Posts by: David O’Donovan

Tecnicas Reunidas Saudia v The Korea Development Bank: UK HC Considers Demand Guarantees


In the recent case of Tecnicas Reunidas Saudia (TRS) v The Korea Development Bank (the Bank), for which the judgment was published last week, the High Court, Queen’s Bench Division (Technology and Construction Court (the TCC)) considered a demand guarantee executed by the Bank in favor of TRS, which formed part of an agreement around certain advance payments made by TRS to a subcontractor.

It is generally recognized that calling on a demand guarantee is a serious step and is therefore not one to be taken lightly. However, as the negative economic impact of COVID-19 continues, parties who would have hesitated to make a call previously may find themselves with no option but to do so in the circumstances. The only real defense is known as the fraud exception (i.e. where there is a fraudulent claim and the issuer knows that the demand is fraudulent), which is extremely difficult to establish. Despite some other jurisdictions taking steps to gradually widen this narrow exception to include aspects of unconscionability, the English courts have yet to do so. This case reiterates the position that if a claim is made under a demand guarantee, payment will be enforced by the English courts save in very limited circumstances.


TRS was engaged by Saudi Aramco to execute two EPC contracts for the Fadhili Gas Plant in Saudi Arabia, a multibillion-U.S.-dollar project designed to process 2.5 billion cubic feet a day of gas from the Hasbah and Khursaniyah fields. TRS engaged as a subcontractor Sungchang & Abdullah Al-Shaikh Contracting Co. Ltd. (Sungchang). In October 2017 TRS paid Sungchang an advance payment, after Sungchang provided TRS with a demand guarantee executed by the Bank, by way of security. In October 2019 TRS terminated its engagement of Sungchang, and in December TRS demanded payment from the Bank under the demand guarantee.

TCC Hearing & Judgment

Before the TCC, the Bank argued that it rejected TRS’ right to be paid on the basis that it was a condition of the demand guarantee that TRS’ advance payment to Sungchang had been paid into a numbered account held with HSBC Bank (the HSBC Condition). The HSBC Condition provided that “It is a condition for any claim and payment under this guarantee … that the funds paid in advance payments subject to the terms of the subcontract must have been received by the sub-contractor on its account number … held with HSBC.”

The advance payment funds had been paid to that bank account, but it was not a HSBC bank account as such. It was a Saudi British Bank account, associated with HSBC and 40% owned by HSBC Holdings, as there was no HSBC presence as such in Saudi Arabia, using the account number provided.  

The defendant contended that even if the advance payment had been made by the claimant, it had not been made to a HSBC account with the relevant account number but rather at the Saudi British Bank, therefore the HSBC condition had not been fulfilled.

Nevertheless, the TCC found in favour of TRS and held that as a matter of interpretation, the HSBC Condition referred to an account held with a branch of HSBC or a bank associated with HSBC.  Mr. Justice Waksman held that the court would strive for an interpretation that was open to it on the words of the guarantee and that would avoid pointlessness or absurdity. Rather than limit the expanded version of the condition to a branch of a bank trading as HSBC, it should be a bank or a branch of a bank ‘trading as HSBC or associated with HSBC.’ The bank where the advance payment had been paid – the Saudi British Bank – was a bank associated with HSBC, and alternatively, that “HSBC Bank” was a misnomer for Saudi British Bank.

Additionally, Mr. Justice Waksman noted, if the position had been as contended for by the Bank, then a very odd result would occur. It would mean that the guarantee had been worthless from the moment that it had been executed. That was because, on the Bank’s case, the HSBC condition could never have been complied with, even though payment had been made to a bank account with that number and to the only domestic bank associated with HSBC in Saudi Arabia. The interpretative approach had to be one that recognized that one interpretation would not merely be commercially risky or commercially disastrous for a party, but it would also mean that there was no point in the document at all.

The TCC also proceeded to consider two alternative arguments raised by TRS based on the Uniform Rules for Demand Guarantees (URDG) (which the guarantee incorporated) – (i) non-documentary conditions and Article 7 URDG and (ii) rejection formalities and Article 24 URDG. While obiter, as the decision had already been made on interpretation grounds, the considerations are nonetheless of general relevance.

