By KATIE LISZKA
IN Gulf Construction’s June 2011 issue, I looked at two cases where the courts (one in Dubai and the other in England) had prevented calls on what on their face appeared to be “on-demand” bonds, on the basis of the provisions in the underlying construction and engineering contracts.

The effect of the courts’ decisions was that “on-demand” bonds may not be able to be called on demand if there are restrictions on making a call in the underlying contracts. This article again looks at circumstances outside the terms and conditions of the bond itself, which may delay, make difficult or make impossible a call on an “on-demand” bond. The focus of this article is the requirements of the issuing entity in light of experience of the practice in Dubai.

Issuing entities are, of course, concerned with the potential for fraud and ensuring that any claim on a bond is made legitimately and by the correct beneficiary. In order to deal with these concerns, issuing entities often request two things, which may not be apparent from the bond itself: the production of the originals of the bond and any amendments to it; and the verification of the signatories to the demand by the beneficiary’s bankers. Both these requirements may seem to be reasonable requests, but in practice they can cause problems.

Original documents

In a perfect world, all original documents would be kept safe and sound and there would be no issue with the requirement to produce the original of the bond and any amendments. In reality, however, documents do get lost or misplaced, particularly in large organisations. If all that is required of the issuing entity by the beneficiary of a bond is to release the bond, there will not usually be a problem in doing this without the originals. It should also not be too problematic to get replacements of the originals if the principal (who will be the contractor in an engineering and construction contract context) consents.

However, it may be that it has only come to light that the originals have been misplaced or lost when the beneficiary is considering enforcing its security. At that stage, if there is a dispute, it may be undesirable or impractical to get the consent of the principal, as to approach the latter would probably highlight that a call is about to be made.

In these circumstances, a dialogue will need to take place between the beneficiary and the issuing entity to see whether there is anything else that can be provided by the beneficiary in place of the originals. This dialogue will, of course, take time and may allow the principal, depending on the governing law and jurisdiction, the opportunity to challenge a legitimate call and possibly seek some kind of interim relief to prevent the call without the consideration of the court.

Verification

Verification of signatories is simply the bank’s confirmation of the identity and signature of an authorised signatory. This requirement does not seem particularly onerous, but again it is not something that is usually set out as a requirement in the on-demand bond itself. This means that a beneficiary may make what it thinks to be a compliant call, only to find itself in the situation where the issuing entity requires some further documentation before it will process the demand and release the monies to the beneficiary.

The process of verification requires documentation to be prepared, then sent to and signed by the beneficiary’s bankers. This process takes time. It is advisable to contact the bank first to explain the situation and ascertain what is required to allow the verification request to be processed quickly without any queries being raised by the bank. It may be that the bank itself has its own requirements as to documentation required to be presented in order to verify signatures. Any such requirements should be checked to avoid further delay.

For the beneficiary, there may also be considerations around delegated authorities and who is authorised to act on its behalf. For example, for a corporate entity, it may be that the signatories for the purposes of banking transactions (whose signatures the bank will be able to verify) are not the same people as those who are able to bind the company and make the call on the bond.

Conclusion

A beneficiary of an “on-demand” bond may think that in order to make a call on its bond, all that it is required to do is send a demand letter. This assumption may be correct when looking only at the terms of the bond. But in practice, there may be other reasons why just sending a demand letter may not allow a successful call. The issuer of the bond is likely to have its own internal procedures to comply with before it is able to process any demand. Regardless of whether the requirements of the issuer are strictly necessary under the terms and conditions of the bond, from a practical perspective, it is wise to comply with them in order that any demand will be processed as quickly as possible.

Clients should be aware of issuers’ typical requirements and, to the extent possible, have satisfied these when making the original demand to prevent any delay in a call being processed. Any delay in processing a call and getting the monies released may diminish the protection afforded by an on-demand bond and give the principal the chance to challenge a legitimate demand. The requirements of the issuing entity are yet another way (in addition to any restrictions in the underlying engineering and construction contract) in which, in practice, “on demand” does not mean on demand.

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