the law applicable to demand guarantees and...

The law applicable to demand guarantees andcounter-guaranteesEnonchong, Nelson

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Citation for published version (Harvard):Enonchong, N 2015, 'The law applicable to demand guarantees and counter-guarantees' Lloyd's Maritime &Commercial Law Quarterly, pp. 194-215.

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194

The law applicable to demand guarantees and counter-guarantees

Nelson Enonchong*

This article examines the choice-of-law rules in Art.4 of the EEC Convention of 19 June 1980 on the law applicable to contractual obligations (Rome Convention) and Art.4(1) and (3) of Regulation (EC) No 593/2008 of 17 June 2008 on the same subject (Rome I Regulation), in the context of demand guarantees and counter-guarantees. The paper argues that the relationship between the instructing bank (counter-guarantor) and the issuing bank (guarantor) should be analysed as a single contract, made up of both the instructions and the counter-guarantee, rather than as two separate contracts. It is contended that this one-contract analysis is preferable to the two-contract approach, since, inter alia, it allows the court, in applying the Rome Convention, Art.4(2) or the Rome I Regulation, Art.4(1)(b) to reach a satisfactory choice of law outcome in the fi rst stage, thereby obviating the need to embark on a more time-consuming second stage by resorting to the Rome

Convention, Art.4(5) or the Rome I Regulation, Art.4(3).

I . INTRODUCTION

It has been said that in private international law the problem of ascertaining the applicable law “is more perplexing in the case of contracts than in almost any other area”. 1 In a demand guarantee transaction, which normally involves a number of interconnected but autonomous contracts, 2 there is perhaps an added complication. In the absence of express choice of law by the parties, the court may be faced with the issue of whether and to

* Barber Professor of Law, University of Birmingham; Barrister. Earlier versions of this paper were presented at a conference on Understanding Demand Guarantees organised by the International Chamber of Commerce United Kingdom (ICC UK) in London in May 2010 and at a Banking Law conference in Johannesburg organised by the Centre for Banking Law, University of Johannesburg, in May 2014. I am indebted to Professor Charl Hugo for his kind hospitality. I am grateful to the anonymous referees for their helpful comments. Any remaining errors are mine.

The following abbreviations are used: Dicey, Morris & Collins : Lord Collins (ed.), Dicey, Morris & Collins: The Confl ict of Laws , 15th edn (Sweet

& Maxwell, London, 2012); ECJ: Court of Justice of the European Communities (1952–2009); Court of Justice of the European Union

(2009– ); Giuliano & Lagarde Report: M Giuliano and P Lagarde, Report on the Convention on the law applicable to

contractual obligations [1980] OJ C282/17; URDG: ICC Uniform Rules for Demand Guarantees. 1 . J Fawcett & J Carruthers (eds), Cheshire, North & Fawcett: Private International Law , 14th edn (Oxford,

2008), 665. 2 . See the discussion on the chain of contracts in a demand guarantees transaction in Part II below.

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THE LAW APPLICABLE TO DEMAND GUARANTEES 195

what extent the determination of the law applicable to one contract is affected by the law that applies to a related but independent contract. The answer depends of course on the choice-of-law rules of the forum. In the United Kingdom and other Member States of the European Union those rules have undergone important changes within the last three decades. The current rules are contained in Regulation (EC) No 593/2008 of 17 June 2008 3 on the law applicable to contractual obligations (the “Rome I Regulation”), 4 which applies to contracts concluded as from 17 December 2009. 5 The Rome I Regulation replaces the EEC Convention of 19 June 1980 on the law applicable to contractual obligations (the “Rome Convention”), 6 which now applies only to contracts concluded between 1 April 1991 and 16 December 2009. 7 National choice-of-law rules applied to contracts concluded before 1 April 1991. 8

As we await the fi rst decisions applying the Rome I Regulation to demand guarantees and counter-guarantees, this article argues that a demand guarantee should be classifi ed as a contract for the “provision of services” within the Rome I Regulation, Art.4(1)(b) and that the issuing bank should be regarded as the party providing the services. Consequently, in the absence of a choice of law, the law that governs a demand guarantee should be the law of the place where the issuing bank has its habitual residence. 9 The paper also advances the argument that, contrary to the conventional view, a counter-guarantee is not a contract independent of the instructions or mandate in respect of which it is given, although it is independent of the demand guarantee, the underlying contract and the contract between the account party and the counter-guarantor. The contention is that the contract between the instructing bank (counter-guarantor) and the issuing bank (guarantor) should not be analysed as two separate and independent contracts, but rather as a single contract comprising both the instructions and the counter-guarantee. On this basis, the paper advances the view that, in the contract between the counter-guarantor and the issuing bank, the characteristic performer is the issuing bank and therefore the law that governs a counter-guarantee under the Rome Convention, Art.4(2) should be the law of the place where the issuing bank has its principal place of business, 10 rather than the law of the country where the counter-guarantor has its principal place of business. On the same basis

3 . [2008] OJ L177/6. 4 . The Rome I Regulation applies to all EU Member States except Denmark. It also applies in the case

of confl icts between the laws of different parts of the UK. See the Law Applicable to Contractual Obligations (England and Wales and Northern Ireland Regulations 2009 (SI 2009/3064), reg.5 of the Law Applicable to Contractual Obligations (Scotland) Regulations 2009 (SSI 2009/410), reg.4.

5 . Art.28, as amended by corrigendum [2009] OJ L307/87. 6 . [1980] OJ L266. Implemented in the UK by the Contracts (Applicable Law) Act 1990. 7 . By the Contracts (Applicable Law) Act 1990, s.4A, the Act does not apply where the Rome I Regulation

applies. The courts are still dealing with disputes relating to contracts falling within the temporal scope of the Rome Convention: eg Sax v Tchernoy [2014] EWHC 795 (Comm). See, in France, Cass. Com 18 June 2013 no. 11-27.132: JDI 2014, p.858, note Pellegrini.

8 . It is unlikely that today a court will have to determine a dispute about a demand guarantee or counter-guarantee issued before 1 April 1991. However, see eg Habib Bank Ltd v Central Bank of Sudan [2006] EWHC 1767 (Comm); [2007] 1 WLR 470; [2006] 2 Lloyd’s Rep 412, where the decision in 2006 was in respect of two letters of credit issued in 1982.

9 . As defi ned in Art.19. 10 . Or the country where the issuing bank has another place of business, where under the terms of the contract

the performance is to be carried out through that other place of place of business.

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196 LLOYD’S MARITIME AND COMMERCIAL LAW QUARTERLY

the paper contends that a counter-guarantee should be regarded as part of a contract for the provision of services within the Rome I Regulation, Art.4(1)(b) and that the issuing bank, rather than the instructing bank, should be regarded as the party providing the services, with the result that the law that governs a counter-guarantee under Art.4(1)(b) is the law of the country where the issuing bank has its habitual residence.

After a brief explanation of the chain of contracts in a demand guarantee transaction in Part II, the choice-of-law rules in the context of demand guarantees are examined in Part III. Part IV questions the way the choice-of-law rules have been applied in the context of counter-guarantees and suggests an alternative approach under the Rome Convention, Art.4(2) and the Rome I Regulation, Art.4(1)(b). The conclusions are stated in Part V.

II . THE CHAIN OF CONTRACTS IN A DEMAND GUARANTEE TRANSACTION

A demand guarantee (also known as a demand bond) is a contractual undertaking by a person (the “issuer” or “guarantor”) to make payment of, or up to, a specifi ed amount to another person (the “benefi ciary”) usually upon demand by the benefi ciary. 11 It is usually given at the request of a third person, (the “applicant” or “account party”) who has a commercial transaction 12 with the benefi ciary. Demand guarantees are, as Carnwath LJ observed in Marubeni Hong Kong and South China Ltd v Government of Mongolia , 13 “a specialised form of irrevocable instrument, developed by the banking world for its commercial customers. They have been accepted by the courts as the equivalent of irrevocable letters of credit”.

