What happens if there is an overpayment on a performance bond?

In Glencore Energy UK Ltd v NIS JSC Novi Sad [2023] 370 (Comm), based on the prevailing market rate for storage charges in respect of contaminated oil, the defendant had been paid 50% too much under a performance bond. Was the claimant oil trader entitled to repayment of sums paid out to the defendant under a performance bond?

Background

The claimant, Glencore, (“Glencore”) had agreed to sell oil from Iran to the defendant, NIS JSC Novi Sad (“NIS”). One parcel of oil was contaminated and remained in storage at the Omisalj terminal in Croatia.

The terminal operator, Janaf Nafteved, claimed storage fees from NIS, which in turn sought reimbursement from Glencore.

Glencore and NIS failed to agree the amount due, and NIS made a demand on a performance bond in the maximum sum of US$12m which Glencore had procured to secure its obligations to NIS. NIS was paid US$2.094m pursuant to the bond.

In this case, Glencore sought to recover sums paid under the bond.

Issues

There were disputes between the parties in relation to how NIS’s claim for loss should be quantified and the appropriate rate for storage which could be recovered. The Court also considered the meaning of the parties’ contractual obligations to act in ‘good faith.’ NIS alleged that Glencore failed to enter into good faith discussions but instead sought to delay negotiations hoping that the performance bond would expire before any claim was made, however, the Judge found no evidence of that.

There was no dispute that NIS would have to reimburse Glencore if and to the extent that the demand for US$2.094m under the bond exceeded what was actually due at the time of the demand.

The performance bond

What is of interest to our surety clients is that the sum paid to NIS was not paid by Glencore but rather by Citibank, the issuer of an on-demand performance bond.

The performance bond was in the maximum amount of US$12m. It provided that Citibank would pay NIS on its first demand upon written demand stating that Glencore had not performed its obligations under the contract. It was, said the Judge, “a genuine ‘demand bond’ requiring only a written confirmation in that form”.

Decision

The Court decided that there had been an overpayment under the performance bond. Glencore was liable to pay only US$1.062m in respect of storage fees, and thus it was entitled to repayment from NIS of US$1.032m, which had been paid by Citibank under the bond.

What does this mean?

The scenario in this case involved an on-demand bond being issued, claimed upon and the sum paid later turning out to be an overpayment. In this case, the principal was solvent and claimed and obtained repayment of the excess.

But what if:

• You had issued the on-demand bond?
• And paid out an amount which later turned out to be an overpayment?
• And what if the principal had become insolvent?

This case reminds us of the importance of ensuring that the surety is able to seek repayment of any overpayment directly from the beneficiary so terms to that effect need to be included in the bond wording if there is a risk of an overpayment, for example, because the bond is payable on-demand.