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A recent case heard in the TCC[1] has highlighted the risks to contracting parties where contract terms are unclear and do not reflect the requirements of the current project. While the case was fact specific and did not involve any new law, the judgment makes clear the dangers of parties entering into a contract which contains inconsistent provisions which the parties do not themselves understand. It also clarifies the requirements for making a valid claim under an on demand bond.

The case concerned an on demand bond provided by the contractor to guarantee the performance of its contractual obligations and its insolvency. The contractor failed to pay liquidated damages for which it was liable and subsequently the employer demanded payment under the bond.

When a party makes a claim under an on demand bond it must ensure that it complies with any formal requirements contained within that document. Failure to do so can render a claim invalid.

In this case the bond issuer argued that the employer had failed to follow the requirements for making a valid claim under the bond. However, it was found that the formal requirements for making a claim under this bond were far from clear as the bond included several provisions which were ‘virtually incoherent‘ when the document was viewed as a whole. As a result, it was decided that the employer’s demand was valid and the court granted summary judgment in favour of the employer.

A key issue in this case was that the bond contained two contradictory provisions which went to the heart of the dispute. Neither party could explain the presence of the contradictory provisions in the bond apart from by suggesting that one of the paragraphs may be an ‘historical throwback’. The court held that one of the paragraphs should not have been included in the bond at all as it was not relevant for an on demand instrument.

The court accepted that the inclusion of such ‘historical throwbacks’ in contractual documents would not be unique and this case serves as a reminder that contracts should always reflect the requirements of a particular project and it should not be assumed that provisions used on a previous project will be suitable for use in later developments. It is also important that the employer understands the nature of security documents and how to make valid claims under them to ensure that the document provides the security that is required. Ideally, an on demand bond should attach a form of demand to be used to avoid any ambiguity over how a claim should be made.

For more information, email blogs@gateleyplc.com.

[1] Lukoil Mid-East Ltd v Barclays Bank plc [2016] EWHC 166 (TCC)


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.