Where a demand guarantee is issued in the context of an international transaction, there will normally be a chain of contractual relationships involving two or more banks. In the ordinary case, there are four such relationships. First, there is the underlying commercial contract, such as a contract for the international sale of goods, between the importer, the benefi ciary of the demand guarantee, and the exporter, the account party on whose behalf the demand guarantee is issued. It is the underlying commercial contract that requires the account party to arrange for a demand guarantee, usually in the form of a performance bond, 14 to be issued for the benefi t of the benefi ciary. Secondly, to comply with that contractual obligation, the account party enters into a contract with a bank (the instructing bank), usually in the account party’s own country, whereby the account party requests the instructing bank to arrange for another bank in the benefi ciary’s country (the issuing bank) to issue the demand guarantee for the benefi t of the benefi ciary. In consideration

11 . N Enonchong, The Independence Principle of Letters of Credit and Demand Guarantees (OUP, Oxford, 2011), 29.

12 . Such as a contract for the international sale of goods or a construction contract. 13 . [2005] EWCA Civ 395; [2005] 1 WLR 2497; [2005 2 Lloyd’s Rep 231, [23]. 14 . Apart from the performance bond or guarantee, there are various types of demand guarantees, such

as advance payment guarantees, bid or tender guarantees, retention guarantees, maintenance guarantees and restoration guarantees.

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of the instructing bank's complying with the account party’s request, the account party gives the instructing bank a counter-guarantee to secure the account party’s liability to the instructing bank under the contract. 15 The third contractual relationship is between the instructing bank and the issuing bank under which the instructing bank requests the issuing bank to issue a demand guarantee, on the responsibility of the instructing bank, 16 to the benefi ciary. In consideration of the issuing bank issuing the demand guarantee as instructed, the instructing bank gives the issuing bank a counter-guarantee, to secure the instructing bank’s liability to the issuing bank. 17 Finally, when the issuing bank issues the demand guarantee to the benefi ciary, there is a contract between the issuing bank and the benefi ciary. 18 Under this contract the issuing bank is bound to make payment to the benefi ciary if the benefi ciary makes a complying demand for payment. 19

It is generally accepted that a demand guarantee is independent of the other contracts in the chain of interconnected contracts, including the underlying commercial contract between the benefi ciary and the account party, the contract between the account party and the instructing bank and the contract between the instructing bank and the issuing bank. 20 It is also accepted that the counter-guarantee is by nature independent of the demand guarantee, the underlying commercial contract, and the contract between the account party and the instructing bank. 21 However, as will be shown below, in the application of choice-of-law rules at common law, whereas the English courts ascertain the law applicable to a demand guarantee independently of the law applicable to any other contract in the transaction, in the case of a counter-guarantee, in the absence of an express choice of law, the courts have been quick to fi nd that the parties tacitly intended that the law applicable to the demand guarantee was also the law applicable to the counter-guarantee and, in

15 . Eg Edward Owen Engineering Ltd v Barclays Bank International [1978] 1 QB 159; Gulf Bank KSC v Mitsubishi Heavy Industries Ltd (No 2) [1994] 2 Lloyd’s Rep 145; Wahda Bank v Arab Bank [1996] 1 Lloyd’s Rep 470.

16 . When giving instructions and a counter-guarantee to the issuing bank, the instructing bank acts as a principal, rather than as an agent of the account party. The instructing bank’s liability on its counter-guarantee is therefore independent of the contract between the instructing bank and the account party.

17 . In some cases there will be one or more banks between the account party’s bank and the issuing bank, thus creating further contractual relationships in the chain of contracts. See eg Esal (Commodities) Ltd v Oriental Credit Ltd and Wells Fargo Bank NA [1985] 2 Lloyd’s Rep 546; United Trading Corp SA v Allied Arab Bank [1985] 2 Lloyd’s Rep 554; British Arab Commercial Bank Plc v Bank of Communications [2011] EWHC 281 (Comm); [2011] 1 Lloyd’s Rep 664.

18 . United Trading Corp SA v Allied Arab Bank [1985] 2 Lloyd’s Rep 554, 559. 19 . If the issuing bank refuses to pay, the benefi ciary is entitled to summary judgment against the bank: Enka

Insaat Ve Sanayi AS v Banca Popolare Dell’Alto Adige Spa [2009] EWHC 2410 (Comm). 20 . See eg UN Convention on Independent Guarantees and Standby Letters of Credit, Art.3; URDG 758,

Art.5(a); Edward Owen Engineering Ltd v Barclays Bank International [1978] 1 QB 159, 171. See gen. Enonchong, The Independence Principle of Letters of Credit and Demand Guarantees (2011), ch.4.

21 . Eg URDG 758, Art.5(b). In England, Edward Owen Engineering Ltd v Barclays Bank International [1978] 1 QB 159; British Arab Commercial Bank Plc v Bank of Communications [2011] 1 Lloyd’s Rep 664. In France, see Société Les Serres Fleuries v Caisse Nationale de Crédit Agricole , Com. 12 December 1984, JCP 1985.II 20436; Omnium Technique des Transports par pipe-lines v Banque de Paris et des Pays-Bas , Com 27 November 1984, D. 1985, Jurisp. 270; Banque Mellat et Banque Markazi Iran v Banque de Paris et des Pays-Bas , Com, 5 February 1985, D. Jurisp., 272; Banque de gestion privée v Arab Bank , Com. 27 February 1990, D. 1990 Somm. 213; Banque libanaise pour le commerce v Crédit Lyonnais , Paris 13 February 1987, D. 1987.1. 172; Arab Bank Ltd v Soc Spie Batignolles , Paris 13 October 1988, D. 1990 Somm. 211.

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the absence of choice (whether express or implied), the courts have held that the law applicable to the demand guarantee was also the law applicable to the counter-guarantee on the basis of the close connection between the two contracts. It is recognised that the courts have been driven to this position by a desire to avoid a multiplicity of applicable laws, which would occur if one law applied to the demand guarantee and a different law applied to the counter-guarantee. However, it will be argued in this paper that, although it may be desirable for one law to apply to both contracts, that result can be arrived at under the provisions of the Rome Convention and also the Rome I Regulation without the need for the courts to follow the common law approach.

III . THE LAW APPLICABLE TO DEMAND GUARANTEES

1. Where there is a choice of law

There is little diffi culty where the parties have chosen the applicable law. Party autonomy is much valued under the common law, the Rome Convention and the Rome I Regulation. 22 Thus, where a demand guarantee contains a clause by which the parties have expressly selected the law that governs the guarantee, 23 the courts normally give effect to it, 24 subject to the usual exceptions. 25 In a case where the guarantee itself does not contain a choice of law clause, if it is subject to the ICC Uniform Rules for Demand Guarantees (the current, 2010, edition of which is referred to as URDG 758), then Art.34(a) may be regarded as an express choice by the parties. 26 It provides that, unless otherwise agreed by the parties, the governing law of a demand guarantee shall be that of the location of the guarantor’s branch or offi ce that issued the guarantee.

In the absence of an express choice of law by the parties, the court may fi nd an implied or inferred choice. Under the Rome Convention, Art.3(1), the inferred choice must be “demonstrated with reasonable certainty” by the terms of the contract or the circumstances of the case and under the Rome I Regulation, Art.3(1) choice must be “clearly” demonstrated. In determining whether there is an implied choice in a Rome I Regulation case, the fact that there is a clause in the demand guarantee giving exclusive jurisdiction to the courts of a Regulation State is one of the factors to be taken into account. 27 The position is similar in a Rome Convention case. 28 However, it should not be inferred that the parties intended that the law that governs the underlying contract is the law that also governs the

22 . See eg the Rome I Regulation, Recital (11), which states that the parties’ freedom to choose the applicable law is “one of the cornerstones of the system of confl ict-of-law rules in matters of contractual obligations”.

23 . Eg Uzinterimpex JSC v Standard Bank P [2007] EWHC 1151 (Comm); [2007] 2 Lloyd’s Rep 187, where an advance payment guarantee contained an express choice of law clause.

24 . Rome Convention, Art.3(1); Rome I Regulation, Art.3(1). 25 . Such as public policy of the forum, overriding mandatory laws of a third state and the European

Community: see eg Rome Convention, Arts 16, 3(3), 7(2); Rome I Regulation, Arts 21, 3(3) and (3) and 9. At common law the courts did not give effect to the parties’ choice of law if it was not bona fi de, legal and if it was contrary to public policy: Vita Foods Product v Unus Shipping Co. Ltd [1939] AC 277.

26 . Rome I Regulation, Recital (13). 27 . Recital (12). 28 . Giuliano & Lagarde Report, 17.

