British Arab Commercial Bank Plc v Bank of Communications & Anor

This is the trial of an action concerning bank guarantees entered into in connection with the Tishrin Dam Project, which is a project on the River Euphrates in Northern Syria. The General Organisation for Land Development (“GOLD”) is the Syrian state owned entity responsible for the project, and a Chinese company called Sichuan Machinery and Equipment Import and Export Corporation (“Sichuan Machinery”) is the contractor. The contract between them was entered into on 31 December 1992. Various disputes arose, and though the parties entered into a settlement agreement in 2009, GOLD has not released a performance bond that was issued to it in 1993. This has had consequences for the three banks involved in the transaction namely the Claimant, British Arab Commercial Bank plc (“BACB”), which is an English bank, the First Defendant, Bank of Communications (“BOC”), which is a Chinese bank, and the Second Defendant, Commercial Bank of Syria (“CBS”), which is a Syrian state bank.

In summary, under the terms of the contract between them, Sichuan Machinery was obliged to submit to GOLD a “Good performance bond issued by [CBS] as per the text accepted by said Bank and amounting to (5%) of the total value of the Contract”. In value terms, the performance bond was to be for an amount of up to US$8,790,000. That was duly done, and a counter-guarantee was given to CBS by BACB, and a counter-guarantee was given to BACB by BOC, thereby passing liability up the line. At the end of 2001, there was a disputed demand by GOLD under the performance bond, and thereafter disputed demands by CBS against BACB, and by BACB against BOC, under their respective counter-guarantees. It is plain that very considerable efforts have been made to settle the underlying issues between the employer and contractor. But given the lapse of time without an apparent resolution, and no doubt concerned about limitation periods expiring, these proceedings were commenced by BACB against BOC and CBS in order to ascertain the parties’ respective rights under the counter-guarantees. There are three principal issues for the Court to determine. First, what law governs the counter-guarantee BACB gave to CBS? BACB says it was English law, CBS says it was Syrian law. Secondly, is CBS right to say that under Syrian law BACB is liable under its counter-guarantee until 31 December 2011, alternatively liable to pay to CBS the full amount of the performance bond? Thirdly, does BOC have any liability under the counter-guarantee it gave to BACB?

Other than in respect of Syrian law, the facts are not in dispute. There is a witness statement from Mr Gary Bishop, BACB’s Head of Operations, and his evidence was not disputed (he did not give oral evidence at trial). The documents show that the banks began exchanging brief communications with each other in early 1993. The first contact was between BOC’s Chengdu Branch in China and BACB (then called UBAF Bank Ltd) in London on 25 February 2003. At that point in time, a five year bond in favour of GOLD was envisaged expiring in July (later agreed to be November) 1998. In Syria at this time, all bonds of this nature were issued by CBS, which did so against counter-guarantees from its correspondent bank abroad. As will be seen, a major issue so far as Syrian law is concerned is that such counter-guarantees were always issued on the basis of standard terms contained in applicable CBS circulars, the operative one being its circular 164/40 of 19 January 1988. In chronological order, the three instruments which are relevant for present purposes are as follows.

The first in time is the counter-guarantee given by BOC to BACB, following arrangements (which are not in evidence) between BOC and its customer in China, the contractor Sichuan Machinery, pursuant to which BOC presumably took security in some form or other. The terms of the counter-guarantee to BACB, as agreed by telexes dated 4 and 5 March 1993 between BOC and BACB were as follows:

“AT OUR FULL RISK AND RESPONSIBILITY, PLS INSTRUCT [CBS] TO ISSUE A PERFORMANCE BOND AGAINST YOUR COUNTERGUARANTEE.

....

[There then followed the language of the performance bond to be issued by CBS and the language of counter-guarantee from BACB to CBS]

IN CONSIDERING OF YOUR INSTRUCTING [CBS] … TO ISSUE THE ABOVE MENTIONED PERFORMANCE BOND …

....

WE HEREBY IRREVOCABLY UNDERTAKE TO PAY TO YOUR ORDER UPON YOUR SIMPLE DEMAND BY TESTED TELEX OR LETTER ANY AMOUNT UP TO FULL AMOUNT OF THIS GUARANTEE INCLUDING THE COMMISSIONS INTERESTS AND EXPENSES IN FOREIGN CONVERTIBLE CURRENCIES AT RATES RULING AT COMMERCIAL BANK OF SYRIA PROVIDED SUCH CLAIM(S) FROM BENEFICIARY REACH COMMERCIAL BANK OF SYRIA, BRANCH 6 ON OR BEFORE JULY 25TH, 1998, 1:00 P.M. [the original expiry date] AND MUST REACH US SOONEST THEREAFTER. OUR LIABILITY UNDER THIS GUARANTEE TOWARDS YOURSELVES WILL CEASE ONLY UPON RECEIPT OF YOUR ADVICE THAT YOU HAVE OBTAINED FROM COMMERCIAL BANK OF SYRIA, BRANCH 6, DAMASCUS, THE RELEASE OF YOUR COUNTER GUARANTEE. OUR COUNTERGUARANTEE TO YOU WILL AUTOMATICALLY BECOME ENFORCEABLE WHEN YOUR A/M COUNTERGUARANTEE BECOMES ENFORCEABLE.”

“OUR COUNTER INDEMNITY TOWARDS YOU AND ALL MATTERS ARISING THEREOUT SHALL BE CONSTRUED AND DETERMINED ACCORDING TO ENGLISH LAW.”

It was expressly agreed between BACB and BOC therefore that the BOC counter-guarantee to BACB should be construed and determined according to English law.

The terms of the BACB counter-guarantee were set out in a telex dated 15 March 1993 from BACB to CBS. CBS says (correctly) that the whole telex is relevant. By it, a request is made by BACB to CBS to issue the performance bond, the terms of which are quoted, followed by the text of the counter-guarantee given by BACB to CBS as issuing bank:

“DATE: 15TH MARCH 1993

TEST 60/804 ON USD 8,790,000

TO: COMMERCIAL BANK OF SYRIA, BRANCH 6, P.O. BOX 2655 GENERAL MANAGEMENT BLDG, YOUSEL EL-AZMEH SQUARE, DAMASCUS, SYRIA TLX 411351/411476

FROM: UBAF BANK LTD LONDON

PLS ISSUE A PERFORMANCE BOND IN ACCORDANCE WITH THE TERMS OF YOUR OFFICIAL TEXT AND H.O. CIRCULAR 164/40/FM DATED 19.1.88 AGAINST OUR COUNTERGUARANTEE (OUR REF. NO. G93/1742) AS FOLLOWING AND TRANSMIT IT TO THE BENEFICIARY: GENERAL ORGANISATION FOR LAND DEVELOPMENT (GOLD), MINISTRY OF IRRIGATION, SYRIAN ARAB REPUBLIC.

QUOTE

PERFORMANCE BOND

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _

TO: GENERAL ORGANIZATION FOR LAND DEVELOPMENT (GOLD), MINISTRY OF IRRIGATION, SYRIAN ARAB REPUBLIC

L/G NO. ( ) FOR USD8,790,000.00 VALID UNTIL JULY 25TH 1998, 1:00 P.M.

WE INFORM YOU THAT WE HEREBY GUARANTEE SICHUAN MACHINERY AND EQUIPMENT IMPORT AND EXPORT CORP, 27 HONG ZHAO BI STREET, CHENGDU, SICHUAN, P.R. CHINA (HEREINAFTER REFERRED TO AS 'SCMEC'). JOINTLY AND SEVERALLY FOR AN AMOUNT OF USD8,790,000.00 (SAY EIGHT MILLION SEVEN HUNDRED NINETY THOUSAND U.S. DOLLARS ONLY).

IN RESPECT OF GOOD EXECUTION OF THE CONTRACT NO. 627/92 OF THE TISHRIN DAM HYDROPOWER PLANT AND EQUIPMENT OF 6X105MW WHICH IS THE SUBJECT OF THE TENDER NO. 917/D/3 DATED JULY 22ND, 1991 ISSUED BY GOLD (HEREINAFTER REFERRED TO AS THE 'CONTRACT'). THIS GUARANTEE IS VALID AND OPERATIVE FROM THE DATE WHEN SCMEC RECEIVES THE LETTER OF CREDIT UNDER THE CONTRACT AND SHALL REMAIN VALID UNTIL JULY 25th, 1998, 1:00 P.M. AND CANNOT BE CANCELLED DURING ITS VALIDITY WITHOUT YOUR WRITTEN CONSENT.

WE UNDERTAKE TO PAY TO YOUR ORDER THE ABOVE MENTIONED AMOUNT OR ANY PART THEREOF OWING TO BREACH OF NON-COMPLIANCE BY THE GUARANTEED PARTY (SCMEC) WITH ANY OF THE OBLIGATIONS INCUMBENT ACCORDING TO THE CONTRACT TERMS UPON YOUR SIMPLE DEMAND BY TESTED TELEX OR LETTER WHICH SHOULD BE DELIVERED AND REACH US OFFICIALLY DURING ITS VALIDITY LATEST ON JULY 25TH, 1998, 1:00 P.M.