Article 7 of the URDG provides that:

  • “A guarantee should not contain a condition other than a date or the lapse of a period without specifying a document to indicate compliance with that condition. If the guarantee does not specify any such document and the fulfilment of the condition cannot be determined from the guarantor’s own records or from an index specified in the guarantee, then the guarantor will deem such condition as not stated and will disregard it except for the purpose of determining whether data may appear in a document specified in and presented under the guarantee do not conflict with data in the guarantee.”

Justice Waksman held that, as the Guarantee did not specify a document that TRS was required to submit to demonstrate that the advance payment had been paid into the correct account, the HSBC condition was a non-documentary condition that should be disapplied pursuant to Article 7 of the URDG. This is the first English judgment that considers the operation of Art. 7, which is incorporated into many of the demand guarantees.  Some doubt had previously been cast on how a provision incorporated by reference (like Art. 7) could operate so that a specifically agreed non-documentary condition should be disregarded.

Article 24 of the URDG provides that:

  • “d. When the guarantor rejects a demand it shall give a single notice to that effect to the presenter of the demand. The notice to that effect shall state:
  • i. that the guarantor is rejecting the demand, and
  • ii. each discrepancy for which the guarantor rejects the demand.
  • e. The notice required by paragraph (d) of this article shall be sent without delay but not later than the close of the fifth business day following the day of presentation.
  • f. A guarantor failing to act in accordance with paragraphs (d) or (e) of this article shall be precluded from claiming that the demand and any related documents do not constitute a complying demand.”

TRS presented its demand in person but, when the Bank rejected TRS’ demand, it did so initially by way of a SWIFT message sent to BNP (the advising bank, acting for TRS). The rejection was notified to TRS the following day, outside the five business day period allowed by Article 24. Therefore, the Bank’s notice of rejection was not sent within 5 business days of TRS’ demand to TRS as the presenter of the demand, pursuant to the time bar provision in Art. 24(d) of the URDG, and the Bank was precluded from claiming that the demand was non-compliant.

The Bank was ordered to pay the full value of an on-demand guarantee of £8.2 million, plus interest and costs.


It is likely that the COVID-19 pandemic will result in more calls being made pursuant to demand guarantees, both domestically and internationally and, as such, cases like the above may well be seen more frequently in the coming months. Parties who have provided demand guarantees, or been given them, will need to be more sensitive than ever to the circumstances in which they can be called, and the clear limitations placed on resisting their calls under English law.

The judgment also poses some interesting questions regarding whether conditions regarding payment are capable of applying where they are not stipulated within the documentary requirements of the guarantee. Previous English cases where the URGD does not apply suggest that conditions that do not expressly carry documentary requirements may give rise to an implication that the fulfilment of the condition needs to be confirmed. However, where the URDG does apply, a tension may arise between these cases and the requirement in Article 7 for operative conditions to “specify” documentary requirements. Additionally, with respect to the obiter consideration of Article 24, and in particular its strict interpretation, parties should ensure that the correct “presenter” of a demand is identified and not merely assume that a rejection sent to the notifying bank will be sufficient. 

Future Fund Goes Live


The UK Government’s Future Fund, a co-investment initiative to help UK start-ups, is now live and accepting applications.

Under the scheme, which was announced on April 20, the government will provide convertible loans ranging from £125,000 to £5 million to certain UK-based high-growth innovative companies, subject to at least equal match funding from private investors, and will be managed by the British Business Bank (BBB). This means that the minimum loan to a company is £250k with no maximum, since there is no upper limit on the amount that additional investors may co-invest.

There is no requirement for a company to make regular repayments, and the intention is that the loans will be converted into equity at a discount at the next funding round or after three years.

BBB states on its website that “the Future Fund uses an online platform based on a recognized financial instrument, and a set of standard terms with published criteria. This allows investors to provide rapid support to the companies where they see good potential. Importantly, it provides a clear, efficient way to make funding available as widely and as swiftly as possible without the need for lengthy negotiations.”

