Lukoil Mid-East Ltd v Barclays Bank plc

May 18, 2016

In the recent case of Lukoil Mid-East Ltd v Barclays Bank plc [2016] EWHC 166 (TCC) Lukoil Mid-East Ltd entered into a contract which engaged Baker Hughes Asia Pacific Ltd to drill several oil production wells in Iraqi oil fields. An on demand performance bond was issued by Barclays Bank plc on behalf of Baker Hughes, worth 5% of the contract value of $142.3 million. It provided that Barclays was responsible for the payment of $7.1 million if Baker Hughes failed to fulfill their contractual provisions. This was subject to a condition in paragraph 4, that no amendment had been made to the contract which impacted on the timely performance of the work.

In October 2015 Lukoil made a written demand to Barclays requesting payment, stating that Baker Hughes was in breach of its contractual obligations as it had failed to achieve any of the key milestones by the dates agreed in the contract. It had also failed to make payment of liquated damages due.

Barclays rejected the validity of the demand and refused to make the payment. They claimed that to comply with paragraph 4 Lukoil should have expressly stated in their request that no amendment had been made to the contract which impacted on the timely performance of the work. Kukoil subsequently issued proceedings against Barclays.

In its judgment the Court held that the bond should be interpreted as a whole, and any individual words or clauses should be interpreted in context. It would also not endorse an interpretation that is commercially absurd.

The Court also held that Barclay’s submission lacked ‘commercial or principled legal justification’. There was no express requirement in the bond that required Lukoil to make a statement that no amendment had been made to the contract which impacted on the timely performance of the works under it.

In addition, the Court found that the bond was incoherent, with paragraph 4 conflicting with paragraph 5. Barclay’s submissions were directly contrary to paragraph 5, which stated that no amendments to the contract would relieve Barclays from their responsibilities. It would therefore be illogical for Lukoil to communicate that there were any amendments that affect the timely performance of the contract, when such information was irrelevant to Barclay’s obligations to make payment.

Furthermore, the Court stated that it was ‘almost inconceivable’ that in the course of such a huge contract that there would be no changes to the scope of the works that would impact on timely performance. Barclays interpretation would have meant that Lukoil would essentially never have been able to make the statement required for a valid demand, in effect rendering the bond ‘virtually useless’. Barclay’s interpretation was therefore entering ‘the realms of commercial absurdity’.

The Court concluded that Lukoil’s demand under the performance bond was valid and awarded them the sums due to them. This case therefore serves as a reminder that a performance bond should be carefully drafted and clearly state any requirements that a demand made under it must meet.

This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Dispute Resolution Team at Cleaver Fulton Rankin for further advice or information.