).

MR. N. TAPP, Q.C. and MR. P. CRESSWELL (instructed by Messrs. Durrant Piesse, Solicitors, London) appeared on behalf of the First Defendants (Respondents).

1

THE MASTER OF THE ROLLS
2

This case concerns a new business transaction called a "performance guarantee" or "performance bond". In order to show the nature of the transaction, I will describe the documents in some detail.

3

THE CONTRACT BETWEEN SUPPLIERS AND CUSTOMERS

4

First I will. describe the principal contract between suppliers and customers. The suppliers are Edward Owen Engineering Ltd. who carry on business at Alton in Hampshire. The customers are the Agricultural Development Council of Libya which is a State enterprise of the Libyan Arab Republic whose full title is the Executive Authority for Jabel El Akhdar. Sometimes called the Green Mountain Project.

5

In November 1976 a contract was made by which the English suppliers agreed to supply and instal glasshouses for the Libyan customers. The glasshouses were to be very extensive. They were to cover two hectares (about five acres) and were to be equipped with a complete irrigation system. The materials were to be sent from England to Benghazi on c. and f. terms: and skilled erectors were to go out from England to Libya to erect the glasshouses and instal the equipment. The total contract price was £502,050, payable in Libyan dinars. The shipment of the materials was to be by the end of April 1977, and erection was to be completed by the end of August 1977. Payment was to be made by the Libyan customers as follows:- 20 per cent payable in advance of delivery; 50 per cent payable on the presentation of the "hipping documents; 10 per cent when the materials were on the site; 15 per cent when there was a provisional handing-over, and 5 per cent on final handing over; thus making it the full 100 per cent. Those instalments were to be payable by an irrevocable confirmed letter of credit which was to be opened in favour of the English suppliers payable at Barclays Bank International, There was an expressclause which said: "The contract is construed in accordance with Libyan law. Any dispute arising between the two parties shall be referred to the competent Libyan court".

6

The Libyan customers instructed the Umma Bank at Benghazi (which is a state bank of Libya) to open an irrevocable documentary credit in favour of the English suppliers for payment of those instalment's. The letter of credit was sent by the Umma Bank in Libya to their London correspondents, who sent it on the 6th January, 1977 through Barclays Bank International to the English suppliers. But it did not comply with the contract. It was not a confirmed letter of credit. It was not confirmed by a bank. This was made clear by the advice itself. The correspondents in London said: "Although our principals make provision for us to add our confirmation to this credit kindly note that we are unable to effect such action in view of the payment terms which are subject to instruction from our principals, upon presentation of documents". That was indeed the case. The letter of credit espressly provided that payment was only to be made when the Libyan customers authorised it. So the letter of credit was plainly not a confirmed letter of credit.

7

As soon as the English suppliers got that notification, they made every effort to get the Libyan customers to amend the letter of credit so as to enable the contract to be fulfilled. They sent a long telex on the 18th January, 1977. They sent one of their staff, a Mr. Cowley, out to Libya to press the Libyan customers to make the required amendments to the letter of credit. But he was unable to get it amended. On his return, the English suppliers consulted their bankers, Barclays, and wrote a letter which was drawn up with the assistance of those bankers. It was dated the 29th March, 1977 by the English suppliers to the Libyan customers and is of much importance.It said: "The letter of credit is still not acceptable to us for three main reasons - (1) Our contract with you dated 9th November 1976 provides for the letter of credit to be confirmed. The advising bank in London refuses to confirm the letter of credit because of the way in which it is drawn up", There follow two other reasons and then this significant paragraph: "Since the letter of credit is not operative, it obviously follows that our guarantee has no effect". That is a reference to the performance guarantee to which I will come shortly.

8

So there is the position. The English suppliers quite reasonably said: "We cannot go on with any obligations under this contract because the letter of credit which would guarantee us payment has not come forward. We have not even got the 20 per cent in advance". It looked very much as if the Libyan customers were in default. They had not provided the stipulated letter of credit. That is why the contract went off.