Although the Future Fund is capped at £250m of state money, Rishi Sunak, the chancellor, indicated this week that he would be “more than happy” to extend the scheme should demand outstrip the initial funds allocated.

The government’s Future Fund page includes the template convertible loan agreement for applicants. Applications for the scheme can be made on the British Business Bank’s Future Fund webpage, which also has detailed information about the scheme.

The Future Fund program is investor-led. An application on the platform is initiated by a lead investor who will provide information about itself, other investors in the round and the company. If an application is successful, the platform will generate documentation for the company and all investors to sign.

Unlike equity investment, there is no requirement under these convertible loans to value the company, which helps speed the process at a time when company valuations have been significantly hit by COVID-19. Applications are submitted through the BBB portal, the process for which takes approximately 21 days.

These convertible loans may be a suitable option for businesses that typically rely on equity investment and are unable to access other government business support programmes because they are either pre-revenue or pre-profit. The financing supports companies are facing a significantly extended length of time between funding rounds, due to the impact of the current economic situation.

Start-ups are eligible for the Future Fund if:

  • it is UK-incorporated. If the business is part of a corporate group, only the parent company is eligible[1];
  • it has raised at least £250,000 in equity investment from third-party investors in the last five years;
  • none of its shares are traded on a regulated market, multilateral trading facility or other listing venue;
  • it was incorporated on or before December 31, 2019; and
  • (i) half or more employees are UK-based or (ii) half or more revenues are from UK sales.

Participation in the Future Fund scheme will not negatively impact enterprise investment scheme (EIS) investments in a company. Whilst EIS investors are not precluded from participating in the Future Fund scheme and triggering matched investment from the Future Fund, they will not be able to obtain EIS relief on such investment through the Future Fund scheme and may lose their entitlement to make future EIS investments in that company going forward.

Further information concerning eligibility, matched funding requirements, headline economic terms, governance terms and the application process is available here.

The Future Fund is part of a wider package of support for UK businesses suffering liquidity or other financial problems caused by the COVID-19 pandemic. Other measures include:

  • £750 million of targeted support for SMEs will be available through the national innovation agency, Innovate UK’s grants and loan scheme. The first payments will be made by mid-May.
  • The HM Treasury and Bank of England COVID Corporate Financing Facility (CCFF), which will provide funding to sound businesses by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy.
  • The Coronavirus Business Interruption Loan Scheme (CBILS). This a temporary scheme, which is being delivered by the British Business Bank via its accredited lenders (including high-street banks, challenger banks, asset-based lenders and smaller specialist local lenders). It aims to support businesses with an annual turnover of no more than £45 million access bank lending and overdrafts. A lender can provide up to £5 million in the form of term loans, overdrafts, invoice finance and asset finance.
  • The Coronavirus Bounce Bank Loans (BBL) for small businesses launched on May 4. Under this scheme, businesses will be able to borrow between £2,000 and £50,000 from accredited lenders. The government will provide lenders with a 100% guarantee for approved BBLs and pay any fees and interest for the first 12 months. No repayments will be due from the borrowers during that period. After the initial 12-month interest-free period, a flat rate of 2.5% interest will be charged. A business that has already taken out a loan under the CBILS of £50,000 or less can switch that loan to the BBLS until November 4.
  • The Coronavirus Large Business Interruption Loan Scheme (CLBILS). Under this scheme, the government will guarantee 80% of loans of up to: (i) £25 million to firms with an annual turnover of more than £45 million; and (ii) £50 million for firms with an annual turnover of more than £250 million. From May 26, the maximum loan will be increased to £200 million. Those borrowing more than £50 million will be subject to certain restrictions on dividend payments, share buybacks and executive pay for the duration of the loan.

[1] There have been indications that an exemption will be applied to the criterion that the applicant must be UK incorporated for companies that have ‘flipped’ to another jurisdiction (possibly U.S. or EU only) in order to be able to participate in an accelerator program, such as Y-Combinator. Confirmation of this and details are awaited.

The Continued Rise of Sustainable Finance in the UK and EU


The present and future impacts of climate change, human rights violations, environmental, labor and regulatory violations and poor corporate governance on the quality of investments and credit risks have spurred widespread recognition for the importance of environmental, social and governance (ESG) considerations in lending and investment activities.