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29 . Broken Hill Pty Co Ltd v Xenakis [1982] 2 Lloyd’s Rep 304. 30 . Wahda Bank v Arab Bank [1996] 1 Lloyd’s Rep 470, 472. 31 . Attock Cement Co Ltd v Romanian Bank for Foreign Trade [1989] 1 WLR 1147. 32 . [1989] 1 WLR 1147; [1989] 1 Lloyd’s Rep 572. 33 . [1989] 1 WLR 1147, 1159. 34 . Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd [2001] EWCA Civ 2019;

[2002] CLC 533, [37].

demand guarantee, even in a case where there is an express choice of law clause in the underlying contract. Since a demand guarantee is independent of the underlying contract, the law applicable to that contract has no effect in demonstrating what choice of law, if any, the parties to the demand guarantee have made.

2. Where there is no choice

At common law the independence of a demand guarantee was maintained even in cases where the applicable law had to be determined in the absence of choice. It is likely that the common law approach will be adopted in cases decided under the Rome Convention and the Rome I Regulation.

(a) Common law

In the case of a suretyship guarantee, in the absence of choice of law, the law that governed the guarantee was the law that governed the underlying contract. 29 This was based on the doctrine of “infection”, to the effect that the close connection between the two contracts made it necessary for the two to be governed by the same law. 30 However, in the case of a demand guarantee, determination of its proper law was not affected by the governing law of the underlying contract, since a demand guarantee is independent of it. At common law a demand guarantee was governed by its own independent proper law, which was the law of the place where the guarantee payment was to be made. 31 In Attock Cement Co Ltd v Romanian Bank for Foreign Trade 32 the underlying construction contract contained an express choice of law clause but the performance bond issued in respect of the contract did not provide for the applicable law. The Court of Appeal rejected a contention that the performance bond was governed by the law that governed the underlying contract. Staughton LJ observed that: 33

“ Almost every letter of credit or performance bond is issued pursuant to some underlying commercial transaction. Yet we were referred to no case where it had even been argued that one was affected by the proper law of the other. Seeing that the letter of credit or performance bond is intended to be a separate transaction, I would hold that it is not so affected, and is ordinarily governed by the law of the place where payment is to be made under it.”

(b) Rome Convention

The English courts have adopted a two-stage approach to the application of the Rome Convention, Art.4. 34 In the fi rst stage, the court applies the presumption in Art.4(2). If

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necessary the court proceeds to the second stage under Art.4(5) to consider whether there are factors that justify disregarding the presumption on the basis that the contract is more closely connected with a different law. Under Art.4(2) a contract is governed by the law of the country where the party who is to effect the performance which is characteristic of the contract has its principal place of business. 35 The “characteristic performance” is usually the performance for which payment is due, such as the delivery of goods or the provision of services. In the case of a suretyship guarantee the characteristic performance is the payment of money by the guarantor 36 and therefore the applicable law is the law of the place where the guarantor is located. 37 Similarly, in the case of a demand guarantee, the characteristic performance is the payment of money by the guarantor, the issuing bank. Therefore, under Art.4(2), the law applicable to a demand guarantee is the law of the country where the issuing bank’s principal place of business is located or, where under the terms of the guarantee the bank’s performance is to be carried out by another branch, the country where that branch is located.

If a court arrives at that result under Art.4(2), would the court seek to disregard it pursuant to Art.4(5), on the ground that the demand guarantee is more closely connected with the law of another country? It is well known that the question of the weight that should be given to the presumption in Art.4(2) or the strength to be attached to the connecting factors that are taken into account in determining whether the presumption should be disregarded has been one of much controversy. 38 Some courts took the view that the presumption was not a strong one, and so could be displaced whenever there was another country that was more closely connected to the contract. 39 Others took the contrary view that the presumption was a strong one, and could be disregarded only if, in the special circumstances of the case, the place of business of the party who was to effect the characteristic performance had no real signifi cance as a connecting factor. 40 However, in ICF (Intercontainer Interfrigo) SC v Balkenende Oosthuizen BV , 41 the ECJ settled the controversy by rejecting the view that the presumption was to be displaced only where the connecting factors applied by the

35 . Or, where under the terms of the contract the performance is to be carried out through another place of business, the country in which that other place of business is situated.

36 . Giuliano & Lagarde Report, 20. 37 . Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd [2002] CLC 533, [38];

Emeraldian Limited Partnership v Wellmix Shipping Ltd [2010] EWHC 1411 (Comm); [2011] 1 Lloyd’s Rep 301; [2010] 1 CLC 993, [171].

38 . See eg G Cuniberti, “L’incertitude du lieu d’exécution sur la loi applicable au contrat. La diffi cile cohabitation des articles 4-2 et 4-5 de la Convention de Rome du 19 juin 1980”, JCP G 2003, I, 153.

39 . Eg Crédit Lyonnais v New Hampshire Insurance Co [1997] 2 Lloyd’s Rep 1, 5, describing the presumption as “very weak”. See also Ennstone Building Products Ltd v Stanger Ltd [2002] EWCA Civ 916; [2002] 1 WLR 3059.

40 . Eg Caledonia Subsea Ltd v Microperi Srl 2002 SLT 1022, [41], following the approach of the Dutch Supreme Court in Société Nouvelle des Papeteries de L’Aa v Machinefabrik BOA , Hoge Raad, 25 September 1992, NJ No 750, noted THD Strucyken [1997] LMCLQ 18. For a mild version of this view see Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd [2002] CLC 533, [41], stating that the presumption should be regarded as “a rule of thumb” to be displaced only where “a preponderance of contrary connecting factors” is established. See also Ennstone Building Products Ltd v Stanger Ltd [2002] EWCA Civ 916; [2002] 1 WLR 3059, [41], per Keene LJ; PT Pan Indonesia Bank Ltd TBK v Marconi Communications International Ltd [2005] EWCA Civ 422; [2007] 2 Lloyd’s Rep 72, [44], per Potter LJ.

41 . (Case C-133/08) [2009] ECR I-9687; [2010] QB 411.

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presumption (place of residence or business of characteristic performer) did not have any genuine connecting value. Instead the court held that the presumption is to be displaced where it is clear from the circumstances as a whole that the contract is more closely connected with a country other than that identifi ed by applying Art.4(2). 42 It is submitted that, in the case of a demand guarantee, in most cases the court will not need to disregard the law identifi ed under Art.4(2), since that is the law with which the demand guarantee is most closely connected, as it is not only the law of the country where the guarantor is located but is also likely to be the law of the country where the benefi ciary has his habitual residence. Is the result likely to be different under the Rome I Regulation?

(c) Rome I Regulation

In the absence of choice, Recital (19) states that the applicable law should be determined in accordance with the choice-of-law rule specifi ed for the particular type of contract. Article 4(1) provides the specifi c choice-of-law rule for each particular type of contract (Art.4(1)(a)–(h). 43 Of these the particular category under which a demand guarantee is most likely to fall is that in sub-paragraph (b). It states that a “contract for the provision of services” shall be governed by the law of the country where the service provider has his habitual residence. The question is whether a demand guarantee can be categorised as a contract for the provision of services within Art.4(1)(b).

Is a demand guarantee a contract for the provision of services?

It is not clear whether a demand guarantee will be regarded as a contract for the provision of services within Art.4(1)(b). The Rome I Regulation does not defi ne the concept of “provision of services” and there is as yet no decision of the ECJ, which provides a defi nition of the “provision of services” in Art.4(1)(b). One view is that, although a demand guarantee may be classifi ed as a contract for the provision of payment services within Art.4(1(b), it is “more likely” to be regarded as a contract other than one for the provision of services. 44 However, it is submitted that in the light of the decisions of the ECJ in relation to Art.5(1)(b) of the Brussels I Regulation, 45 a demand guarantee should be regarded as a contract for the provision of services and that the guarantor, the issuing bank, is the party providing the services.

It is trite that in the absence of a decision of the ECJ on Art.4(1)(b), guidance is to be sought from decisions of that court interpreting the concept of “provision of services” in the Brussels I Regulation, Art.5(1)(b). Recital (7) of the preamble to the Rome I Regulation tells us that provisions of the Rome I Regulation should be consistent with the Brussels I Regulation; 46 and the Rome I Regulation, Recital (17) more specifi cally states that the

42 . Ibid , [64]. 43 . Where a particular contract does not fall within the list in Art.4(1), the basic choice-of-law rule in Art.4(2)

applies. 44 . Dicey, Morris & Collins , [33.318]. 45 . Council Regulation (EC) No 44/2001 of 22 December 2000, on jurisdiction and the recognition and

enforcement of judgments in civil and commercial matters (OJ 2001 L12/1). 46 . See eg Koelzsch v Grand Duchy of Luxembourg (Case C-29/10) [2011] ECR I-1595; [2012] QB 210.

