B ank guarantees are designed to reduce risk. But a guarantee does not necessarily remove all risk. If we look at the following two cases we can see how this is so.

 

The first case involves a Liberian cargo ship which was in Bangladeshi waters en route to Chittagong when it collided with another vessel already anchored in port. This threatened to damage perishable goods onboard one of the vessels.

 

If a person breaks a law, law enforcement authorities in that country may arrest the offender. Similarly, if a vessel is involved in a breach of local law, authorities can arrest the vessel. As mentioned earlier, one vessel involved in this accident was carrying perishable goods to be delivered to different ports. Moreover, the shipowner would have to pay a considerable fine that increases day by day.

 

Therefore, the sole remedy is to issue a bank guarantee in favor of the supreme court in order to release the arrested vessel so that it can deliver the goods to their intended customers.

 

The shipowner’s company would contact its bank and request the issuance of a counter guarantee to a bank in Bangladesh. On the strength of that counter guarantee a Bangladeshi bank would issue a guarantee in favor of the supreme court of Bangladesh. After the port authority receives the guarantee it would release the vessel.

 

The above example clearly demonstrates that the bank guarantee involves high risk. For a better understanding, we could discuss the following case study regarding bank guarantee risk and the mitigation of that risk.

 

A recent case study shows that the court determined that a faxed copy of a bank guarantee that had purportedly been canceled by the issuing bank could still be encashed. This is a reminder to participants in the construction industry of the need for following prudent practices when dealing with such forms of performance security.

 

In 2007 AJ Richardson Properties appointed Mr & Mrs Robert Segboer to construct an addition to the Centrepoint Shopping Centre in Tamworth in New South Wales, Australia. As is commonly the case in construction contracts, the builder was required to procure performance security, which in this instance comprised two bank guarantees for $375,000 each, with AJ Richardson Properties and the project lenders as joint beneficiaries. The bank guarantees were required to be in place until 12 months after the practical completion of the works (presumably, this period refers to the expiry of the defect liability period). However, the originals of these bank guarantees were never delivered to the beneficiaries.

 

Each of the bank guarantees had been signed, witnessed and sealed in accordance with the issuing bank’s requirements. Copies of the bank guarantees were faxed to the project manager, with the following statement: “The bank is in a position to be able to provide bank guarantees to assist Robert Segboer in the construction of the Centrepoint Shopping Centre development. Please find enclosed those guarantees. The originals will be forwarded to you in due course.”

 

The original bank guarantees were given to the builder, who did not provide them to either the beneficiary or the project manager. Part way through the construction, and only 12 months after the issue of the bank guarantees, the builder returned the originals to the issuing bank and requested that they be canceled. The issuing bank made no further enquiries of the builder or the status of the project and purportedly canceled the bank guarantees.

 

Subsequently, issues arose during the defect liability period (when the construction contract still required the bank guarantees to be in place). AJ Richardson Properties made a demand for the full value of one of the bank guarantees. The original court hearing was related to an action by AJ Richardson Properties against the issuing bank for payment against the demand. Judgment was made in favor of AJ Richardson Properties. The builder then appealed (as it was liable to indemnify the issuing bank).

 

The key issue arose from the legal nature of the bank guarantee as a deed, and whether the issuing bank had "delivered" the bank guarantee. The Court of Appeal decided that the bank guarantee had been “delivered,” and that AJ Richardson Properties, as one of the beneficiaries, was entitled to cash the bank guarantee notwithstanding that it was not able to provide the original document and that the issuing bank had purportedly canceled the bank guarantee.

 

The Court of Appeal found it well established that delivery is an essential requirement of a deed, but that the requirement of delivery can be met without physical delivery. In the absence of physical del