AUTOMATICALLY THEREAFTER OUR OBLIGATION UNDER THIS GUARANTEE WILL CEASE WITHOUT NEED FOR WARNING OR ANY OTHER PROCEDURE, AND ALL CLAIMS RECEIVED WILL BE IGNORED AND WILL BE CONSIDERED CANCELLED UNLESS WE PROCEED TO EXTEND OR RENEW IT IN WRITING.

WE DECLARE THAT THAT THIS PERFORMANCE BOND IS SUBJECT TO SYRIAN LAWS AND REGULATIONS AND WE CHOOSE THE FOLLOWING ADDRESS AS OUR DOMICILE IN ALL THAT CONCERNS THE EXECUTION OF THIS GUARANTEE:

THE COMMERCIAL BANK OF SYRIA, BRANCH NO. 6, SYRIAN ARAB REPUBLIC.

UNQUOTE”

There then follows set out in the telex immediately below the terms of the BACB counter-guarantee to CBS:

“IN CONSIDERING OF YOUR ISSUING THE ABOVE MENTIONED PERFORMANCE BOND, WE, UBAF BANK LIMITED LONDON, HEREBY UNDERTAKE TO PAY TO YOUR ORDER UPON YOUR SIMPLE DEMAND BY TESTED TELEX OR LETTER ANY AMOUNT UP TO FULL AMOUNT OF THIS GUARANTEE INCLUDING THE COMMISSIONS INTERESTS AND EXPENSES IN FOREIGN CONVERTIBLE CURRENCIES AT RATES RULING AT YOUR BANK PROVIDED YOU RECEIVE SUCH CLAIM(S) FROM BENEFICIARY ON OR BEFORE JULY 25TH, 1998, 1:00 P.M. AND THIS CLAIM(S) MUST REACH US SOONEST THEREAFTER. OUR COUNTERGUARANTEE TO YOU WILL AUTOMATICALLY BECOME ENFORCEABLE WHEN YOUR A/M PERFORMANCE BOND BECOMES ENFORCEABLE.

PLEASE NOTE, WE REITERATE THAT ANY CLAIM(S) SUBMITTED UNDER THIS GUARANTEE MUST BE RECEIVED BY YOURSELVES FROM THE BENEFICIARY ON OR BEFORE JULY 25TH, 1998, 1:00 P.M.

IN THE EVENT OF YOUR RECEIVING A CLAIM(S) UNDER THIS GUARANTEE, YOU ARE REQUESTED TO ADVISE US THE USD AMOUNT OF SUCH CLAIM TOGETHER WITH THE FOREIGN CURRENCY EQUIVALENT (IF ANY) IN WHICH PAYMENT IS REQUIRED DULY CONVERTED AT A SPECIFIC RATE DETERMINED BY YOU.

WE SHALL NOT FAIL TO ADVISE YOU BY WAY OF A FORMAL AMENDMENT WHEN THIS GUARANTEE BECOMES OPERATIVE.”

As can be seen, there was no express agreement between CBS and BACB regarding the law applicable to the BACB counter-guarantee. One of the important issues between BACB and CBS is whether, as BACB contends, its counter-guarantee is governed by English law, or whether, as CBS contends, it is governed by Syrian law.

The terms of the performance bond dated 10 May 1993, as issued by CBS to GOLD, were as follows:

“COMMERCIAL BANK OF SYRIA

Branch No. 6

Damascus 10 / 5 / 1993

PERFORMANCE GUARANTEE No. (21808/93)

To: GENERAL ORGANIZATION FOR LAND DEVELOPMENT (GOLD) MINISTRY OF IRRIGATION – DAMASCUS

We inform you that we hereby guarantee [Sichuan Machinery]

Jointly and severally for an amount of $8,970,000/- …

…

in respect of good execution of contract No AS MENTIONED ON THE ATTACHED COPY OF THE L/G.

This guarantee is valid from today until 6/11/1998 and cannot be cancelled during its validity without your written consent.

We undertake to pay to your order the above mentioned amount or any part thereof owing to breach or non-compliance by the guaranteed party with any of the obligations incumbent according to contract terms upon your first written demand which should be delivered and reach us officially during its validity latest 6/11/1998 1.00 P.M.

Automatically thereafter, our obligation under this guarantee will cease without need for warning or any other procedure, and all claims received will be ignored and will be considered cancelled unless we proceed to extend or renew it in writing.

We declare that we choose the following address as our domicile in all that concerns the execution of this guarantee.

Branch No.6 Street: PORT SAID P.O.Box 2655 City DAMASCUS

These terms were substantially based on CBS’s official text for performance guarantees as attached to Circular 164/40 sent by CBS to its correspondents by a letter dated 19 January 1988. This was consistent with the agreement reached between the three banks in their telexes dated 4 March 1993 that the bond should be issued “in accordance with the terms of your [i.e. CBS’s] official text and H.O. Circular 164/40/fm dated 19.1.88”.

As can be seen from its text, by the time of the issue of the performance bond, its expiry date had been agreed to be 6November 1998. There were thereafter a number of agreed extensions. In summary, GOLD requested CBS to make the extension it required, and in at least one case did so in terms that made it clear that otherwise it required the bond to be paid. CBS passed on the requests for extension to BACB (in at least one case by way of an “extend or pay” demand). In each case, BOC confirmed to BACB its agreement to the extension sought. It is to be noted in the case of each extension that, so far as relevant, these steps were taken prior to the then current expiry date of the performance bond. CBS would then issue an “Advice of Extension” to BACB, claiming commission for the extended period. The last such extension was until 31 December 2001, and it is common ground that the performance bond and the counter-guarantees were valid until that date.

On 5 December 2001, GOLD wrote to CBS asking for another extension of a year. The letter refers to the bond and says, “Please work for the extension of the above referenced guarantee until 31/12/02 as it is still required and please inform us and the beneficiary”. (There is a minor translation issue—this is the translation of the expert witness for CBS, whereas the expert witness for BACB considered the translation should read, “Please work on the extension …”. It is not suggested by any of the parties that this makes any material difference.) This is a crucial communication, because it was the only such communication by the beneficiary to CBS prior to 31 December 2001, the restated expiry date of the bond.

By a telex dated 19 January 2002 to BACB, CBS referred to the beneficiary’s letter and requested that BACB “credit our H.O. A/C with you or authorise us to extend the validity of the [performance bond] until 31.12.2002”. In other words, CBS required BACB to extend or pay. It stated that it would await BACB’s instruction by return tested telex. So far as timing is concerned, BACB point out that 19 January 2002 was a Saturday, and the telex was not authenticated by BACB until Monday 21 January 2002. They make this point to show that they did not delay in contacting BOC as now explained.

By a SWIFT message prepared by BACB on 24 January 2002 (though actually sent to BOC on 25 January 2002), BACB advised BOC of the request from CBS, and asked it either to “Request us to instruct our correspondents [i.e. CBS] to extend the validity date of their Guarantee OR kindly effect payment …”. On its part therefore, BACB required BOC to extend or pay, just as it had been required to extend or pay, albeit in both cases after the restated expiry date of the bond.

By a SWIFT message to CBS dated 24 January 2002, BACB acknowledged receipt of CBS’s telex saying that, “We have contacted our principals [i.e. BOC] in this respect and will revert upon receipt of their reply”. However, there was no reply by BOC to this communication from BACB.

Neither CBS nor BACB appear to have pursued the matter at this time. In December 2002, the pattern repeated itself. GOLD asked for an extension until 31 December 2003, CBS made an extend or pay demand on BACB (this was also made after year end), and BACB made an extend or pay demand on BOC. This time however, BACB did follow up, and eventually elicited a response from BOC. By a SWIFT message dated 16 September 2003, BOC stated, “Please be informed the above mentioned guarantee has been expired from Dec 31, 2001”. BOC did not say so expressly, but the clear implication was that no claim had been made by GOLD on the performance bond prior to that date and that no claim could therefore be made under the terms of the BOC counter-guarantee. BOC has maintained that position consistently since then.

CBS complains (with some justification) that BACB failed to inform it at the time that this was the position being taken by BOC, though BACB ripostes that CBS must have been well aware of the position. What BACB did however do, citing circular 164/40, was tell BOC that Syrian law stipulates that a guarantee cannot be cancelled without the agreement of the beneficiary irrespective of any stated expiry date—this is contrary to its present position. Meanwhile GOLD continued to request successive year on year extensions of the validity of the performance bond (most recently until 31 December 2011). On 3 January 2006, BACB wrote to CBS saying that “whilst [the performance bond] has been extended our client has stated that the contract has been completed some years ago, the dam and works are fully functioning and that the guarantee should have been released”. BACB asked CBS to contact its customer “to obtain their reason to keep the guarantee in place”.