The rapid development of the sustainable finance sector seen in 2019 has continued into 2020. “Sustainable finance” is a very broad term, but in short, it is any form of financial service and/or product which integrates ESG criteria into business, financing or investment decisions. The financial markets are now starting to possess a range of tools in the “sustainable finance” space.

The value ascribed to robust ESG credentials also continues to grow. Companies and financial institutions are increasingly seeking ways in which they can conduct business in an environmentally-conscious manner and minimize ESG risks. Attention is coming from all sides – from activists such as Greta Thunberg; from regulators, with Mark Carney recently pronouncing on the integration of climate-related financial risks into day-to-to-day supervisory work of the regulators of the financial sector; and from investors such as BlackRock. Also, in the “BNP Paribas ESG Global Survey 2019” 78% of respondents stated that ESG is either playing a growing role or becoming integral to what they do as an organization (including in respect of what they investor in and/or who they lend to).

With the focus on sustainability and ESG only increasing, the appetite for sustainable finance products is set to continue to increase in 2020 and beyond.

Rise in Popularity of Sustainability-Linked Debt Products

There have always been compelling environmental reasons for sustainability-linked financial products and yet it is only recently that the economic rationale for such investments has come to the forefront. 2019 was a record year for sustainable finance, with more sustainable debt issued globally than ever before. The total raised was US$465bn globally, up 78% from US$261.4bn in 2018, according to Bloomberg data.

The key instruments from a pure financing perspective currently appear to be “Green Loans/Bonds” and “Sustainability-Link Loans/Bonds”.

It is important to know that “Green Loans/Bonds” and “Sustainability-Link Loans/Bonds” are different.

  • “Green Loans/Bonds” use the proceeds of such instruments to finance green projects or related capital expenditure (e.g. renewable power generation, carbon reduction and waste reduction).
  • “Sustainability-Link Loans/Bonds” do not have a dedicated use of proceeds and are not linked to green projects or green business (more flexible than “Green Loans/Bonds” but nevertheless, a good way for a company to demonstrate its ESG credentials). Rather, they include performance criteria linked to sustainability or ESG criteria/targets. Such criteria/targets can be measured by way of a general ESG rating or specific agreed criteria/targets. If the borrower hits the relevant sustainability or ESG criteria/targets, the loan will be cheaper. Recent deals have also adapted a two-way pricing structure, with the price of the loan increasing if the borrower fails to meet its ESG targets, further incentivizing the borrower to meet its ESG targets.

However, “Sustainability-Link Loans” are a relatively recent development in Europe. For example, it was reported that:

  • in May 2019, Masmovil Group, the Spanish telecom operator, was the first European borrower to include an ESG-linked margin ratchet in leveraged loan facilities, being a 15 basis point pricing adjustment linked to its third party ESG score (but noting that the pricing adjustment only applied to the capex and revolving credit facilities and not the much larger term loan debt); and
  • in December 2019, Jeanologia, a Spanish developer of eco-efficient technologies for the apparel & textile industry, completed the first sponsor-backed (Carlyle) ESG-linked term loan. The margin is directly linked to a sustainability performance indicator produced by the borrower, related to its water-saving processes. If the borrower meets its targets, the margin tightens, while if the target is missed by 15% or more, the margin ratchets upwards.

In addition, the Loan Market Association (LMA) published the Sustainability Linked Loan Principles (SLLP) in March of 2019, which provide suggested criteria for setting and monitoring sustainability targets of “Sustainability-Link Loans”. The criteria are meant to be ambitious and meaningful to the borrower’s business. The metrics vary and there is no market standard, from ESG scores (provided by third party ESG rating agencies) to borrower led / specific targets (as seen in the examples above). As such, the SLLP recommend they should be negotiated on a deal-by-deal basis. However, on a related point, the European Leveraged Finance Association (ELFA) has started, together with the LMA, to engage with borrowers, private equity sponsors, arrangers, rating agencies and others in order to develop a standard set of the most relevant disclosures for the purpose of making informed ESG-related investment decisions.

