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Friday 14 December 2012

Words in Wonderland

The law is about facility with words in the same way that accountancy is about nimbleness with numbers. Indeed, many lawyers have grown used to the following quote when learning the application of their trade:

“When I use a word,” Humpty Dumpty said in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.” (Lewis Carroll, Through the Looking Glass).

Personally, I prefer the following rather more elegant words of the great American jurist, Oliver Wendell Holmes, jr:

“A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and time in which it is used.”

But if the practice of law is about mastery over the use and interpretation of words, it is to be regretted that there is still far too much, ‘word magic’ in everyday legal usage. By ‘word magic’, I mean that certain words have become invested over time with a certain reverence and meaning in commercial contracts that does not particularly accord with what they might mean in real life. A good example of this is the use of deeds in law, with formulaic execution clauses developed and a whole subset of meaning invested into concepts like delivery which are pretty meaningless to all but the initiated. What is more, because the meaning attributed to such concepts is often artificial, it does not take much to drive the train into the buffers when the terms are slightly misused.

A troubling example of this in a different context is highlighted in the recent Court of Appeal judgement in the case of  Wuhan Guoyu Logistics Group Co Ltd and Yangzhou Guoyu Shipbuilding Co Ltd v. Emporiki Bank of Greece SA   [2012] EWCA Civ 1629  about the interpretation of a guarantee.

Emporiki Bank issued a payment guarantee (the “Guarantee Document”) in favour of Wuhan and Yangzhou (the “Seller”) in respect of its client’s (the “Buyer”) payment obligations under a shipbuilding contract with the Seller (the “Contract”).

The Seller attempted to enforce the Guarantee Document. There was a dispute over whether the Seller had complied with its obligations under the Contract. If the Guarantee Document was a guarantee properly called, it could only be enforced against Emporiki if the Seller was liable to the Buyer under the Contract. If on the other hand the Guarantee Document was a performance or demand bond, then Emporiki would have to pay up irrespective of whether the Seller was liable to the Buyer under the Contract. £10 million was at stake. So a pretty important difference.

The relevant parts of the Guarantee Document read as follows:

(1). We [EMPORIKI BANK] hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as the primary obligor and not merely as the surety, the due and punctual payment by the BUYER of the 2nd instalment of the Contract Price amounting to a total sum of United States Dollars 10,312,500.00… as specified in (2) below.

 (2). The [payment] guaranteed hereunder, pursuant to the terms of the…Contract, comprises the 2nd instalment in the amount of U.S. Dollars 10,312,500.00 payable by the BUYER within five (5) New York banking days after completion cutting of the first 300 MT of steel plate in your Seller’s workshop and written notice thereof along with certificate of cutting of steel plate countersigned for approval by the Buyers representative.

 (3). We also IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as primary obligor and not merely as surety, the due and punctual payment by the BUYER of interest on the second Instalment guaranteed hereunder at [specified rate], from and including the first day after the date of instalment in default until the date of full payment by us of such amount guaranteed hereunder.

 (4). In the event that the BUYER fails to punctually pay the second Instalment guaranteed hereunder or the BUYER fails to pay any interest thereon, and any such default continues for a period of twenty (20) days, then, upon receipt by us of your first written demand stating that the Buyer has been in default of the payment obligation for twenty (20) days, we shall immediately pay to you or your assignee the unpaid 2nd Instalment, together with the Interest as specified in paragraph (3) hereof, without requesting you to take any or further action, procedure or step against the BUYER or with respect to any other security which you may hold.


(7) Our obligations under this Guarantee shall not be affected or prejudiced by any disputes between you as the SELLER and the BUYER under the … Contract … or by any security or other indemnity now or hereafter held by you in respect thereof, or by any time or indulgence granted by you or any other person in connection therewith, or by any invalidity or unenforceability of the terms thereof, or by any act, omission, fact or circumstances whatsoever, which could or might, but for the foregoing, diminish in any way our obligations under this Guarantee.

In the Court of Appeal, Lord Justice Longmore said that he didn’t find it a particularly easy case. The judge at first instance (Christopher Clarke J) evidently didn’t either as he delivered a judgement of 93 paragraphs citing no less than 20 authorities, agonising over the meaning of the Guarantee Document.

The Court of Appeal thought that there were six or so clear pointers in the Guarantee Document demonstrating that it was a guarantee (the Bank wins) and four demonstrating that it was a demand bond (the Bank loses).

In the end, Lord Justice Longmore turned to a textbook, Paget’s Law of Banking and decided that the Guarantee Document was a demand bond because it related to an underlying transaction between parties in different jurisdictions, was issued by a bank, it contained an undertaking to pay “on demand” and did not contain clauses excluding or limiting the defences available to a guarantor.

The key seems clearly to have been that clause 4 of the Guarantee Document contained an undertaking to pay “on demand”.  So the Bank lost. The Bank had won at first instance. Why? Well, Christopher Clarke J thought there were nine good reasons why the Guarantee Document was a guarantee and not a demand bond, not least of which were that the document was called a “guarantee” and that he thought that clause 1 contained the “core obligation” (though he seems to have overlooked the fact that in clause 1, the Bank agrees to be liable as “primary obligor” for some reason).

What seems to me most striking about the case however is not the whys and wherefores of who won and who lost and how, but that so much difficulty and trouble arose from something which because of its crucial nature to commerce, ought to be straightforwardly unambiguous, readily understandable and simple for all.

Lord Justice Longmore felt that some of the difficulties in the case may have arisen from the fact that the Guarantee Document was probably drawn up,” to some extent by persons not entirely familiar with the English language; it may well be something of a palimpsest…”

Rather less politely, he might have said that the Guarantee Document was cobbled together by someone who did not know what he was doing. That may be so, but with all due respect, it should not have been necessary to go all the way to the Court of Appeal to find out what the Guarantee Document meant either. The law in this area is obviously far too complex. As I said at the outset, a degree of ‘word magic’ has crept into the interpretation of key phrases commonly found in these types of documentation and they do not sit well when they are required to be interpreted together in the same document.  There is surely now a case for them to be abandoned in favour of a common sense approach, which would see legislation provide for standard form documentation which would clearly indicate according to which form was used, the manner in which the guarantor was offering to be bound.

Bruce Jones

MH Corporate

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