9

THE PERFORMANCE GUARANTEE

10

Second, I will deal with the contract between the banks. This is where we come to the "performance guarantee" or "performance bond". That is a guarantee by a bank that the suppliers will perform their obligations under the contract. The Libyan customers, before any contract was concluded, stipulated that there should be a performance guarantee. It was to be a condition precedent to their entering into any contract at all. The English suppliers wrote this letter on the 4th November, 1976 to the Libyan customers: "Upon agreement of the final Contract sum and approval of a draft Contract, we will arrange for a Letter of Guarantee to be issued by Barclays Bank International and lodged at the Umma Bank, Benghazi, for 10% of the total Contract price and valid up to the final delivery date. On receipt of the Letter of Guarantee at the Umma Bank, Benghazi, we will sign the Contract and theauthority (the Libyan customers) will immediately open a Letter of Credit to our benefit for the full Contract price".

11

So even before the contract was actually signed, the English suppliers agreed to arrange for a performance guarantee to be given for 10 per cent of the contract price. The contract was signed on the 9th November, 1976 and the performance guarantee given on the 15th November, 1976. It was given in this way: The English suppliers instructed their bankers, Barclays Bank, to give the performance guarantee. Acting on those instructions, on the 15th November Barclays Bank International in England sent a cable to the Umma Bank in Benghazi in these words: "Upon our responsibility and on behalf of Edward Owen Engineering Ltd. please issue, in form required, performance bond in favour of Executive for Jabel el Akhdar el Marj Libyan Arab Republic for pounds sterling 50,203 being ten percent of total contract value for supply of greenhouse equipped with drip-overhead irrigation system contract dated 9th November 1976; performance bond to be valid for claims on you until 31st August 1978 and is to be handed to Mr. N. Cowley accredited representative of Edward Owen Engineering Ltd., who will contact you: we confirm that United Kindom exchange control regulations satisfied and that our maximum liability is limited to the sum of pounds sterling 50,203".

12

On the 17th November, 1976 Barclays Bank International confirmed that cable by letter to the Umma Bank and added: "We look forward to receiving in due course two translated copies of the actual guarantee issued". (It was not in fact received until May 1977).

13

The Umma Bank wanted, however, a further assurance before issuing the performance guarantee. On the 22nd November, 1976 they sent a telex to Barclays Bank International containing this request: "Please confirm that you will pay total or partof said guarantee on first of our, demand without any conditions or proof".

14

On the same day, the 22nd November, Barclays Bank International replied to Umma Bank: "We confirm our guarantee … payable on demand without proof or conditions".

15

So there it is. Barclays Bank International asked the Umma Bank (the State bank in Libya) to issue the guarantee, and Barclays Bank promised to pay it on first demand by Umma without any conditions or proof.

16

On receiving that promise, the Umma Bank did issue a guarantee bond in favour of the Libyan customers. It was written in Arabic, but we have a translation of it. It is dated the 23rd November, 1976, Benghazi. It is addressed by the Umma Bank to the Libyan customers under the name of the Green Mountain Project. It says: "Dear Sirs, Whereas the contract in respect of this operation requires the submission of a bank guarantee in the value of £ 50203 Sterling … We the undersigned stand as guarantors for the company (Edward Owen) to the extent of the above mentioned figure, recognising that this payment would be made upon first request from you, which must reach us during the validity of the letter of guarantee. This guarantee shall be deemed valid until the 31st August 1978 after which it will be valueless and should be returned to the Bank",

17

That is the performance guarantee. It was handed by the Umma Bank to Mr. Cowley in Libya. He was there as the representative of the English suppliers. He handed it to the Libyan customers. Thereupon the English suppliers had done everything necessary on their part to make the contract binding on the Libyan...