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concept of “provision of services” in Art.4(1)(b) should be interpreted in the same way as it is interpreted under the Brussels I Regulation, Art.5. How then has the ECJ interpreted the “provision of services” in Art.5(1)(b)? In Car Trim GmbH v KeySafety Systems Srl , 47 the ECJ stated that, in order to classify a contract as one for the provision of services or for the sale of goods within the Brussels I Regulation, Art.5(1)(b), the classifi cation must be based on obligations which characterise the contract in question. In Falco Privatstiftung v Weller-Lindhorst , 48 the ECJ held that “the concept of service implies, at the least, that the party who provides the service, carries out a particular activity in return for remuneration”. 49 More recently, in Corman-Collins SA v La Maison du Whisky SA , 50 the ECJ clarifi ed that the fi rst criterion set out in the Falco case, namely the existence of an activity, requires the performance of positive acts, rather than mere omissions, 51 and that the second criterion, namely the remuneration paid as consideration for an activity, is not to be understood strictly as payment of a sum of money. 52 It is suffi cient if the advantages gained by the party performing the activity represent an economic value that may be regarded as constituting remuneration. 53

It is submitted that a demand guarantee satisfi es the two criteria in the defi nition of the “provision of services” laid down in decisions of the ECJ. First, one party, the issuing bank, carries out a number of activities which involve the performance of positive acts. It receives the benefi ciary’s demand for payment, examines it to ensure that it complies with the terms of the demand guarantee 54 and, if the demand is compliant, it makes payment to the benefi ciary. 55 Secondly, the issuing bank performs these acts in return for remuneration in the form of commission. 56 To be sure, the issuing bank’s commission is paid not by the benefi ciary, the other contracting party, but by the instructing bank, which is not a party to the contract. However, it is submitted that it is not a requirement, for a contract to be classifi ed as one for the provision of services, that the remuneration must be provided by the other contracting party. In other words, the remuneration need not move from the other contracting party. 57 Such a requirement accords ill with commercial reality and would be contrary to the broad approach adopted by the ECJ. 58

47 . (Case C-381/08) [2010] ECR I-1255; [2010] Bus LR 1648. 48 . (Case C-533/07) [2009] ECR I-3327; [2010] Bus LR 210. 49 . Ibid , [29]. Followed by the same court in Krejci Lager v Olbrich Transport (Case C-469/12) [2014] CEC

654; [2014] IL Pr 139, [26]. 50 . (Case C-9/12) [2014] QB 431. 51 . Ibid , [38]. 52 . Ibid , [39]. 53 . Ibid , [40]. 54 . For demand guarantees subject to the URDG 758, the issuing bank’s duty of examination is set out in

Art.19. See also the UNCITRAL Convention on Independent Guarantees and Stand-by Letters of Credit, Art.16. 55 . See URDG 758, Art.20(b). 56 . Eg, in Wahda Bank v Arab Bank [1996] 1 Lloyd’s Rep 470, for issuing a performance bond in the amount

of US$9,708,138, the issuing bank’s commission was US$161,000. In Geenland Bank Ltd v American Express Bank Ltd [2009] EWCA Civ 14; [2009] 1 Lloyd’s Rep 307, the amount of the performance bond issued was US$1.5 million and the commission payable was 1% per annum.

57 . As opposed to the position of English law of contract in relation to the requirement of consideration, see eg Thomas v Thomas (1842) 2 QB 851, 859; Tweddle v Atkinson (1861) 1 B & S 393, 398; 121 ER 762.

58 . Especially in the Corman-Collins SA case [2014] QB 431, [39].

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Applicable law under Art.4(1)(b)

If the issuing bank is the party providing the services under a demand guarantee, then, under Art.4(1)(b), the law that governs a demand guarantee is the law of the place where the issuing bank has its habitual residence. The issuing bank’s habitual residence is the place where it has its central administration, or where the guarantee is issued by a bank’s branch, or, if under the terms of the demand guarantee performance is the responsibility of a branch, the place where that branch is located. 59 Since in most cases that will also be the country where the benefi ciary is habitually resident, it is highly unlikely that the court will seek to escape from that result by virtue of Art.4(3).

IV. THE LAW APPLICABLE TO COUNTER-GUARANTEES

1. Where there is a choice

Where there is an express choice of law clause in the counter-guarantee, no diffi culty arises. 60 In the absence of express choice, the court may infer choice. A question that arises here is whether the court should infer that the parties intended that the law that governs the demand guarantee should also govern the counter-guarantee. On this point, it is questionable whether the approach of the courts under the Rome I Regulation and the Rome Convention should necessarily be the same as that at common law.

(a) Implied choice at common law

At common law the approach of the court was to infer that the parties to the counter-guarantee intended that it should be governed by the law that governed the demand guarantee. 61 Thus, in Wahda Bank v Arab Bank , 62 the Court of Appeal held that, although counter-guarantees were autonomous contracts, as they were intimately connected to the performance bonds, the court could infer that the parties to the counter-guarantees intended that they were to be governed by the law that governed the performance bonds. The counter-guarantees in that case were not subject to the URDG but the court was referred to it. Staughton LJ, who delivered the judgment of the court, disagreed with the choice-of-law rule stated in URDG 458, Art.27, which is similar to that in URDG 758, Art.34, because it leads to different and potentially confl icting laws applying to the demand guarantee and the counter-guarantee. He explained that: 63

59 . Art.19. 60 . However, in practice counter-guarantees rarely contain an express choice of law clause. In the case of

a counter-guarantee that is subject to URDG 758, if there is no express choice of law clause in the counter-guarantee itself, Art.34(b) stipulates that the governing law is that of the location of the counter-guarantor’s branch or offi ce that issued the counter-guarantee. The English courts are likely to consider Art.34(b) as an express choice of law clause.

61 . Turkiye IS Bankasi AS v Bank of China [1993] 1 Lloyd’s Rep 132; Wahda Bank v Arab Bank [1996] 1 Lloyd’s Rep 470.

62 . [1996] 1 Lloyd’s Rep 470. 63 . Ibid , 473.

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“A banker who issues a performance bond for a tiny commission will want to ensure that he takes no greater risk than the solvency of the bank putting up his counter guarantee. He will want to ensure that his right of reimbursement is back-to-back the same as his liability; a banker who instructs another bank to issue a performance bond ought to, and in my view would, readily agree to that. Hence it is that in the absence of any express choice I can infer without any doubt that the parties intended the counter-guarantees… to be governed by the same law as governed the guarantees.”

Should the same approach be adopted when applying the Rome Convention, Art.3(1)?

(b) Implied choice under the Rome Convention, Art.3(1)

Under Art.3(1), in the absence of express choice of law, the court can fi nd a choice of law by the parties where this can be “demonstrated with reasonable certainty” by the terms of the contract or the circumstances of the case. 64 Some commentators take the view that the common law approach—to the effect that, in the absence of express choice, the court would usually infer that the parties intended a counter-guarantee to be governed by the law that governed the demand guarantee—should be adopted when applying the Rome Convention, Art.3(1). 65 However, it is submitted that the common law approach should not be applied in a case under the Rome Convention, Art.3(1). First, Art.3(1) is expressed in terms different from the common law. As has been explained, 66 under this provision an inferred choice can be found only where it is reasonably clear that it is a genuine choice of the parties. 67 The Giuliano and Lagarde Report makes clear that the choice must be a “real choice” and that Art.3(1) “does not permit the court to infer a choice of law that the parties might have made where they had no intention of making a choice”. 68 So, as some commentators have remarked, the court is not entitled to impute a choice to the parties. 69 The court should not infer choice on the basis that the counter-guarantor “ought to” have readily agreed to it.