On 22 May 2006, BACB told CBS (apparently for the first time) that BOC was saying it was not liable because the performance bond had expired in December 2001. BACB said that it was not liable under its counter-guarantee to CBS because of the alleged failure by CBS to notify BACB “soonest thereafter” of the request for extension dated 5 December 2001. This is a reference to wording that is found in both counter-guarantees. In other words, BACB was complaining that CBS had failed to make a timely demand. On its part, during the course of 2006 and 2007 CBS wrote to GOLD on a number of occasions saying that the bond had expired on 31 December 2001 because no demand had been made during its validity—this is contrary to its present position. Both BACB and CBS have at times therefore expressed views that are inconsistent with their present case, though this appears to be of limited relevance to the decision which has to be made on the claim, which turns on the parties’ respective expert evidence.

As against CBS, in terms of the argument, BACB and BOC have made common cause. Their position is that they had no duty to extend the period of validity of the performance bond beyond 31 December 2001, and that the bond expired on 31 December 2001 without GOLD having made any claim for payment under it prior to that date. In particular, both BACB and BOC contend that GOLD's request dated 5 December 2001 to CBS to extend the validity of the performance bond being merely a request for extension was not a demand or claim for payment under the bond, and did not therefore satisfy the requirement of the counter-guarantees of a claim for payment received by CBS from GOLD before the expiry of the bond on 31 December 2001. Hence, BACB and BOC contend that no obligation to pay arose under the bond before it expired, and no corresponding claim for payment under the BACB counter-guarantee can be made by CBS. Alternatively, if a valid claim was made by GOLD before expiry of the performance bond, BACB contends that that claim (and/or any claim for payment under the BACB counter-guarantee) was not received by BACB "soonest thereafter" as required by the terms of the instrument. BACB contends therefore that it is not liable to CBS under the terms of the BACB counter-guarantee.

It is to be noted that the arguments of BACB and BOC are to the effect that under the terms of their counter-guarantees, it is a condition of their liability that (1) CBS received a claim from the beneficiary (being they say a demand for payment) on or before 1.00 pm on the expiry date, that is 31 December 2001, and that (2) this claim reached them soonest thereafter. CBS accepts that the first (but not the second) was a condition, and says that both were complied with. It follows that BACB does not contend that liability under its counter-guarantee was solely predicated on a demand for payment made by CBS within time (similarly as to BOC). Whether or not a claim from the beneficiary was received by CBS before expiry of the performance bond is a factual question, in that sense qualifying the “on demand” nature of the counter-guarantees.

For its part, CBS submits that the BACB counter-guarantee in its favour is governed by Syrian law and that, under Syrian law, BACB remains liable under the counter-guarantee until 31 December 2011 or is, in the alternative, liable to make payment to CBS of the full amount of the performance bond. It submits that under Syrian law, CBS was bound to accede to, and would be treated in Syrian law as having acceded to, GOLD’s 5 December 2001 request for extension and each annual request for extension thereafter. This would mean that the performance bond has remained alive over this period and is due to expire on 31 December 2011. The effect of this analysis is that BACB is bound under Syrian law to stand behind the performance bond—either by agreeing to extend the counter-guarantee or by payment of the full amount of the bond. On timing under the counter-guarantee, it is submitted that the court ought to construe the words “and this claim(s) must reach us soonest thereafter” not as imposing a condition for the validity of claims, but rather as an administrative requirement, where a failure to comply would sound only in damages. By late amendment, CBS also submits that BACB remains liable under its counter-guarantee even were the court to decide, contrary to CBS’s submissions, that it is governed by English law. This is on the basis that the court would need to look to Syrian law in relation to the meaning of “claim” as used in the instruments. CBS’s case is that Syrian law would consider GOLD’s 5 December 2001 request for extension to be a valid “claim” under the performance bond.

BACB and BOC’s basic position is that BACB is not liable to CBS, so that neither bank is liable on its respective counter-guarantee. Essentially, BACB has argued that it is entitled to pass on to BOC any liability that it does have. It submitted that if it remains liable to CBS under its counter-guarantee, whichever law applies to it, BOC must similarly remain liable to BACB under the BOC counter-guarantee. This, it says is the conclusion to be drawn from the language of the BOC counter-guarantee. The obvious intention of these provisions, BACB says, is to ensure that, for as long as BACB may be liable to CBS under its counter-guarantee, it should be entitled to seek an indemnity from BOC under the BOC counter-guarantee. BACB passed on BOC’s demand of 19 January 2002 “soonest thereafter” and, if and to the extent that this is a condition precedent to BOC’s liability under the BOC Counter-Guarantee, the condition was fulfilled.

In substance, BOC’s answer is that the guarantee chain is not a simple chain of indemnities—each instrument is autonomous and the wording of each makes it clear that payment is to be against a compliant demand rather than as a back to back indemnity. In any case, it is said that CBS’s cause of action against BACB arose in 2002 when BACB neither extended nor paid and when any obligation to pay must have crystallised so that any claim became time-barred in early 2008 before CBS issued a counterclaim. BOC says it can only be liable on the basis that the letter of 5 December 2001 amounted to a claim under the BOC counter-guarantee which was passed “soonest thereafter” to BOC, on the footing either that the request for extension in that letter amounted in English law to a claim on the performance bond, or on the basis that the letter amounted to a claim on the performance bond as a matter of Syrian law and one should look at the Syrian law treatment of that letter when construing the BOC counter-guarantee, both of which propositions it submits are wrong.

There is no dispute that the performance bond is governed by the law of Syria, and that the counter-guarantee given by BOC to BACB is expressly governed by English law. However the counter-guarantee given by BACB to CBS (unlike the BOC counter-guarantee) contained no express choice of law clause. CBS maintains that it is governed by Syrian law, whilst BACB maintains that is governed by English law, and this is the first issue which I have to resolve. It is common ground that the question is to be determined by the provisions of the Contracts (Applicable Law) Act 1990 and Articles 3 and 4 of the Rome Convention to which that Act gives effect.

Articles 3 and 4 provide as follows:

“ Article 3 Freedom of choice

1.

A contract shall be governed by the law chosen by the parties. The choice must be express or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

....

Article 4 Applicable law in the absence of choice

1.

To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. ...

2.

Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporated, its central administration. ...

...

5.

Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.”

There is a considerable measure of agreement as to the principles to be applied, the primary disagreement being as to how they are to be applied on the facts. In summary, CBS relies on the fact that the guarantee is governed by Syrian law, and contends that applying either of Article 3(1), express choice, or Article 4(5), closest connection, leads to the conclusion that Syrian law governs the BACB counter-guarantee, an outcome which it says is supported by cases dealing with back-to-back obligations of this kind. Its case under Article 3(1) arises by recent amendment. BACB contends that there was no common subjective intention to subject the BACB counter-guarantee to Syrian law, and that applying the presumption in Article 4(2), as between BACB and CBS, the party who provides the characteristic performance under the BACB counter-guarantee is BACB as the guarantor. The governing law is therefore the law of the country in which BACB has its central administration, that is English law, and there is no reason for the presumption to be disregarded under Article 4(5). (These arguments do not directly concern BOC.)

Each bank relies on a number of factors supporting its respective argument. BACB emphasises that its intention was plainly to create a back-to-back relationship with BOC. That shows, it says, that the parties cannot have had a common intention that Syrian Law governed. As regards Article 4, the fact that the CBS guarantee was governed by Syrian law does not lead, it is submitted, either on authority, or on the facts of the case, to a disregarding of the “characteristic performance” test stipulated in Article 4(2). As to connecting factors under Article 4(5), reliance is placed on the fact that (1) any claim or demand by CBS for payment under the counter-guarantee would have to reach BACB in London, (2) any payment by BACB to CBS was due to be made into CBS’s account with BACB in London, (3) the key element of performance under the counter-guarantee is the honouring of the payment undertaking of BACB as guarantor, which is geographically located in England, and (4) that the law of the BOC counter-guarantee is English law.

CBS submits that commercial parties would expect the counter-guarantee to be governed by the same law as the guarantee itself. Under Article 3, the court is concerned not with the subjective intention of the parties, but with whether they have made a real choice. In this context, reliance is placed upon the reference to governing law in Circular 164/40. The choice of English law as regards the BOC counter-guarantee is irrelevant, it is submitted, because CBS would not have known about such choice. As regards Article 4, CBS accepts that the performance which is characteristic of the BACB counter-guarantee is that of BACB as guarantor, and that since its central administration is in England, an application of the Article 4 (2) presumption leads to English law. However it submits that the circumstances as a whole show that the contract is more closely connected with Syria, and that under Article 4(5) Syrian law is the governing law because of (1) the importance as shown in the case law of preserving a common governing law between related contracts, (2) the fact that the underlying contract and the underlying infrastructure project are in Syria, (3) the fact that payment under the bond is to be in Syria, (4) the fact that for the BACB counter-guarantee to be triggered there must have been a “claim” under the performance bond, and what counts as a claim is a matter for Syrian law and regulations to determine, (5) and because GOLD and CBS are both located in Syria.