To continue reading

Request your trial
243 cases
4 firm's commentaries
  • Letters of credit, on-demand bonds, and the "fraud exception"
    • United Kingdom
    • JD Supra United Kingdom
    • 6 December 2014
    ...[1] [2014] UKPC 31. [2] See RD Harbottle (Mercantile) Ltd. v. National Westminster Bank [1978] QB 146. [3] (1941) NYS 2d 631. [4] [1978] QB 159. [5] [1984] 1 Lloyd's Rep 251. [6] See American Cyanamid Co. v. Ethicon Ltd. [1975] AC 396. [7] [1985] 2 Lloyd's Rep 554. [8] The fact that the ban......
  • On Demand Bonds: A Strategic Retreat?
    • United Kingdom
    • Mondaq UK
    • 21 August 2015
    ...5th Edition, 2008, Chapter 16 - 001, page 575 As per Lord Denning in Edward Owen Engineering Limited -v- Barclays Bank International [1978] 1 All ER 976 (CA) See for example Raymond Construction Pte Ltd v Low Yang Tong [1996] SGHC 136, in which Lai Kew Chai J stated that the "concept of 'un......
  • Demand Bonds - A Pound Of Flesh
    • South Africa
    • Mondaq Southafrica
    • 14 November 2007
    ...CC v Nedbank Limited and Another 1996 (1) SA 812 (AD) and Edward Owen Engineering Limited v Barclays Bank International Limited [1978] 1 All ER 976 CA at 171 Hudson's Building and Engineering Contracts - 11th Edition by I N Duncan Wallis para 17.056. Vereins-Und Wesbank AG v Veren Investmen......
  • A Yellow Book Tale: Termination, Letters Of Credit And A Question Of Fraud
    • United Kingdom
    • Mondaq UK
    • 27 February 2017
    ...Tottel Publishing, Fourth Edition, 2009, chapter 12.13, page 341. Edward Owen Engineering Ltd v Barclays Bank International [1978] 1 All ER 976 Mr David Foxton QC. [2016] EWHC 607 (TCC). See paragraph 25 of Lord Justice Longmore's judgment in National Infrastructure Development Company Limi......
14 books & journal articles
  • RESTRAINING A CALL ON A PERFORMANCE BOND: SHOULD ‘FRAUD OR UNCONSCIONABILITY’ BE THE NEW ORTHODOXY?
    • Singapore
    • Singapore Academy of Law Journal No. 2000, December 2000
    • 1 December 2000
    ...Ltd v Notis Shipping Corp [1981] 2 Lloyd’s Rep 256, at 257; Edward Owen (Engineering) Ltd v Barclays Bank International Ltd and Anor[1978] 1 QB 159, at 169; RD Harbottle Mercantile Ltd v National Westminster Bank Ltd[1978] 1 QB 146, at 155; Malaysia Overseas Investment Corp Sdn Bhd v Sri Se......
  • Security for performance
    • United Kingdom
    • Construction Law. Volume II - Third Edition
    • 13 April 2020
    ...see, eg, Gulf Bank KSC v Mitsubishi Heavy Industries Ltd (No 2) [1994] 2 Lloyd’s rep 145. 158 In Edward Owen Ltd v Barclays Bank [1978] 1 QB 159, the English Court of appeal treated a performance guarantee as being analogous to a letter of credit as to the circumstances in which payment was......
  • Legal basis for the fraud exception in letters of credit under English Law
    • United Kingdom
    • Journal of Financial Crime No. 30-2, February 2023
    • 4 March 2020
    ...Oil SA v. Chase Manhattan Bank[1984] 1 Lloyd’s Rep. 251 at 257, see also EdwardOwen Engineering Ltd v. Barclays Bank International Ltd [1978] Q.B. 159 at 173, see also DeutscheRuckversicherung AG v. Walbrook Insurance Co Ltd [1994] 4 All ER 181.Fraudexception inletters of credit599 28. 3M C......
  • Building and Construction Law
    • Singapore
    • Singapore Academy of Law Annual Review No. 2010, December 2010
    • 1 December 2010
    ...of the law in Singapore from the English position as laid down in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 (‘Edward Owen’) that fraud is the only ground for restraining a call on a performance bond. Chan CJ considered that the English position was influenc......
  • Request a trial to view additional results

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