Secondly, in any event, the view that both parties to a counter-guarantee necessarily intend that the law that governs the demand guarantee shall also govern the counter-guarantee is not universal. 70

Thirdly, although it is stated in the Giuliano and Lagarde Report that choice may be inferred from an express choice of law “in related transactions”, this is expressly confi ned

64 . For convenience, this choice (as well as the non-expressed choice within the Rome I Regulation, Art.3(1)) is referred to in this paper as “implied” or “inferred” choice. However, it is not intended that these terms should be understood in the light of the English law concept of implied choice.

65 . Eg Dicey, Morris & Collins , vol.2, [33.304]; M Brindle and R Cox (eds), Law of Bank Payments , 4th edn (Sweet & Maxwell, London, 2010), 874.

66 . Oldendorff v Libera Corp [1996] 1 Lloyd’s Rep 380, 387–388; [1996] CLC 482, 505–506; Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd [2001] EWCA Civ 2019; [2002] CLC 533, [26–27].

67 . The requirement in Art.3(1) that the choice must be demonstrated with “reasonable certainty” has been described by Hamblen J as an “onerous requirement”: Sax v Tchernoy [2014] EWHC 795 (Comm), [132].

68 . Giuliano & Lagarde Report, 17. 69 . C Clarkson and J Hill, The Confl ict of Laws , 4th edn (OUP, Oxford, 2011), 211. 70 . See eg URDG, Art.34, under which, if the parties are in different countries, the demand guarantee will be

governed by the law of one country (issuing bank’s country) and the counter-guarantee will be governed by the law of a different country (counter-guarantor’s country).

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to transactions “between the same parties”. 71 The parties to a demand guarantee are not the same as the parties to the counter-guarantee.

Fourthly, the situation where, for example, in the context of a transaction for fi nancial assistance from a bank, the parties expressly agree in a framework document that the law of a particular country will govern all “agreements to which the bank is a party unless the application of local law is mandatory” should be clearly distinguished. In such a case, in the absence of an express choice in one of the agreements with the bank, for example a guarantee, a court can fi nd that the parties intended the law specifi ed in the framework document to be the governing law of the guarantee, 72 because that is what the parties had expressly agreed. However, the position is different in the ordinary case of a counter-guarantee, since a demand guarantee does not normally contain a similar stipulation in relation to the law applicable to related contracts such as a counter-guarantee.

Fifthly, the view that, in the absence of an express choice, the court should not be quick to infer that the parties to a counter-guarantee intended the governing law to be the law that governs the demand guarantee is supported by the decision in British Arab Commercial Bank v Bank of Communications. 73 In that case the court rejected a submission that there was an implied choice that the counter-guarantee was governed by the law that governed the performance bond because the two contracts were closely connected. Blair J explained that “The existence of a close connection between two contracts is signifi cant, but it does not obviate the need to consider whether the requirements of Art.3(1) are satisfi ed by reference to the terms of the contract and the circumstances of the case”. 74 If the common law approach is not to be followed in a Rome Convention case, should the courts take a different approach in a Rome I Regulation case?

(c) Implied choice under the Rome I Regulation, Art.3(1)

It is submitted the common law approach to implied choice should also not be applied in a Rome I Regulation case, since the terms of Art.3(1) are different from the common law. 75 Under this provision an implied choice of law must be “clearly demonstrated” by the terms of the contract or the circumstances of the case. For the reasons given in the preceding paragraphs in relation to the Rome Convention, Art.3(1), it is unlikely that an implied choice (that the law that governs the demand guarantee is the governing law of the counter-guarantee) will be clearly demonstrated simply on the basis that there is a close connection between the counter-guarantee and the demand guarantee. Although a close connection between two contracts may be relevant as part of the “circumstances of the case”, it is not the only circumstance of the case that the court is required to consider under Art.3(1). 76 If the consequence of not adopting the common law approach is that the court

71 . Giuliano & Lagarde Report, 17. See eg FR Lurssen Werft v Halle [2011] EWCA Civ 587; [2011] 1 Lloyd’s Rep 265, where the commission agreement was closely related to the shipbuilding contracts between the same parties.

72 . European Bank for Reconstruction and Development v Tekoglu [2004] EWHC 846 (Comm). 73 . [2011] EWHC 281 (Comm); [2011] 1 Lloyd’s Rep 664. 74 . Ibid , [30]. 75 . Contra, Dicey, Morris & Collins , [33.304]. 76 . Cf British Arab Commercial Bank Plc v Bank of Communications [2011] EWHC 281 (Comm); [2011] 1

Lloyd’s Rep 664, [30].

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must conclude that there is no choice of law, then the choice-of-law rules applicable in the absence of choice become relevant.

2. Applicable law in the absence of choice

It may be helpful to start with a discussion of the position at common law, since it has infl uenced the approach of the English courts to the application of the Rome Convention, Art.4 and this may in turn cast a long shadow over the application of the Rome I Regulation, Art.4.

(a) Pre-Rome Convention

The approach of the national courts prior to the entry into force of the Rome Convention revealed two main contrasting approaches, each yielding to a particular legal policy. On the one hand, there is the policy in favour of avoiding the counter-guarantee and the demand guarantee being governed by two different and potentially confl icting laws. This policy seeks to ensure that the two contracts are governed by one and the same law so that the liability of the issuing bank under the demand guarantee is matched by its rights under the counter-guarantee. One way of giving effect to this policy is to hold that the law that governs a counter-guarantee is the law that governs the demand guarantee. 77 On the other hand, there is the legal policy in favour of upholding the independence of the counter-guarantee and its applicable law. This policy insists that the law that governs a counter-guarantee should be ascertained independently of the law that governs the demand guarantee. If this policy appears to lack the practical advantages of the policy in favour of a single applicable law, it is driven by a desire to uphold the principle of independence of the counter-guarantee. Whereas the English courts favoured the unity of applicable law, the courts in other jurisdictions, such as France, leaned in favour of the independence of the counter-guarantee and its applicable law.

At common law, in the absence of a choice, the law that governed a counter-guarantee was the law that governed the demand guarantee . 78 The law that governed the demand guarantee was regarded as the law with which a counter-guarantee had its closest connection. 79 However, the common law approach was not universal.

Courts in some other jurisdictions took a different approach and arrived at a different choice-of-law outcome. For example, in Banque Internationale a Luxembourg SA v Yapi ve Kredi Bankasi AA . 80 the Court of Appeal of Luxembourg rejected the view that the law applicable to a counter-guarantee was the law of the place where the issuing bank was

77 . This policy is seen as commercially desirable in that it reduces transaction costs, since the issuing bank would not have to consider the effect of the law of the counter-guarantor’s country before accepting to issue the demand guarantee in return for the counter-guarantee. There is also the additional advantage that, in the event of litigation, costs would be lower because the parties and the court will be concerned with the law of one country rather than the laws of two countries.

78 . Turkiye Is Bankasi AS v Bank of China [1993] 1 Lloyd’s Rep 132. 79 . Ibid , 135–136. 80 . Luxembourg, 16 March 1983, D. 1983 IR, p.299.

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located and therefore the same as the law applicable to the demand guarantee. The Court of Appeal held that, since the demand guarantee was independent, the law applicable to the counter-guarantee was not necessarily that which applied to the demand guarantee. Instead, the counter-guarantee was governed by the law of the place where the counter-guarantor had its habitual residence (in that case, Luxembourg) and which was also the law of the place of conclusion of the contract. A similar approach was later adopted by the Paris Court of Appeal in BNP v Banque Commercial du Rwanda , 81 where it was held that the law applicable to a counter-guarantee given by a French bank to a foreign issuing bank was French law, on the basis, inter alia, that French law was the law of the place where the counter-guarantor was located. Since, on the same reasoning, the law applicable to a demand guarantee was the law of the country where the guarantor (issuing bank) was located, by holding that the law that governed the counter-guarantee was the law of the country where the counter-guarantor was located, the approach of the French courts resulted in different and potentially confl icting laws applying to the demand guarantee and the counter-guarantee. However, the French courts felt compelled to this result by the independence of the counter-guarantee from the demand guarantee. Thus, in Midland Bank v Banque de Paris et des Pays-Bas Belgique Paribas , 82 the Paris Court of Appeal stated that the independence of the counter-guarantee in relation to the demand guarantee rendered untenable the argument advanced by the issuing bank in that case, based on the need for harmony between the foreign law that governed the demand guarantee and the law that should govern the counter-guarantee. The approach of the French courts is in line with the position under URDG 758, Art.34, but should the result be different under the Rome Convention?

( b) Who is the characteristic performer?