For completeness, I should mention that the first edition of the ICC Uniform Rules for Demand Guarantees was published in 1992 at about the time of issuance by the parties of their respective instruments, but the rules were not incorporated into them. Since the parties did not address argument on the URDG, I do not deal with them below.

In a number of cases of pre-Rome Convention cases, as counsel have pointed out, the English courts held that in the absence of a choice to the contrary, a counter-guarantee would usually be governed by the same law as the guarantee: see e.g. Turkiye Is Bankasi A.S. v Bank of China [1993] 1 Ll Rep 132, Phillips J; Wahda Bank v Arab Bank plc[1996] 1 Ll Rep 470 (CA), Staughton LJ (with whom Henry and Pill LJJ agreed). The reasoning flowed from the more general proposition that the legal or commercial connection between one contract and another may enable a court to say that the parties must be held implicitly to have submitted both contracts to the same law: see e.g. The Broken Hill Proprietary Co. Ltd. v Theodore Xenakis [1982] 2 Ll Rep 304, Bingham J. A recent decision decided under the Rome Convention applied similar reasoning (Emeraldian Ltd Partnership v Wellmix Shipping Ltd[2010] 1 CLC 993 at [[170], Teare J), though the case did not involve a counter-guarantee.

In the present case, it is not in dispute that the interpretation of the Rome Convention rules should be looked at from a broad Convention-based approach. There was no express choice of Syrian law in the counter-guarantee, and the first question therefore is whether CBS can show that such choice is “… demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case” (Article 3(1)). Again, it is not in dispute that, as the Giuliano-Lagarde report says, it must be a “real choice” which the parties had a clear intention to make. A tacit choice must only be found where it is reasonably clear that it is a genuine choice by the parties (see Clarke J’s review of academic authority in Oldendorff v Libera Corp [1996] CLC 482 at p. 505-6, cited by Potter LJ in Samcrete Egypt Engineers and Contractors S.A.E. v. Land Rover Exports Ltd [2002] C.L.C. 533 at [26 - 27]). It follows that both parties must be shown with reasonable certainty to have had a common intention, though I consider (in agreement with Mr Daniel Toledano QC, counsel for CBS) that it is unnecessary to distinguish between subjective or objective intention in this regard. The fundamental question is whether in the absence of an express choice, there was nevertheless a real choice. As Giuliano-Lagarde put it, “This Article does not permit the court to infer a choice of law that the parties might have made where they had no clear intention of making a choice. Such a situation is governed by Article 4” (Report on the Rome Convention by Prof. Mario Giuliano and Prof. Paul Lagarde O.J.1980 No.C 282/1 at 282/17).

I record that Mr Gary Bishop, BACB’s Head of Operations, says that the bank would not have agreed to Syrian law governing, and that nowadays it always aims to include an English choice of law in its documentation. This evidence however cannot be given much weight, if only because he was not responsible for the transaction at the time. The significant point in my judgment is that no choice of law clause was incorporated in the counter-guarantee when it was issued—it would have been straightforward to do so, as was done in the BOC counter-guarantee. Equally, there was an express stipulation as to the governing law of the performance bond in Circular 164/40 sent by CBS to its correspondents on 19 January 1988 (“Your undertaking and commitment that subject guarantee (issued by us on your behalf) is subject to Syrian Laws in case of dispute or disagreement arises, and that the place of its issue in Syria shall be chosen as domicile in all that concerns its provisions”). I consider (in agreement with Mr Alain Choo-Choy QC, counsel for BACB) that in those circumstances the fact that the BACB counter-guarantee was silent on the subject militates against the conclusion that there was a “real choice” of Syrian law, or, I would add, English law. I do not see any factual basis for CBS’s response—this is to the effect that the absence of any discussion of the governing law is readily explained on the basis that no discussion was thought necessary in view of the reasonably to be expected application of the law of the performance bond resulting from cases such as Wahda Bank v Arab Bank plc¸ ibid. The existence of a close connection between two contracts is significant, but it does not obviate the need to consider whether the requirements of Article 3(1) are satisfied by reference to the terms of the contract and the circumstances of the case. In my judgment, CBS has not demonstrated with reasonable certainty a choice of Syrian law.

Moving to Article 4, CBS rightly accepts that BACB as guarantor is the party which is to effect the performance which is characteristic of the counter-guarantee, and that its central administration is in England. Accordingly, an application of the presumption under Article 4(2) leads to English law as the governing law of the BACB counter-guarantee. However, CBS submits that by virtue of Article 4(5), the court should disregard the presumption on the basis that it appears from the circumstances as a whole that the contract was more closely connected with another country, namely Syria, and that therefore Syrian law is the governing law of the counter-guarantee. The burden of proof is on CBS in this regard (Samcrete at [37]).

It has been questioned whether, when applying Article 4(5), the court may have regard to the governing law of a related transaction, as in Wahda Bank v Arab Bank plc, and other authority cited above, or whether this is precluded on the basis that such an approach would wrongly import into Article 4 considerations that are only relevant under Article 3(1). In Samcrete at [49], Potter LJ said that it was “… not necessary to decide whether and to what extent the existence of a choice of law clause in a contract the subject of a guarantee, if ineffective to give rise to a tacit choice of law under art. 3 in respect of the guarantee itself, may nonetheless, be regarded as a connecting factor in the sense required by art. 4”. His inclination, he went on to say, would be that it may not.

The question can now be addressed in the light of Intercontainer Interfrigo SC v Balkenende Oosthuizen BV [2010] QB 411 in which Article 4 of the Rome Convention was considered by the European Court of Justice for the first time. The ECJ declined to adopt an overly restrictive or strict approach to the application of Article 4(5), stating (at [59]) that the article was intended to introduce “a certain flexibility”. At [64], the court said:

“… article 4(5) of the Convention must be construed as meaning that, where it is clear from the circumstances as a whole that the contract is more closely connected with a country other than that determined on the basis of one of the criteria set out in article 4(2) to (4) of the Convention, it is for the court to disregard those criteria and apply the law of the country with which the contract is most closely connected.”

Both counsel agree, in my view correctly, that the tentative view expressed in Samcrete is overtaken by the reasoning in Intercontainer Interfrigo. The court is not precluded from taking into account any particular type of factor when applying Article 4(5), and is not required to look at the contract in question in isolation from other contracts with which it is connected. Authority is to be found in the context of reinsurance in Gard Marine and Energy Ltd v Glacier Reinsurance AG [2010] EWCA Civ 1052, which was decided following the Intercontainer Interfrigo decision. The court held that the presumption of Swiss law under Article 4(2) would be disregarded in favour of English law for reasons which included the fact that other parts of the reinsurance were governed by English law and the fact that the underlying policy was governed by English law (see [39] – [47], Thomas LJ with whom Richards and Ward LJJ agreed). See also earlier cases in the context of letters of credit adopting the same approach: The Bank of Baroda v The Vysya Bank Ltd [1994] 2 Ll Rep 87, pp 92-3, Mance J; P T Pan Indonesia Bank Ltd v Marconi Communications International Ltd [2005] EWCA Civ 422 at [51]; and in the context of guarantees, Emeraldian, ibid, at [171], Teare J. Finally, and with specific reference to counter-guarantees, Dicey, Morris & Collins, The Conflict of Laws, 14^th edn, state at 33-318: “It is submitted that a similar approach [to letters of credit] can be taken in the case of a counter-guarantee so as to reach the conclusion that the same law applies to that contract as applies to the performance bond”. Brindle & Cox, Law of Bank Payments, 4^th edn (2010) paragraph 8-136 express a similar view, and this effectively summarises CBS’s case in this regard.

As against that, BACB relies upon the factors I have identified above, including the fact that the claim was to be made to BACB in London, where BACB is geographically located, and where the key element of performance is the honouring of its payment undertaking as guarantor. These are plainly factors that connect the counter-guarantee with England. On the other hand, I cannot give the same force to the other factors relied upon by BACB. Whilst the evidence is that any payment due would in practice be made into an account which CBS held with BACB in London, there was no term in the instrument which gave this place of payment contractual effect. Whilst it is also correct that the BOC counter-guarantee was governed by English law, the case law has emphasised the importance of the connection to the guarantee rather than the counter-guaranteeing bank’s own security arrangements (Wahda Bank v Arab Bank plc, ibid, at 473, citing in addition to the above authorities Bank of Credit and Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Ll Rep 227 at 237, Cresswell J). A material point on the facts of the present case is as follows. As I have noted, BACB puts the case on the basis that it was a condition of liability under its counter-guarantee that CBS received a claim under the performance bond from the beneficiary on or before the expiry date. That raises the question of what is meant by “claim” for these purposes, and the law under which that question should be determined. The performance bond was governed by Syrian law, and on that basis, CBS submits that the court would need to look to Syrian law in relation to the meaning of “claim” as used in both instruments. This is correct in my view, and is an additional connecting factor to Syria. For all these reasons, I am satisfied from the circumstances as a whole that the counter-guarantee is more closely connected with Syria than with England—the court must therefore disregard the application of English law under Article 4(2) and apply the law of Syria to the contract.

