Enforcement of Bank Performance Bonds; Key Takeaways From High Court Case No. E059/2022 Magnate Ventures Limited -Vs- Credit Bank Plc.

Magnate Ventures, a local economic giant, has successfully converted Credit Bank’s liability towards a Chinese firm, into an asset as Credit Bank was ordered by Court to honour their performance bond and settle a debt owed by Hebei Tuofa Telecommunication & Electric Manufacturing Ltd. Efforts towards unraveling themselves from the conflict between Magnate and the Chinese firm proved unpliable as the High Court ruled that the Financier was bound by its guarantee which obligation becomes due upon demand. “…a bank which issues a performance bond has to honour that guarantee in accordance to its terms. The obligation arises immediately upon demand,” the judge said.

The dispute arose when the Chinese firm contracted Magnate Ventures to supply and install lines and transformers. They agreed that the Chinese company would get a performance bond from Credit Bank. The Chinese company didn’t pay, so Magnate Ventures sued Credit Bank to make them pay. Read the full ruling here.

The main issue

Whether the performance bond rightfully bound the Bank to the contract between Magnate Venture and the Chinese Firm.

Analysis, Implications in Law and Our Take.

A performance security bond is “…a three-party agreement between the principal, the obligee, and the surety in which the surety agrees to uphold, for the benefit of the obligee, the contractual obligations of the principal if the principal fails to do so.”

If the principal fulfills its contractual obligations, the guarantor’s obligation becomes void. However, if the principal defaults on the underlying contract, the obligee can make a claim against the surety under the surety bond. In the case of Kenindia Assurance Company Limited vs. First National Finance Bank Limited Civil Appeal No. 328 of 2002 the Court of Appeal also held as follows;

“A bank, which gives a performance guarantee, must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer, nor with the question whether the supplier has performed his contractual obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions. “

The bank doesn’t have to pay if the main person and the other person have done everything they’re supposed to. The bank also doesn’t have to pay if the claim is not related to the performance bond. The bank can avoid paying if they can prove clear and concise fraud. The fraud must be shown to exist by irrefutable evidence as was stated by Ackner, L.J.  in the case of United Trading Corporation S.A. v. Allied Arab Bank Ltd (C.A. July 17, 1984) where it was held that;

“The evidence of fraud must be clear, both as to the fact of fraud and as to the bank’s knowledge. The mere assertion or allegation of fraud would not be sufficient ………..We would expect the court to require strong corroborative evidence of the allegation, usually in the form of contemporary documents, particularly those emanating from the buyer. In general, for the evidence of fraud to be clear, we would also expect the buyer to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circumstances where one could properly be expected. If the court considers that on the material before it the only realistic inference to draw is that of fraud, then the seller would have made out a sufficient case of fraud.”

In conclusion, a performance bond is a separate contract that the bank must follow. If the bank doesn’t pay when asked, it’s basically breaking its promise, unless there’s a good reason like clear fraud. In this case, Credit Bank couldn’t prove any fraud, so they had to pay.