In applying the Rome Convention, Art.4(2), the court needs fi rst to identify the party who is to carry out the performance which is characteristic of the counter-guarantee. In the case of a demand guarantee, as indicated above, that party is the guarantor who undertakes to pay under the guarantee. However, in the case of a counter-guarantee it is not entirely clear whether the characteristic performer is the issuing bank, which has been requested by the instructing bank to issue a demand guarantee, or whether it is the instructing bank, which by its counter-guarantee has undertaken to indemnify the issuing bank. It is a point on which commentators are divided, with some expressing the view that the issuing bank is the characteristic performer 83 and others stating that the counter-guarantor is the characteristic performer. 84

81 . Paris 26 July 1985, D. 1986 IR, p.157. 82 . Paris 28 June 1989, D. 1990. Somm. 212. 83 . Eg F Bonelli, “La Convention de Rome du 19 juin 1980 et la loi applicable aux operations bancaires,

RDAI, 1985, 389, 393; J-P Mattout, Droit bancaire international , 3rd edn (Paris, 2004), 224. 84 . Eg D Ben Abderahmane, “Les confl its des lois en matiere de garantie a premiere demande”, CFJE, 1987,

545; M Pelichet, “Garanties bancaires et confl its des lois”, RDAI, 1990, 335, 345.

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For their part, the courts, at least in France and England, appear to be in favour of the view that the counter-guarantor is the characteristic performer. Although the French courts have not directly addressed the issue, it is thought 85 that the position under Art.4(2) of the Rome Convention is the same as that expressed in the pre-Rome Convention cases, discussed above, so that the counter-guarantor is to be regarded as the characteristic performer and the law applicable to the counter-guarantee is the law of the place where the counter-guarantor is located. 86 The idea that the counter-guarantor is the characteristic performer has also gained ground in England. Thus, in British Arab Commercial Bank Plc v Bank of Communications 87 there was no dispute on the point, as both parties took the view, and the judge agreed, that the counter-guarantor, as the guarantor, was the characteristic performer.

However, part of the contention of this paper is that the performance which is characteristic of a counter-guarantee depends on how one views the contractual relationship between the counter-guarantor and the issuing bank. Is the counter-guarantee to be regarded as a self-contained contract separate from and independent of the rest of the contractual relationship between the counter-guarantor (instructing bank) and the issuing bank? Or is it properly to be regarded as one part of a wider contract, between the counter-guarantor and the issuing bank, which includes the instructions or mandate?

One contract or two separate contracts?

This question has not been directly considered by the English courts or by commentators in England. However, it has attracted the attention of German commentators, who have expressed the view that in the relationship between the instructing bank and the issuing bank there are two distinct contracts: the instructions or mandate, on the one hand, and the counter-guarantee, on the other hand. 88 According to this view, the counter-guarantee is separate from and independent of the instructions. Since, on this view, the counter-guarantee is a distinct contract, the counter-guarantor, as guarantor, is regarded as the party who is to effect the performance which is characteristic of that specifi c contract. Consequently, under the Rome Convention, Art.4(2), the law of the country where the counter-guarantor is located should be the law that governs the counter-guarantee. It follows that, in the separate contract arising from the instructions or mandate, the issuing bank will be the party carrying out the performance that is characteristic of that contract and therefore under Art.4(2) the law applicable to the instructions will be the law of the country where the issuing bank is located.

It is recognised that, if indeed there are two separate contracts between the instructing bank and the issuing bank and the counter-guarantee is independent of the instructions or mandate, then the counter-guarantor, as guarantor, is the party carrying out the characteristic performance. However, it is submitted that in the contractual relationship

85 . Eg M Pelichet, “Garanties bancaires et confl its des lois”, RDAI, 1990, 335, 345; J-P Mattout, Droit bancaire international , 3rd edn (Paris, 2004), 224.

86 . M Pelichet, “Garanties bancaires et confl its des lois”, RDAI, 1990, 335, 345. 87 . [2011] EWHC 281 (Comm); [2011] 1 Lloyd’s Rep. 664, [31]. 88 . See R Bertrams, Bank Guarantees in International Trade , 4th edn (Kluwer, The Hague, 2013), 175–176.

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between the instructing bank and the issuing bank there is but one contract (not two) and the contract is made up of both the counter-guarantee and the instructions or mandate in respect of which it is given. In other words, the counter-guarantee is not independent of that contract; it is part of it. This one-contract analysis should be preferred for a number of reasons. First, it is in line with commercial reality and the practice whereby the instructing bank requests the issuing bank to issue the demand guarantee or performance bond “upon our responsibility” 89 or “under our responsibility” 90 and in the terms quoted in the request. The instructing bank’s letter usually then goes on to provide the counter-guarantee to the issuing bank in consideration of the issuing bank issuing the guarantee in accordance with the instructions. 91 So the counter-guarantee is not a free-standing undertaking. It is, as Phillips J pointed out in the Turkiye IS Bankasi case, 92 “coupled with a request” or instructions to issue a demand guarantee or performance bond. 93 In this way, the two parts of the instructing bank’s letter (that is to say, the instructions and the counter-guarantee) are so interdependent that they must be regarded as one contract.

Secondly, in terms of choice of law outcome, the two-contract approach has the disadvantage that it results in two different and potentially confl icting laws applying to the contractual relationship between the instructing bank and the issuing bank. The law of the issuing bank’s country will govern the relationship arising out of the instructions or mandate and the law of the counter-guarantor’s country will govern the counter-guarantee. This is not a very satisfactory outcome. 94 And, although in some cases it may be possible to avoid this outcome by resorting to the escape provision in Art.4(5), this may not be possible in all cases without some artifi cial interpretation of the facts and connecting factors.

Thirdly, the one-contract analysis derives some support from the decision of the Court of Appeal in Esal (Commodities) v Oriental Credit Ltd . 95 The case concerned a contract under which R agreed to sell a quantity of sugar to E, Egyptian buyers. BDC, a bank in Egypt, confi rmed a performance bond for the benefi t of E, in return for a counter-guarantee given by WF, who had instructed BDC. WF had in turn received instructions and a counter-guarantee from OCL, who had received instructions and a counter-guarantee from their customer, R. Pursuant to a decision of a judicial body in Egypt, BDC was required to make payment to the benefi ciary under the bond. BDC claimed summary judgment to enforce its right under the counter-guarantee given by WF and WF also claimed summary

89 . See eg the instructions of the instructing banks in Edward Owen Engineering Ltd v Barclays Bank International [1978] 1 QB 159, 166 and Wahda Bank v Arab Bank [1996] 1 Lloyd’s Rep 470, 472.

90 . The wording in the ICC’s Form of Counter-Guarantee under URDG 758: see ICC Publication No 758, 38. 91 . See eg the counter-guarantees in Turkiye IS Bankasi AS v Bank of China [1993] 1 Lloyd’s Rep 132 and

Wahda Bank v Arab Bank [1996] 1 Lloyd’s Rep 470, 472. The ICC’s Form of Counter-Guarantee under URDG 758 does not contain similar wording, but it requires a statement from the issuer of the demand guarantee stating that it has received a complying demand under the guarantee.

92 . Turkiye IS Bankasi AS v Bank of China [1993] 1 Lloyd’s Rep 132, 135. 93 . This is a signifi cant difference between the counter-guarantee, on the one hand, and the suretyship

guarantee and demand guarantee, on the other hand. 94 . In pre-Rome Convention cases, decided under the common law rules, discussed above, the courts stated

that this sort of outcome was unsatisfactory and sought to avoid it. 95 . [1985] 2 Lloyd’s Rep 546.

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judgment to enforce its rights under its own counter-guarantee given by OCL. OCL raised a number of defences to justify its having permission to defend. One of them was that OCL’s liability under the counter-guarantee was subject to a condition that WF would notify OCL promptly in the event of a demand being made under the performance bond and that WF failed so to notify OCL. The Court of Appeal held that there was no such implied condition requiring a bank to inform its customer before it pays pursuant to a demand and that there was no such implied condition that after payment the bank should promptly notify the customer.