I should state that if (contrary to my finding) the counter-guarantee was governed by English law, it is not in dispute that as a matter of English law the beneficiary’s letter of 5 December 2001 was not a “claim” for the purpose of the counter-guarantee—it was a request for an extension, not a demand for payment, and the two are different.

However, I must now make my findings as to the position under Syrian law. In this regard, the court received detailed evidence from two well qualified experts. Mr Abdulhay Sayed, Managing Partner of Sayed & Sayed, a law firm based in Damascus, gave evidence of behalf of CBS. Mr Fadi Sarkis of Sarkis & Associates, also a Damascus law firm, gave evidence for BACB (BOC did not call its own evidence). Both were good witnesses, and Mr Sayed in particular had an impressive grasp of the issues both from a Syrian, and an international, perspective.

In closing submissions, CBS helpfully identified the salient matters on which it relies. In so far as the evidence went beyond that, I need make no findings, and do not do so. In summary, for CBS the evidence of Mr Sayed is that if, prior to the expiry date, CBS receives a request for extension of a performance bond issued in a public procurement context (as this one was) CBS is obliged in law to grant the extension. The 5 December 2001 telex from GOLD therefore obliged CBS to extend the performance bond. A correspondent bank such as BACB, which instructs CBS to issue a performance bond in a public procurement context on behalf of the correspondent bank and at its entire responsibility, will be considered in law as bound to stand behind CBS’s obligations to the beneficiary, either by approving an extension of the performance bond and the counter-guarantee or, if it so chooses, by paying the full amount of the performance bond.

In summary, for BACB the evidence of Mr Sarkis is that even in the public procurement context, Syrian law gives effect to a performance bond according to the agreed terms. There was no valid demand for payment by GOLD within the validity period of the bond, with the consequence that BACB’s liability under its counter-guarantee expired on 31 December 2001, it being under no liability to extend or make payment.

To give their evidence context, it should be noted that the question whether Syrian law gives effect to expiry dates in performance guarantees has been the subject of some international commentary. This is therefore, CBS fairly point out, a recognised issue. The evidence from both witnesses has been that the Syrian Government has encouraged public authorities (such as GOLD) to take proper steps prior to expiry of performance guarantees in accordance with international practice, and not to rely upon inaction as resulting in continued validity. There appear to have been concerns over damage to Syria’s international reputation when public authorities have done this. The nub of the issue between the experts was whether, as Mr Sarkis considers, Syrian law gives effect to the desired result, or whether, as Mr Sayed considers, it is still (as he elegantly put it) lex ferenda.

Since Mr Sarkis considers that the matter is determined by the terms of the bond, it is convenient to focus on the case as to Syrian law advanced by CBS in its closing submissions. It submits that the court should find that the Syrian Public Procurement Act of 1974 and the principles reflected in it have legal precedence over a strict application of Articles 148 to 152 of the Civil Code (which contain basic principles of contract law such as pacta sunt servanda) so far as performance bonds and counter-guarantees entered into in a public procurement context are concerned. This means that, first and foremost, such instruments will be interpreted in accordance with the Public Procurement Act and the principles reflected in it and not in accordance with the usual rules of construction which would be applied in a private law context. The consequence of this is that performance bonds and counter-guarantees entered into in a public procurement context are construed under Syrian law conservatively with the aim of promoting the state/public interests involved.

The court should find, CBS submits, that under Syrian law the consequences are as follows. Performance bonds issued in a public procurement context must be held by the beneficiary for the entire duration stipulated by Articles 41(b) and 42 (final paragraph) of the Public Procurement Act. These provisions are included for the protection of the public purchasing entity and the safeguarding of public funds. Under Syrian law, the beneficiary is given a wide discretion to see that these provisions of the Public Procurement Act are implemented. If performance bonds are issued in a public procurement context for a fixed period of time, beneficiaries are entitled to take such steps as are needed to ensure that they are extended or renewed so that there is the equivalent of cash in place for the entire duration stipulated in the Public Procurement Act.

CBS, as issuing bank of a performance bond issued in a public procurement context, cannot rely on an expiry date in such a performance bond if the beneficiary indicates prior to the expiry date that the performance bond needs to remain in place because the duration stipulated by the Public Procurement Act has not come to an end. To this extent, expiry dates in performance bonds are not enforceable. This means that if, prior to the expiry date, CBS receives a request for extension of a performance bond issued in a public procurement context it is obliged in law to grant the extension. The 5 December 2001 telex from GOLD therefore obliged CBS to extend the performance bond.

So far as the correspondent bank is concerned, CBS submits that the court should find that under Syrian law, a correspondent bank which instructs CBS to issue a performance bond in a public procurement context on behalf of the correspondent bank and at its entire responsibility, will be considered in law as bound to stand behind CBS’s obligations to the beneficiary, either by approving an extension of the performance bond and the counter-guarantee or, if it so chooses, by paying the full amount of the performance bond. This conclusion is applicable to BACB in the present case because BACB asked CBS to issue the bond to a state owned entity in a public procurement context and “in accordance with” Circular 164/40, including paragraph A thereof. (Paragraph A says, “Your application should clearly state your request to issue on your behalf and upon your entire responsibility our letter of guarantee in official text”). On this basis, because GOLD has continued to request successive year on year extensions, it is CBS’s case that BACB remains liable on its counter-guarantee until 31 December 2011. CBS has a further point under Article 99 of the Civil Code based on post 2001 events which I shall come to.

My findings as to Syrian law in this respect are as follows. First, I accept Mr Sayed’s evidence that the Public Procurement Act is lex specialis, in the sense that it takes priority over the general provisions of the law of contract. In the context of bank guarantees, such a principle has the support of the Advisory Opinion of the Syrian State Council, which is a judicial body, dated 6 June 1980. The effect, according to the oral evidence of Mr Sarkis, which I also accept, is that in the case of conflict with the general law, priority would be given to the procurement law. It should however be noted that (as is common ground) the provision of the Public Procurement Act that gives recognition to this principle (Article 56B) does so in the context of the contract between public body and contractor (here GOLD and Sichuan Machinery). It should also be noted that the Advisory Opinion of 6 June 1980 (and a later Opinion of 14 April 2001) do not in themselves resolve the issue in this case because they were given at a time when (as Mr Sayed accepted) the form of performance bond used by CBS contained a specific expiry date, but went on to state that CBS would be “liable to pay the equivalent of this bond on expiry of the period thereof to your treasury without the need for any transaction or warning on your part ...”. There was, I find on the basis of the evidence of both experts, a change in the position in that regard introduced by Prime Minister’s Circular No. 43 of 1987, which attached new forms of bank guarantee. Finally, although in general terms I accept CBS’s case that guarantees entered into in a public procurement context are construed conservatively under Syrian law with the aim of promoting the state/public interests involved, the issue is whether extension is obligatory notwithstanding the terms of the instrument, which issue has to be determined according to the law. It was not suggested in any way that state interests would be promoted regardless of the law.

In that regard, as the parties agree, the 5 December 2001 telex from GOLD to CBS was a request to work for the extension of the performance bond. Consequently, the question is whether that request triggered an obligation on CBS to grant the extension. The key provisions relied on by CBS are Articles 41(B) and 42 (final paragraph) of the Public Procurement Act of 1974, although it submits that this gives effect to a broader principle. The Act deals with public procurement issues such as the tendering process. Articles 40 to 43 deal specifically with bonds and down payments. The agreed translation of the central provisions, namely Articles 41(B) and 42 (final paragraph), is as follows:

“Article 41

…

(B)

Performance bonds shall be released to their owners following the final acceptance, with respect to the provision of supplies and services; as to the provision of works, performance bonds shall be returned following the provisional acceptance, except if such obligations upon the contractors have arisen that justify the retention of the bonds.

…

Article 42

…

The contracting authority shall keep the final guarantee to ensure the good performance of the obligations incumbent upon the contractor in accordance with the contract agreed with him, and to pay up delay penalties as well as all damages arising out of any harm sustained as a result of the contractor’s breach of his obligations.”

Mr Sayed’s evidence is that the effect of these provisions is that so long as the beneficiary expresses an opinion that the bond needs to be maintained, it must be maintained, and this must be accepted by the contractor and by the bank. He says that various circulars have shown progressive movement and development in Syrian law relating to expiry dates. The most significant change (and this is common ground) occurred in 1987 by way of Prime Minister’s Circular No. 43 when the new forms were introduced. The focus of the change so far as expiry dates was concerned was to shift the burden away from CBS, and away from the making of payment at expiry, and onto beneficiaries to (as he put it) “speak up” prior to the expiry date. However, the development of the law has not, he considers, gone so far as to cause a “paradigmatic change”. The position remains that a request by the beneficiary prior to expiry is binding on CBS. Binding requests for extension prior to expiry are preserved, he says, by circulars which only allow CBS to cancel performance bonds where CBS receives no reply or no instruction from the beneficiary prior to expiry.

The evidence of Mr Sarkis on the other hand is that where the issuing bank commits itself up to a certain amount and for a certain period, its liability is only commensurate with those terms, and the provisions of the Public Procurement Act make no difference to the liability of the bank and the public authority between themselves.

Both parties are in agreement as to the importance of reading these provisions together with applicable circulars. The most important of these is Prime Minister’s Circular No. 43 of 1987 to public entities concerning the approval of unified forms of bank guarantees which I have mentioned already. A Prime Ministerial circular is one of the means by which enacted laws are implemented by the executive in Syria, and are effectively mandatory. The circular had as an annexure three forms of guarantee, two of them being advance payment guarantees, and the other being the form of performance guarantee that was substantively the same as that given in due course by CBS to GOLD. It is also common ground that it was this circular that led to the sending in January 1988 by CBS of Circular 164/40 to its correspondent banks. This circular is referred to in the counter-guarantees, and it also attached the forms of guarantee that had been approved by the Prime Minister.

Both experts placed reliance on Circular No 43 of 1987. Mr Sayed pointed to language that states that, “The contracting entity for whom the guarantee is issued shall be responsible for determining the validity period of such guarantee and following the performance thereof. Therefore such entity shall duly follow the procedures for payment, renewal or extension of the guarantee. In order to ensure the procedures are duly followed, a special register shall be prepared for guarantees recording the numbers, dates, due dates and payment dates of such guarantees as per the applicable manual. [The last five words to the agreed translation were added by Mr Sarkis and it is accepted that they accurately reflect the Arabic.] The beneficiaries shall return the guarantees together with their extensions and amendments to the issuing bank upon approval by such bank to pay the guaranteed amount or upon expiry of the purpose for which the guarantee was issued”.

Mr Sarkis did not agree that this meant that validity continued automatically if a request for extension of the bond was made. He emphasised in his evidence that the form of performance guarantee that was annexed to the circular provided for a stated period of validity. It stated that the guarantee “cannot be cancelled during its validity without your [i.e. the beneficiary’s] written consent”. It stated, “Automatically thereafter [i.e. after the end of the stated validity date], our obligation under this guarantee will cease without need for warning or any other procedure, and all claims received will be ignored and will be considered cancelled unless we [i.e. the issuing bank] proceed to extend or renew it in writing.” As to the “procedures” that are referred to in the circular, BACB says that these are as set out in CBS Board Resolution 4407 of 1973, though it is to be noted that this board resolution was some fifteen years earlier. It does however clearly state that the correspondent bank’s prior written consent is required, and this plainly implies that without such consent, the correspondent bank will not be liable, and I am satisfied that it was required.

The experts explained that unlike a Prime Ministerial circular which is mandatory, a CBS circular reflects the bank’s understanding of the applicable law. Subject to that limitation, particular reliance was placed by both BACB and BOC on a later circular namely Circular 3114/04 issued by CBS to its branches on 25 September 1999. It reads in part:

“In our above mentioned circular [this is a reference to an earlier circular] we stressed the importance of giving notice to all beneficiaries in order to state their positions regarding guarantees which are due within fifteen days from receiving their notice (with acknowledgement of receipt), failing which such guarantees shall be cancelled without the consent of such beneficiaries regardless of whether the original document has been received or not. We learned about some problems happening at some branches because of sending these notices, apart from multiplying the volume of work in the guarantees sections. Upon sending the said notice to the beneficiaries in order to return the overdue guarantee which has not been claimed during the validity period, such beneficiaries requests the concerned branch to extend or pay the guarantee amount, mostly after the validity date, which is in breach of the official wording of the guarantee approved, under the Prime Minister’s instructions no. 43/B/1637/15 dated 26.05.1987 which provides that a guarantee which is not claimed during the validity period shall expire on the due date. We should keep in mind that upon the expiry of the validity period, a corresponding bank will immediately cancel such guarantee and close its file if it does not receive a request from us for extension or payment within the validity period.”

As a matter of language, Circular No 43 of 1987 does not in terms allow CBS to cancel performance bonds only where it receives no reply or no instruction from the beneficiary prior to expiry. On the other hand, the language of Circular 3114/04 of 1999 and in particular the reference to the “official wording of the guarantee approved, under the Prime Minister’s instructions” gives support to BACB’s submissions. It is of some interest that it appears to have been interpreted consistently with BACB’s submissions in international commentary as I shall mention.

Lastly, so far as it is necessary for this judgment to refer to specific circulars, BACB relies upon CBS Circular 692 of 30 March 2002, which “re-stressed that [branches] should comply with” a 1970 Circular “stating that the renewal or extension of a bank guarantee shall not be automatic [or in Mr Sayed’s preferred translation, presumed] and that both parties should agree to such extension before the expiry of the validity period”. The experts were not in accord as to who “both parties” were for these purposes. Mr Sayed thought it was a reference to CBS and the beneficiary, whilst Mr Sarkis thought that it was a reference to the contractor and the beneficiary. Either seems to me to be a reasonable reading of the language, but even if Mr Sayed is correct, the circular is supportive of BACB’s case, because it explicitly recognises that extension is not automatic, merely because requested, but has to be consensual.

The central issue is whether the evidence shows that under Syrian law CBS is obliged to grant a request for an extension where the performance bond is issued in a public procurement context. Such an obligation, both parties agree, must be found in law, not practice. In cross examination, Mr Sayed suggested that practice in relation to automatic extensions has crystallised into “customary law” because it is supported by the opinio juris. However that possibility is not mentioned in his written report, and does not take account of the fact that the practice, to the extent that it happens, is regarded as unsatisfactory, and efforts have been made to change it. I cannot give this suggestion much weight.

I return therefore to the key provisions relied on by CBS, namely Articles 41(B) and 42 of the Public Procurement Act of 1974, viewed against the legislative policy of protecting the public purchasing entity. Mr Sayed’s opinion was principally based on the words, “performance bonds shall be returned following the provisional acceptance, except if such obligations upon the contractors have arisen that justify the retention of the bonds” (Article 41B), and, “The contracting authority shall keep the final guarantee to ensure the good performance of the obligations incumbent upon the contractor in accordance with the contract agreed with him” (Article 42).

The intention is clearly to require the public authority to maintain the performance guarantee in force while the contract is on foot up to the time of provisional acceptance. Essentially the difference between the experts was that Mr Sayed considered that this provision imposed obligations upon the issuing bank, whereas Mr Sarkis considered that it applied between contractor and public authority only. According to Mr Sarkis, the obligations of the bank are as stated in the instrument which it has issued. In the present case, and in accordance with the form annexed to Circular No 43 of 1987, he says that the bank’s undertaking is clear. In the case of breach by the contractor, it undertakes to pay the amount of the guarantee upon the beneficiary’s first written demand to reach the bank during the validity of the instrument. Automatically thereafter, its obligation under the guarantee will cease, unless the guarantee is extended. Extension refers to a consensual extension, in the absence of which, Mr Sarkis considered that the beneficiary could fulfil its obligation under the Public Procurement Act by requiring payment, so long as it did so in time. But, he considered, regardless of whether the public authority complied with its obligations under the Public Procurement Act, the bank’s liability is as stated in the instrument.

Mr Sayed accepted this last point in his answers in cross-examination:

“A. The instruments need to be in line with the various provisions, you know, as a matter of form, with the public procurement requirements.

Q. But if they are not --

A. If they are not there should be consequences on the public procuring authority from oversight agencies, you know, responsibilities from the persons who have accepted this as a matter of administrative law, and that’s something that is absolutely possible.

Q. Yes. But so far as the bank is concerned, its liability is only as stated in the performance bond that has been accepted by the public authority?

A.

Yes.”

I prefer the evidence of Mr Sarkis on this issue. I am satisfied that CBS was not under an obligation to extend the performance bond by reason of GOLD’s request for an extension. I do not accept the suggestion (tentatively made) that the language of the letter of 5 December 2001 was wide enough to encompass a demand for payment, because it plainly was not. There is a further point that appears to me to support BACB’s analysis. The terms of the performance guarantee say that the beneficiary’s first written demand (which Mr Sayed accepts must be a demand for payment) has to reach CBS during the validity period of the instrument. Automatically thereafter, CBS’s obligation under the guarantee will cease “unless we proceed to extend or renew it in writing”. In the case of the extensions up to 31 December 2001, CBS issued BACB with an Advice of Extension stating that the guarantee had been extended, in the case of the last such Advice to 31 December 2001. There is no further such document. CBS accepts that the consequence of that is that it cannot point to an extension or renewal document such as the wording of the instrument contemplates. It submits however that it does not “necessarily follow” that the 5 December 2001 request had no legal status under Syrian law.

