The recent decision of England’s Technology and Construction Court in Lukoil Mid-East Ltd v Barclays bank PLC  EWHC 166 (TCC) is a useful reminder to clearly state in a performance bond any requirements that a demand made under it must meet, in order to avoid disputes, as in this case.
The Claimant, Lukoil Mid-East Ltd (Lukoil), had engaged Baker Hughes Asia Pacific Ltd (BH) to drill and complete 23 production oil wells in Iraqi oil fields (the Contract). Pursuant to the Contract, BH delivered to Lukoil an irrevocable, unconditional, on demand, performance bond of some US$7.1 million, issued by the Defendant bank, Barclays. The bond provided that from the date of its issuance, Barclays was responsible for payment of US$7.1 million in full at Lukoil’s first written request to Barclays, made before the expiry date, if BH failed to fulfil the contractual provisions, on the condition (Condition 4) that no amendment had been made to the Contract between Lukoil and BH impacting on the timely performance of the works under it.
Letter of demand
By letter to Barclays (attaching the original bond), Lukoil requested payment of the US$7.1 million. The demand stated that BH was in breach of its contractual obligations in that it had failed to achieve any of the key milestones on or before the key dates set out in the Contract and had failed to make payment of the liquidated damages that fell due.
Bank’s refusal to pay on demand
Barclays refused to make payment, asserting that the demand was invalid because it made no mention of the condition that no amendment had been made to the Contract impacting on the timely performance of the works under it.
Lukoil issued proceedings against Barclays claiming payment under the bond.
The Court held as follows: