Petefish Skiles & Co v. Meads-Maes USA Chiren Joint Venture Company [2025]

Factual Summary:

Alleging various breaches of the Project Contract, Beneficiary made a demand under the Bank Guarantee. The demand included, inter alia, a written statement that summarized the nature and extent of the breaches as well as copies of several letters which Beneficiary had sent to Applicant regarding the alleged breaches. Five days later, Bank notified Applicant of the demand, stating that the demand was compliant and would be honored “unless [Bank] received confirmation that the demand was rescinded or the breaches were cured”.  

Responding three days later, Applicant rejected the alleged breaches, pointed to insufficient documents called for by Bank Guarantee, and requested Bank to withhold payment until the underlying dispute between Beneficiary and Applicant could be resolved. Applicant’s answer filed in the case alleged, among other defenses, that the demand was made in bad faith, phony and fraudulent to cover up Beneficiary’s unaccounted for losses of substantial European and government agency funds invested in the Chiren Project. Applicant reported to the Court that the demand on the Bank Guarantee was made on the same day as Beneficiary’s offices were “raided” by the European Public Prosecutor’s Office and Beneficiary was being investigated by the NGO Bulgarian Energy and Mining Forum.   

A significant amount of Applicant’s answer and documents presented in support of its position constituted argument that it did not breach the underlying Project Contract which the Bank Guarantee secured and that the demand on the Bank Guarantee was therefore potentially unjustified.  

Court’s Rulings:

Escrow vs. Guarantee. The Court’s rulings at this early stage of the case were shaped by the particular type of lawsuit filed, namely an interpleader action alleging an escrow arrangement to determine which party is entitled to the remainder of advance payment funds the Bank was holding from advance payment monies. Although the Court repeated statements made by the Bank that it was holding funds of the parties in escrow, it did not rule on that issue. 

Stay Pending Arbitration. The Court ruled that the pending arbitration proceedings in London over Applicant’s disputes with Beneficiary are irrelevant to the question of whether Beneficiary was entitled to payment under the Bank Guarantee. That ruling is in line with the independence principle of URDG demand guarantees. With the exception of the defense of fraud by the beneficiary, a timely and conforming demand on a URDG guarantee should be honored without regard to contract defenses or a resolution of the underlying contract disputes in litigation or arbitration. See URDG 758 Articles 5 and 6.

Late Filing of Answer. The Court also denied the motion by Beneficiary for judgment on pleadings based on Applicant’s late filing of its answer, with the result that the guarantee/escrow dispute continues in court.

Insufficient Demand. The Court did not rule on Applicant’s claim at this stage of the case that the demand on the Bank guarantee was insufficient because the guarantee required “all” documents supporting the claim of breach of the Project Contract and not all were submitted with the Beneficiary’s demand.

Fraud. Fraud and bad faith were the first defense against payment that the Applicant raised supported by claims of irregularities committed by the Beneficiary in performing the Project Contract and impugning the motive for the draw. The Court allowed the answer to be filed by the Applicant claiming this defense but at this early stage did not rule on the defenses of fraud.

Status. The actual question whether Beneficiary is entitled to the money it demanded under the Bank Guarantee remained unanswered at this stage.

Comment:

Pending Arbitration. The Court’s decision to deny the motion to stay pending any arbitration proceedings appears correct. Except for the allegations of fraud, entering an order for payment of the demand on the Bank Guarantee for a compliant demand should not be stayed. A core principle of URDG guarantees is that they are to be treated as an independent obligation of the guarantor; the undertaking of the guarantor is not to be concerned with underlying contract disputes. URDG 758 Article 5.

Preclusion. Specific preclusion rules in URDG 758 require timely payment of a complying demand or if not paid, timely notice of nonpayment and notice of each discrepancy for which the issuer rejects the demand. URDG 758, Articles 19, 20, and 24. Under these articles, an issuer of a URDG guarantee has a maximum of five business days to examine and reject a demand based on non-compliance. Once this period has lapsed without giving notice of dishonor and any discrepancies in the presentation justifying dishonor – and absent any clear indications of fraud or similar deceptive conduct by the beneficiary – the issuer is precluded from rejecting the demand and the demand is deemed to be compliant. URDG Article 24. In the present case, the five business day period after presentment appears to have lapsed without the Bank notifying the Beneficiary it rejected the demand and the specific discrepancies justifying that rejection; instead, the Bank even acknowledged to its customer that the demand on the Bank Guarantee was compliant.  

Escrow Claim. Payment under a bank guarantee should not put the issuer in a position of acting as an escrow agent to hold funds under the guarantee pending final resolution of underlying contract disputes. A bank guarantee, like a letter of credit, can provide under certain events (such as an imminent expiration or an issuer credit downgrade), that funds drawn under it should be paid into a specifically identified escrow account pursuant to a separately signed escrow agreement with an escrow agent. That was not the case here. Moreover, the Bank’s allegation that the USD 7 Million it held were subject to an escrow arrangement was not shown to be supported by the underlying Project Contract and the Bank Guarantee, both of which were filed as exhibits with the Court; the Project Contract called for the Applicant to provide the Beneficiary with an unconditional demand bank guarantee and neither the URDG guarantee nor the Project Contract appear to create or mention an escrow arrangement. 

While escrow account arrangements and independent bank guarantees can serve similar purposes in commercial transactions, they operate very differently and follow distinct rules and practices. Due to the way the complaint was pled, the court noticeably struggled with the mechanics of independent bank guarantees which are seldom issued by U.S. banks and litigated in the U.S. While the Court did not rule that the funds payable under the Bank Guarantee were part of an escrow arrangement, it repeated the allegations of the Bank’s interpleader complaint that the Bank was “holding $7,000,000 in escrow for [Applicant] or [Beneficiary]” and that the “escrowed funds are part of an Advance Payment Bank Guarantee”.

Sufficiency of Documents Supporting Demand. While not ruled on, the Applicant raised a defense against honor of the demand based on the wording of the URDG guarantee calling for the demand to be accompanied by “all” documents supporting or involved in the claim of breach or nonperformance and that not all such documents were presented. Aside from interpretive issues of how to read the demand language of the URDG guarantee, the issues of preclusion discussed above and the issue of the standing of a nonparty applicant to the guarantee instead of the issuer raising claims against the sufficiency of beneficiary’s demand, this defense raises another question: How is the Bank as issuer of the guarantee – but not a party to the underlying Project Contract or its performance –  to determine if “all” documents involved in the claim of breach have been presented by the Beneficiary. That question and the defense raised concerning it underscores the importance of careful drafting of the requirements for demands on bank guarantees.   

The author wishes to thank Carter Klein (Of Counsel at Jenner & Block, Chicago) for his tremendously helpful comments on an earlier draft and the significant additions he proposed.

[[1]]: Controlling parent of Maes of the joint venture is a limited liability corporation based in Austin, Texas, with an additional place of business in Petersburg, Illinois, where the Bank was located