I accept that this may not necessarily follow, but the fact that there are no subsequent extension advices supports the view that extension had to be consensual, and would not happen automatically upon a request being made. If such a view was in fact taken by CBS at the time, I consider upon the evidence that I have heard that it was the correct view. I am satisfied that Syrian law required either a demand for payment made within the validity period of the guarantee, or a consensual extension of the validity period, neither of which occurred.

On that basis, I find that as a matter of Syrian law, CBS’s liability under the bond expired on 31 December 2001, and there was no liability for it to pass on to BACB, and there were thereafter no liabilities which (to quote CBS’s closing argument), BACB was bound to stand behind. (It also follows that there was no liability for BACB to pass on to BOC under its counter-guarantee, which had an express choice of English law.) I need not express a final view as to whether, had such a liability existed, BACB would have been liable by virtue of the language of paragraph A of Circular 164/40, or liable to the beneficiary directly on an agency, or on a joint liability basis, as suggested by Mr Sayed. There was a suggestion that BOC might equally be liable as joint and several obligor (albeit Mr Sayed accepted that this would be considered extreme). As counsel for CBS acknowledged, these would be difficult (one might think impossible) propositions for a correspondent bank to accept, and the expectation would be that the liability of the banks would depend on the terms of their respective counter-guarantee. They were not abandoned, but not pressed, in closing submissions. Mr Sarkis rejected any such analysis, and I do not find it persuasive. I find that the correspondent bank’s consent was required to an extension or renewal of a bond if such bank was to remain liable under its counter-guarantee.

As mentioned, it was a condition of the BACB counter-guarantee (and of the BOC counter-guarantee) that CBS received a claim from the beneficiary on or before 1.00 pm on the expiry date, that is 31 December 2001. I accept Mr Sayed’s evidence that where the term “claim” is used in the performance bond, it refers to a demand for payment. I do not accept his evidence that where the term “claim” is used in the counter-guarantee it means a demand for payment or a request for extension. As a matter of Syrian law, I am satisfied that they have the same meaning in both instruments. I find that there was no claim made in time as required under the counter-guarantees, and that BACB was not liable under Syrian law on its counter-guarantee.

CBS have a further point, as follows. Under Syrian law, in some circumstances silence may be deemed to be enough to constitute an acceptance under Article 99 of the Syrian Civil Code. I have set out the facts relevant to this submission above. From 2002 to 2006, BACB responded to CBS’s extend or pay demands by saying that it had referred the matter to BOC and would revert. BACB did not revert with a substantive response even after BOC had told BACB that in its view the performance bond had lapsed at the end of 2001 (which it did on September 2003). According to Mr Sayed, Syrian law would treat such conduct as amounting to a deemed acceptance of the extension requests under Article 99 of the Civil Code and would reject any later attempt by BACB to reject further extension requests. The result, he said, is that BACB will be treated in Syrian law as having approved an extension of the performance bond and as having extended the counter-guarantee.

Article 99(1) provides (in Mr Sayed’s translation) that, “In the event the nature of the transaction, the commercial custom or other circumstances indicated that the offeror did not anticipate a declaration of acceptance, the contract is deemed to have been concluded, if the offer is not refused within a reasonable time”. So far as silence in responding is concerned, Article 99(2) provides that there is deemed acceptance “when there is a previous dealing between the contracting parties, and the offer is connected to this dealing, or if the offer would benefit the offeree”. I am satisfied that Article 99 has no application to the present facts. There was nothing to suggest that CBS did not anticipate an express acceptance by BACB. It was suggested that there must have been an assumption that there was an extension, in order for CBS to ask for a further extension. This is contradicted (among other things) by the absence of any Advice of Extension beyond 31 January 2001. As BACB put it in its closing submissions, CBS never proceeded to renew or extend the performance bond. Further, this was not a case of silence in responding. BACB did respond, stating that it would revert to CBS after it had heard from BOC. Nothing in the course of dealing suggests otherwise, and I am satisfied that although CBS invited annual renewals of the counter-guarantee from 2002 onwards, BACB did not agree to a renewal under Article 99 or otherwise.

Both BACB and BOC rely on the language in the counter-guarantees by which their undertaking to payarises“PROVIDED YOU [CBS] RECEIVE SUCH CLAIM(S) FROM BENEFICIARY ON OR BEFORE [31 DECEMBER 2001], 1:00 P.M. AND THIS CLAIM(S) MUST REACH US SOONEST THEREAFTER”.(The language is slightly different in the BOC counter-guarantee, but not materially so.) They submit that it is a condition of their liability under the instruments that the beneficiary’s claim is made by 1.00 pm on 31 December 2001, and that the claim “must reach us soonest thereafter”. Though the issue does not arise on the basis (as I have found) that BACB did not incur liability on its counter-guarantee, my findings are as follows.

Mr Sarkis agreed with Mr Sayed that the term is not one used in Syrian bank guarantees, but nevertheless was of the opinion that it would be construed as meaning “immediately”, that the CBS telex of 19 January 2002 did not qualify for these purposes, and was accordingly not valid as a demand on BACB. Mr Sayed considered that the phrase “soonest thereafter” as used in the BACB counter-guarantee, when construed in the light of Circular 164/40 of 1988, imposes an administrative requirement on CBS to forward a beneficiary’s claim. It is not a condition precedent to the validity of the claim under the BACB counter-guarantee. The words provide CBS with latitude in relation to the forwarding of the beneficiary’s claim and do not impose a strict timetable on CBS. In particular, CBS was not required to ensure that the claim is received by BACB prior to the end of the validity period.

I prefer the evidence of Mr Sayed in this regard. In my view, he gives persuasive reasons for saying that under Syrian law the words should be read not as imposing a condition for the validity of claims under the BACB Counter-Guarantee, but rather as an administrative requirement, where a failure to comply would sound only in damages. That in my judgment is the position that obtains under English law, which is the law that applies to the BOC counter-guarantee. I accept that the words “soonest thereafter” are deliberately imprecise and non-specific—they clearly allow CBS some time to dispatch the claim and some time for it to be received by BACB. They cannot be construed as meaning the same as “immediately”. If that had been the intention, the word “immediately” would have been used. Alternatively, it would have been straightforward to impose a specified time limit, as is frequently done. I further accept the submission of CBS that in any event, the time lapse between 5 December 2001 and 19 January 2002 satisfied the “soonest thereafter” requirement whether or not the term is construed as a condition. The evidence as a whole shows that there was no particular speed in the communications which any of the three banks had with each other over the years, and though the claim clearly could have reached the counter-guaranteeing banks earlier than it did, I do not consider that on that ground they escape liability.

There is some commentary on the above issues in international sources, and I am indebted to Mr Sayed for very properly bringing it to the court’s attention. Particularly relevant in my view is Roeland F Bertrams, Bank Guarantees in International Trade, 2^nd edn, 1996, and 3^rd edn,2004. Mr Bertrams is not a Syrian lawyer, and his book is not source material, but it is of interest nevertheless because he considers the issues that the court has to decide in this case, and the position is stated to have changed. In the 1996 edition at page 196, it is stated that, in a small number of countries, it was “certain” that expiry dates were not enforceable “pursuant to local regulations, court decisions or practice”. The book goes on to identify Jordan, Lebanon, Syria and Thailand in this regard. As to Syria, it is stated that pursuant to CBS Board Resolution no 4407 of 21 March 1973 and to CBS Circular of 19 January 1988 “expiry dates in respect of performance guarantees are not enforceable”. It is stated at p. 197:

“It is especially confusing that Syrian performance guarantees even explicitly state that they cease to be valid upon the expiry date, unless extension has been requested before expiry. Since the expiry dates are not enforceable, the only event which terminates the guarantee, is the beneficiary’s statement of discharge or the return of the guarantee document. Because of this, the counter-guarantee in favour of the Syrian issuing bank provides that it remains in force until discharge, regardless of the expiry date of the counter-guarantee.”

This is entirely consistent with the case that CBS has advanced in these proceedings.

However a very different position is set out in the 3^rd edition of the book published some years later in 2004 under the heading, “Enforceability of expiry date uncertain, Syria”. At paragraph 12-51 (page 249-250) it is said that:

“12-51 Although, as mentioned in … there is a general and clear trend towards respecting the enforceability of expiry dates and although in respect of a vast number of countries the enforceability is, at present, beyond any doubt …, the possibility that this might still be different in some countries cannot be ruled out entirely.