Legislative Change on the Horizon

There are many legislative changes on the horizon in relation to the development of robust sustainable lending products and sustainable finance more generally. These include: (i) the Taxonomy Regulation, which is expected to be formally adopted, introducing an EU-wide classification of environmentally sustainable activities; (ii) the Disclosure Regulation (main provisions coming in to force from March 2021), which will impose new transparency and disclosure obligations on certain firms; (iii) the Low Carbon Benchmark Regulation, effective as of December 10, 2019, which will continue to set out minimum requirements for EU climate transition benchmarks and ensure that these benchmarks can work alongside other pre-existing ESG objectives; and (iv) the development of technical standards by the ESMA on disclosure provisions for sustainable investments during 2020. From an investor/lender perspective, the Disclosure Regulation (noted at (ii) above) will be key, as it will require certain firms, including asset and fund managers, to comply with new rules on disclosure, as it regards to sustainable investments and sustainability risks.

Furthermore, it was reported this week that the current European Commission is prioritizing climate change in all sectors, including in financial services. An update to the law known as the “Green Taxonomy” would require banks, insurers, and listed companies with more than 500 staff members to report how much of their expenses are put towards environmental initiatives such as reduction of greenhouse-gas emissions. In a quest to widen its net, the European Commission is hoping to broaden the scope of the non-financial reporting even further in the legal proposal that is due by the end of 2020. The proposal likely seeks to cover asset managers, as well as large unlisted companies. Although some unlisted companies, such as Ikea, already do produce voluntary reports on sustainability, these new requirements may come less favorably to those companies seeking to avoid higher reporting burdens by staying off the public markets or to companies headquartered in more climate-skeptic countries.

Although changes to the regulatory capital treatment of sustainability linked debt are in contemplation at both a European and UK level, they are in their infancy. Currently, the focus of regulators appears to be on driving a conscious governance and disclosure framework and on integrating ESG risks into the management policies of regulated firms.

Recent Reports and Strategy Statements

Several reports and strategy statements have been published in recent weeks by a variety of prominent industry regulators and trade bodies in respect of ESG. Some highlights include:

The European Securities and Markets Authority (ESMA) published its Strategy on Sustainable Finance on February 6, 2020, setting out how ESMA will prioritize sustainability by embedding ESG factors in its work. The key priorities for ESMA include transparency obligations, risk analysis on green bonds, ESG investing, convergence of national supervisory practices on ESG factors, taxonomy and supervision. Steven Maijoor, Chair, said: “The financial markets are at a point of change with investor preferences shifting towards green and socially responsible products, and with sustainability factors increasingly affecting the risks, returns and value of investments. ESMA, with its overview of the entire investment chain, is in a unique position to support the growth of sustainable finance while contributing to investor protection, orderly and stable financial markets.”

The Investment Association (IA), the trade body that represents UK investment managers, published its Shareholder Priorities for 2020 report in January of this year. In the report, the IA noted its support for the recommendations made in the Green Finance Strategy released in early July 2019 by the UK government. Such recommendations set out two objectives: 1) to align private sector financial flows with environmentally sustainable growth that is supported by government action; and 2) to increase the competitiveness of the financial sector in the UK.

The UK Sustainable Finance and Investment Association (UKSIF) published a report on February 6. The report found that pension scheme trustees are failing to comply with their investment duties. Following a change to the law in 2019, trustees must publish their approach to protecting people’s pension savings from the financial risks of climate change and other ESG issues. UKSIF report: 1) found that only one third of a representative sample of trustees have complied with the legal transparency requirements and are calling for the Pensions Regulator to carry out a review to investigate levels of compliance across the UK’s pensions sector; and 2) looked at the different policies trustees have adopted to comply with the new regulations. It found that although most trustees say they believe ESG issues will affect the financial performance of their scheme’s assets, most trustees have adopted “thin and non-committal” policies to manage ESG financial risk.


In short, ESG is no longer a peripheral exercise thanks to investor demand, regulation and greater certainty about the link between ESG risks and long-term financial performance. And as noted above, the focus on sustainability and ESG is only increasing.