However, Ackner LJ, with whom Glidewell and Neil LJJ agreed, went on to suggest that, if the counter-guarantor wanted this to be a condition of liability, an obvious course for the counter-guarantor to have taken was for them, “in their letter of instructions”, to require WF to inform it immediately any demand was made under the performance bond. 96 In other words, if the condition to inform the counter-guarantor was contained in the instructions, not necessarily in the counter-guarantee, then the counter-guarantor’s liability under the counter-guarantee would have been subject to the condition. The Court of Appeal therefore considered that the counter-guarantee was not to be seen in isolation, as an independent contract, separate from the instructions, but rather as part of one contract made up of both the instructions and the counter-guarantee.

Further, international banking practice, as refl ected in URDG 758, appears to be consistent with the view that the counter-guarantee is not a contract separate from and independent of the instructions or mandate. URDG 758, Art.5(b) states that a counter-guarantee is “independent of the [demand] guarantee, the underlying relationship, the application and any other counter-guarantee to which it relates”. It does not state that the counter-guarantee is independent of the instructions or mandate in respect of which it is given. Rather, Art.5(b) goes on to declare that the undertaking of the counter-guarantor to pay under the counter-guarantee is not subject to claims or defences arising from any relationship “other than a relationship between the counter-guarantor and the guarantor”. Since the “relationship” between the counter-guarantor and the guarantor includes both the counter-guarantee and the instructions given by the counter-guarantor, it follows that under Art.5(b) the undertaking of the counter-guarantor is subject not just to the terms of the counter-guarantee, but also to the instructions. To put it another way, under Art.5(b) the liability of the counter-guarantor under the counter-guarantee is subject to such conditions as are stipulated in the instructions or mandate. 97 This accords with the one-contract analysis advanced in this paper and with the view of the Court of Appeal in the Esal case. 98

If the transaction is treated as one contract, the party who is to carry out the performance which is characteristic of that contract is the issuing bank, since it is the issuing bank that is carrying out banking operations requested by the instructing bank. 99 In this regard, the

96 . Ibid , 552–553. 97 . Although it is argued in the text that URDG, Art.5(b) is consistent with the one-contract analysis, the

actual choice-of-law rule in Art.34(b) appears to be aligned with the two-contract approach to the extent that it seems to treat the counter-guarantee as independent of the instructions.

98 . See also Bertrams, Bank Guarantees in International Trade , 4th edn (2013), 491 for a view that the relationship between the instructing bank and the issuing bank is “one and indivisible”.

99 . See Giuliano & Lagarde Report, 20.

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instructing bank is, in effect, the customer of the issuing bank and the issuing bank is the banker providing banking services requested by its customer, the counter-guarantor. 100 Moreover, the relationship between the instructing bank and the issuing bank in a counter-guarantee transaction is analogous to that between an issuing bank and a confi rming bank in a letter of credit transaction, whereby the issuing bank 101 requests the confi rming bank (usually in a different country) to confi rm the credit and undertakes to reimburse the confi rming bank. In a letter of credit transaction, it has been held that the confi rming bank, as the bank that provides a service requested by the issuing bank, is the characteristic performer. 102 It is submitted that on the same basis, in the case of a counter-guarantee transaction the characteristic performer is the issuing bank that is to provide the service requested by the instructing bank.

Applicable law under Art.4(2) and the need to escape from it

Since the issuing bank is the characteristic performer of the contract between the counter-guarantor and the issuing bank, under Art.4(2) the law that governs that contract, including the counter-guarantee, is the law of the country where the issuing bank’s principal place of business is located. 103 That law is likely to be the same as the law that governs the demand guarantee under Art.4(2). 104 This choice-of-law outcome, whereby the law that governs the counter-guarantee is the same as the law that governs the demand guarantee, will be commercially attractive to the English courts. Therefore, it will be unnecessary for the court to seek to disregard it by proceeding to a second stage under Art.4(5).

However, this is not the approach that has been adopted by the English court. In British Arab Commercial Bank Plc v Bank of Communications , 105 an English bank instructed a Syrian bank to issue a performance bond to a benefi ciary in Syria. The English bank provided a counter-guarantee to the Syrian bank. In the absence of a choice of law clause in the counter-guarantee, the English bank argued that the counter-guarantee was governed by English law and the Syrian bank contended that it was governed by Syrian law. The Syrian bank accepted that the counter-guarantor, as guarantor, was the party who was to effect the performance that was characteristic of the counter-guarantee. The learned judge agreed that this was correct, 106 with the consequence that English law, as the law of the counter-guarantor’s country, was the law applicable to the counter-guarantee under Art.4(2). Sadly, as there was no dispute on the point, the court offered no explanation as to why the counter-guarantor was the characteristic performer. It may be that the learned judge was infl uenced by the decisions in Samcrete Egypt Engineers and Contractors SAE

100 . In a contract between a bank and its customer, the characteristic performer is the bank providing banking services: Sierra Leone Telecommunications Co Ltd v Barclays Bank Plc [1998] CLC 501; [1998] 2 All ER 821.

101 . Here the bank that issues the letter of credit. 102 . Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87. 103 . Or, where under the terms of the contract performance is to be carried out by another branch, the country

where that branch is located. 104 . As discussed ante , 199–201. 105 . [2011] EWHC 281 (Comm); [2011] 1 Lloyd’s Rep 664. 106 . Ibid , [31].

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v Land Rover Exports Ltd 107 and Emeraldian Ltd Partnership v Wellmix Shipping Ltd , 108 both of which are cited in the judgment. However, neither case was concerned with a counter-guarantee; both were concerned with guarantees which were not coupled with a request or instructions.

To the extent that the reasoning in the British Arab Commercial Bank case is allied to a two-contract analysis, it shows a disadvantage of that analysis. In that case, the law applicable to the counter-guarantee under Art.4(2) (English law) was regarded as commercially unattractive by the English court, because it was different from and potentially in confl ict with the law applicable to the demand guarantee (Syrian law). 109 This made it necessary for the court to proceed to the second stage, by virtue of Art.4(5), to disregard English law and to hold that the law applicable to the counter-guarantee was Syrian law, on the basis that it was the law that governed the performance bond. 110 The law applicable to the counter-guarantee was therefore affected or even determined by the law that governed the performance bond. This may be seen as infringing the independence of the counter-guarantee in a way that the French courts refused to accept in the pre-Rome Convention decisions.

The advantage of the one-contract analysis is not only that it enables the court to arrive at the desired result, but to do so in the fi rst stage under Art.4(2) 111 and to do so without undermining the independence of the counter-guarantee. Under the one-contract analysis, the issuing bank is the characteristic performer and therefore, on the facts of the British Arab Commercial Bank case, the law that governs the counter-guarantee would be Syrian law. That law is the same as the law that governed the performance bond in that case. Consequently, there would be no need for the court to proceed to the second stage by virtue of Art.4(5) in order to arrive at the same result. Can the one-contract analysis deliver a similar result under the Rome I Regulation?

(c) Is a counter-guarantee a contract for the provision of services under the Rome I Regulation, Art.4(1)(b)?

In a Rome I Regulation case, when determining the law applicable to a counter-guarantee in the absence of choice, the fi rst question is whether a counter-guarantee is a contract for

107 . [2001] EWCA Civ 2019; [2002] CLC 533. 108 . [2010] EWHC 1411 (Comm); [2010] 1 CLC 993. 109 . The English courts adopt a similar approach in the context of letters of credit. See Enonchong, The

Independence Principle of Letters of Credit and Demand Guarantees (2011), 330–331. 110 . It is not clear whether the French courts would proceed to the second stage and resort to Art.4(5) in

order to avoid the outcome arrived at under Art.4(2). In the pre-Rome Convention cases, discussed above, the French courts did not appear to be unduly concerned by the fact that the law applicable to the counter-guarantee was different from the law applicable to the demand guarantee. Writing before the entry into force of the Rome Convention, one commentator stated that the Convention would not modify the approach of the French courts whereby different laws applied to the counter-guarantee and the demand guarantee. He noted that, if this separation of laws appeared “desirable”, because of the dislike of bankers to have to examine the contractual relationships between the principal and the benefi ciary, it did not diminish the intellectual discomfort generated by the application of different laws to different contracts in the transaction: see Pelichet, “Garanties bancaires et confl its des lois”, RDAI 1990, 335, 345.

111 . Thus avoiding the need for the court to embark on a second—and therefore more time-consuming and expensive—stage in order to arrive at a satisfactory outcome.