One of those countries (if there are any others) is Syria. According to Resolution no. 4407 dated 21 March 1973 issued by the Board of Directors of the Commercial Bank of Syria, which is the only bank in Syria with the power to issue guarantees, expiry dates in respect of performance guarantees were not enforceable and such guarantees could not be cancelled until the beneficiary had returned the original guarantee document. Although the official texts of performance guarantees had been changed pursuant to a Circular Letter of 19 January 1988, to the effect that the demand for payment had to be made on or before the expiry date and that automatically thereafter the bank’s obligation ceases without the need for warning or any other procedure, and although the standard text of counter-guarantees in favour of the Commercial bank of Syria had also been adopted in that Circular Letter, uncertainty continued to prevail due to confusing and sometimes conflicting documentation from the Commercial Bank of Syria in the past. Clarity appears to have emerged from a Circular Letter of 30 July 1999 and 25 September 1999 from the Board of Directors of the Commercial Bank of Syria, stating that performance guarantees will be cancelled after their expiry date if there has been no request for payment within their validity period even though the original document has not been returned.”

I interpose to say that the parties have searched for these circulars, and the one which has been found is that dated 25 September 1999. It is common ground that this is Circular 3114/04 issued by CBS to its branches on 25 September 1999 which I have quoted in part above. The book continues:

“If any doubt still exists in respect of the enforceability of expiry dates and particularly of those in counter-guarantees in favour of the Commercial Bank of Syria, it is because of some phrases in the official text thereof which may be open to diverging interpretations. In the relevant part, the official text provides for an undertaking by the instructing bank to the Commercial Bank of Syria ‘to pay on simple demand within the validity period of the letter of guarantee, regardless of the date when such demand reaches you’ (i.e. the Commercial Bank of Syria) [italics added]. According to some representatives of the Western banking community the phrase in italics shows that, at least in respect of the counter-guarantee, expiry dates are not enforceable. It is more likely, however, that the provision, read as a whole, either means that, if the term ‘letter of guarantee’ relates to the primary guarantee issued by the Commercial Bank of Syria, it merely allows that bank a certain undefined mailing period for lodging a claim under the counter-guarantee provided that the primary guarantee had been called on or before its expiry date, or that, should the term ‘letter of guarantee’ relate to the counter-guarantee, the date of despatch of the demand by the Commercial Bank of Syria (as opposed to the date of receipt by the instructing bank) determines its timeliness.”

I take some comfort from the fact that, albeit acknowledging that the alternative possibility “cannot be ruled out entirely”, this passage is consistent with the analysis of Syrian law that I have accepted on the evidence. For completeness, I should add that Mr Sarkis adopted the view expressed by Mr Bertrams as to the meaning to be given to the words in CBS Circular 164/40 of 19 January 1988 “regardless of the date when such demand reaches you”, namely that it allows CBS a certain undefined mailing period for lodging a claim under the counter-guarantee provided that the primary guarantee has been called on or before its expiry date. I accept it as correctly stating the meaning of those words in Syrian law.

BACB and BOC’s basic position is that BACB is not liable to CBS, so that neither bank is liable on its respective counter-guarantee. I have found that position to be correct, and so will deal relatively shortly with the position between BACB and BOC. For understandable reasons, the position as between themselves has in any case had much less attention either in written and oral submissions, and there was some dispute as to the points that were open to BACB in this regard. As I have said, essentially BACB has argued that it is entitled to pass on to BOC any liability that it has to CBS. In its written opening at trial, it submitted that if it remains liable to CBS under its counter-guarantee, whichever law applies to it, BOC must similarly remain liable to BACB under the BOC counter-guarantee. This, it says is the conclusion to be drawn from the provisions in the BOC counter-guarantee (the text of which is quoted above) by which:

“OUR [i.e. BOC] LIABILITY UNDER THIS GUARANTEE TOWARDS YOURSELVES [i.e. BACB] WILL CEASE ONLY UPON RECEIPT OF YOUR ADVICE THAT YOU HAVE OBTAINED FROM COMMERCIAL BANK OF SYRIA, BRANCH 6, DAMASCUS, THE RELEASE OF YOUR COUNTER GUARANTEE. OUR COUNTERGUARANTEE TO YOU WILL AUTOMATICALLY BECOME ENFORCEABLE WHEN YOUR A/M COUNTERGUARANTEE BECOMES ENFORCEABLE.”

It also relies on the words at the beginning of the instrument. The obvious intention of these provisions, BACB says, is to ensure that, for as long as BACB may be liable to CBS under its counter-guarantee, it should be entitled to seek an indemnity from BOC under the BOC counter-guarantee. Since BACB has never “advised” BOC that it had obtained the release of its counter-guarantee from CBS, BOC must continue to remain liable under the BOC counter-guarantee. Further, if and in so far as CBS is entitled to payment by BACB of the performance bond, BACB must likewise be entitled to such relief against BOC, since the terms of the BACB and BOC counter-guarantees are in all material respects the same. BACB passed on to BOC CBS’s demand of 19 January 2002 “soonest thereafter” and, if and to the extent that this is a condition precedent to BOC’s liability under the BOC Counter-Guarantee, the condition was fulfilled.

On BOC’s part, there was a question whether an indemnity claim had been properly pleaded against it, though this was not pursued. In substance, BOC’s answer is that the guarantee chain is not a simple chain of indemnities—each instrument is autonomous and the wording of each makes it clear that payment is to be against a compliant demand rather than as a back to back indemnity. In any case, it is said that CBS’s cause of action against BACB arose in 2002 when BACB neither extended nor paid and when any obligation to pay must have crystallised in debt or damages as a right to be paid. Any claim became time-barred in early 2008 before CBS issued a counterclaim, and so there is no liability for BACB to be indemnified against. This argument gave rise to amendments at trial, BACB pleading the time bar point against CBS, and CBS responding that time only started to run in 2006 when BACB first made it clear that liability under its counter-guarantee was being avoided.

BOC says it can only be liable on the basis that the letter of 5 December 2001 amounted to a claim under the BOC counter-guarantee which was passed “soonest thereafter” to BOC, on the footing either that the request for extension in that letter amounted in English law to a claim on the performance bond, or on the basis that the letter amounted to a claim on the performance bond as a matter of Syrian law and one should look at the Syrian law treatment of that letter when construing the BOC counter-guarantee, both of which it submits are wrong.

It said that its potential liability was limited in this way because BACB did not effectively pass on in its pleadings and/or argument CBS’s claim for a declaration that the counter-guarantee is still valid (it is CBS’s case that BACB remains liable on its counter-guarantee until 31 December 2011). Again, the pleading point was not pursued, but as I understood it, BACB did accept that if Syrian law determined what was a valid claim for the purpose of the BACB counter-guarantee, and if a claim for an extension was valid in Syrian law so as to bind BACB, BOC’s liability to BACB could only arise by way of indemnity.

I accept BACB’s general submission that the intent of the contractual arrangements it put in place in 1993 was plainly that if it remained liable to CBS under its counter-guarantee (whichever law applied to it), BOC would similarly remain liable to BACB under its counter-guarantee. But I cannot accept that it did so by way of an indemnity given by BOC. This contention was advanced to secure coverage as regards the alternative claim made by CBS, namely that if not liable to pay the full amount of the performance bond, BACB nevertheless remains liable under its counter-guarantee until 31 December 2011 in the light of GOLD’s annual requests for extensions. This case could only credibly be passed on to BOC on the basis that it was liable as an indemnifier. Although the wording relied upon by BACB gives some support to the indemnity construction, viewed as a whole, the instrument is an irrevocable undertaking by BOC to pay upon simple demand. In my judgment (and in agreement with Mr Simon Kverndal QC, counsel for BOC) it takes effect as an autonomous instrument triggered by a demand according to its terms. It takes its place within a chain of autonomous instruments, being the two counter-guarantees, and the performance guarantee issued to the beneficiary. That being so, the limitation issues which gave rise to amendments of the pleadings at trial do not arise, and I need say no more about them.

As BOC submits, its liability depends on whether the terms of the counter-guarantee were satisfied. One such term, which appears in both counter-guarantees, and which both banks accept was a condition, was that a claim from the beneficiary should reach CBS on or before 31 December 2001. I have held that under Syrian law, as under English law, a claim for these purposes means a claim for payment, and that did not happen. It follows that BOC ceased to be liable under its counter-guarantee. However, as I have also indicated, I do not regard the “soonest thereafter” provision as amounting to a condition. If I had, I would have regarded it as satisfied for reasons set out above in relation to BACB. I do not understand any independent timing point to arise as between BOC and BACB, which (as the factual account set out above shows) notified BOC of the communication it had received from CBS promptly after receipt.

Finally, I should state that it is not in dispute that had the letter of 5 December 2001 been a valid claim under the performance bond, the SWIFT message which BACB sent to BOC on 25 January 2002 in “extend or pay” terms would have amounted to a valid claim under the BOC counter-guarantee. However, for the above reasons, that issue does not arise.

In substance, my conclusion is that neither BACB nor BOC is liable on their respective counter-guarantees. I will hear the parties on any consequential matters arising, and am grateful to them for their assistance.