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the provision of services within Art.4(1)(b). One view is that, although a counter-guarantee may be classifi ed as a contract for the provision of services, it is “more likely” that it will be classifi ed as a contract other than one for the provision of services. 112 It is submitted that the counter-guarantee should be classifi ed as a contract for the provision of services, irrespective of whether the contractual relationship between the counter-guarantor and the issuing bank is analysed as a single contract or as two separate contracts. However, if the counter-guarantee is a contract for the provision of services within Art.4(1)(b), the law applicable to it will be different depending on whether one adopts the one-contract analysis advocated for in this paper or the conventional two-contract approach.

The one-contract analysis

Under the one-contract analysis, the contract between the instructing bank and the issuing bank satisfi es the criteria in the defi nition of provision of services set out in the ECJ’s decisions discussed above. First, it involves one party carrying out an activity, in that the issuing bank is required to perform positive acts which include: issuing a demand guarantee in the terms specifi ed; receiving and examining any demand for payment from the benefi ciary to determine whether it is a complying demand and, if it is, making payment to the benefi ciary in accordance with the terms of the demand guarantee. Secondly, the issuing bank performs these acts in return for remuneration in the form of commission. 113 The issuing bank is remunerated by the instructing bank. 114 Thus, even if, contrary to the argument advanced above, it is a requirement, for a contract to be classifi ed as one for the provision of services, that the remuneration must be provided by the other contracting party, that requirement is satisfi ed in the case of a counter-guarantee.

On the one-contract analysis, the issuing bank is the party providing the services, since it is the party carrying out the activities in return for remuneration. Consequently, on that view, the law that governs the counter-guarantee under Art.4(1)(b) is the law of the country where the issuing bank has its central administration or where, under the contract, performance is the responsibility of a branch of the issuing bank, the country where that branch is located. 115 Applied to the facts of the British Arab Commercial Bank case, for example, the counter-guarantee would be governed by Syrian law. As that is the same as the governing law of the performance bond in that case, there would be no need for the court to proceed to a second stage by means of the escape clause in Art.4(3) in order to displace the applicable law identifi ed in the fi rst stage. The position is different under the two-contract analysis.

112 . Dicey, Morris & Collins , [33.321]. 113 . It is unlikely that payment by the counter-guarantor to the guarantor of the exact amount paid by the

guarantor under the guarantee will be regarded as remuneration, since this payment is in commercial terms a reimbursement for the amount which the guarantor has paid (or will pay) the benefi ciary and therefore does not represent any economic value to the guarantor.

114 . Although the instructing bank will recover the payment from its own customer, namely, the party who requested the instructing bank to instruct the issuing bank, in giving the issuing bank the instructions and the counter-guarantee the instructing bank is acting as a principal, in its own name, rather than as agent of its customer.

115 . Under the Rome I Regulation, Art.19(1) and (2).

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The two-contract analysis

If the counter-guarantee is treated as a separate contract from the mandate, the counter-guarantee may also be regarded as a contract for the provision of services within the Rome I Regulation, Art 4(1)(b) for reasons similar to those advanced above in relation to the demand guarantee. 116 The counter-guarantor is required to make payment to the issuing bank upon receiving a complying demand. The counter-guarantor performs this act in return for remuneration, by way of commission. As argued above in relation to a demand guarantee, it is immaterial that the remuneration or consideration is provided by a third party 117 rather than the other contracting party, here the issuing bank. 118

Seen in this way, the counter-guarantor, as the party who performs a positive act in return for remuneration, is the party providing the services. In that case, the law that governs the counter-guarantee under Art.4(1)(b) will be the law of the country where the counter-guarantor has its habitual residence. 119 That law is likely to be different from and potentially in confl ict with the law that governs the demand guarantee. Applied to the facts of the British Arab Commercial Bank case, for example, the counter-guarantee would be governed by English law, whereas the performance bond would be governed by Syrian law. It is likely that an English court would fi nd this result to be unsatisfactory and would seek to escape from it by proceeding to the second stage under Art.4(3). How will the courts determine the law applicable to the counter-guarantee at this second stage? In particular, to what extent will that determination be affected by the law that governs the demand guarantee?

It is not entirely clear that, when applying the Rome Convention, Art.4(5), the court is permitted to take into account the fact that the contract has a close relationship with another contract between different parties, in the way that the English courts have done in the context of counter-guarantees and letters of credit. 120 However, in the case of the Rome I Regulation, Art.4(3), Recital (20) of the Regulation expressly allows courts to take into account the fact that the contract has “a very close relationship with another contract or contracts”. Due to the close relationship between the counter-guarantee and the demand guarantee, it is likely, following the approach at common law and under the Rome Convention, 121 that an English court would fi nd that a counter-guarantee is manifestly more closely connected to the law that governs the demand guarantee and that therefore that law is also the law that governs the counter-guarantee. So, although the ultimate result

116 . See ante , discussion in Part III(2)(c). 117 . Namely, the instructing bank’s customer who had requested the instructing bank to instruct the issuing

bank to issue the demand guarantee and to give the issuing bank the counter-guarantee. 118 . Of course if, contrary to the view expressed in this paper, it is a requirement that the remuneration must

move from the other contracting party, then that requirement would not be satisfi ed. 119 . That is to say, the place where it has its central administration or, where the counter-guarantee was

issued by a branch, or if, under the terms of the counter-guarantee, payment was the responsibility of a particular branch, the country where that branch is located: Art.19.

120 . Eg in British Arab Commercial Bank Plc v Bank of Communications [2011] EWHC 281 (Comm); [2011] 1 Lloyd’s Rep 664; PT Pan Indonesia Bank Ltd TBK v Marconi Communications International Ltd [2005] EWCA Civ 422; [2007] 2 Lloyd’s Rep 72, [41]; Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87.

121 . See British Arab Commercial Bank Plc v Bank of Communications [2011] EWHC 281 (Comm); [2011] 1 Lloyd’s Rep 664.

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under the two-contract analysis would be the same as that of the one-contract analysis, there is an important difference. Under the two-contract analysis, the result is arrived at by means of a tortuous route involving two stages (Art.4(1)(b) and Art.4(3)), and it is necessary for the court to hold that the law that governs the counter-guarantee (a contract which is independent of the demand guarantee) is affected by the law that governs the demand guarantee. By contrast, the one-contract analysis delivers the same result more directly at the fi rst stage and by fi nding the law that is applicable to the counter-guarantee independently of the law that governs the demand guarantee, thus keeping intact the independence of the counter-guarantee.

V. CONCLUSION

The determination of the law applicable to a demand guarantee is not affected by the law applicable to any of the autonomous contracts in a demand guarantee transaction. However, at common law and under the Rome Convention, the determination of the law applicable to a counter-guarantee is affected by the law that governs the demand guarantee, even though the counter-guarantee is by nature independent of the demand guarantee. This approach of the English courts, which appears to go against the independence of the counter-guarantee, is not universal. It has been rejected by the French courts and has not been adopted by the URDG. The English approach is based on the understandable desire for one law to govern both contracts so that the liability of the issuing bank under the demand guarantee would be back-to-back the same as its rights under the counter-guarantee.

This paper has sought to argue that a better way of achieving that desirable result is through the one-contract analysis. Thus, it has been argued that a counter-guarantee is not a contract that is separate from and independent of the instructions in respect of which it is given; rather, it is part of a single contract, between the counter-guarantor and the issuing bank, which includes the instructions. On this basis, it has been suggested that the issuing bank is the characteristic performer and therefore the law that governs a counter-guarantee under the Rome Convention, Art.4(2) should be the law of the place where the issuing bank (rather than the instructing bank) has its principal place of business. Since that law will normally be the same as the law that governs the demand guarantee, the court arrives at a satisfactory result at the fi rst stage, without the need to proceed to the second stage by virtue of Art.4(5). Thus, the one contract analysis delivers in one stage the comforting result which the two-contract approach can only deliver in two stages.

The paper has also endeavoured to show that the one-contract analysis can deliver a similar result under the Rome I Regulation. It has been suggested that the contract between the counter-guarantor and the issuing bank should be classifi ed as a contract for the provision of services with the issuing bank as the party providing the services. On those bases, the law that governs the counter-guarantee under Art.4(1)(b) is the law of the country where the issuing bank has its habitual residence. As this will normally be the same as the law that governs the demand guarantee, the English courts are likely to be satisfi ed with this choice of law outcome, making it unnecessary for the court to proceed to the second stage by resorting to the escape provision in Art.4(3).

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