Wrongful calling of an on-demand guarantee
The risk that a buyer, often a public one, calls without cause the bank guarantee the exporter provided, and that the bank must pay without being able to dispute it; it is insured as a political risk.
In large export contracts, the buyer almost always demands bank guarantees: bid bonds, advance payment guarantees, performance guarantees. Most are on-demand, meaning the guarantor bank must pay on a simple complying demand by the beneficiary, without raising defenses drawn from the underlying contract, except in cases of manifest fraud. That autonomy, which gives the guarantee its value for the buyer, is what makes it dangerous for the exporter, who will have to reimburse its bank. Wrongful calling refers to a call made even though the exporter properly performed its obligations, or for reasons unrelated to the contract, for example when a new government disowns its predecessor's commitments. It is covered either by public export credit agencies or in the private political risk market. The cover indemnifies the exporter for sums wrongly called and sometimes for a call justified by a political event that prevented performance. The International Chamber of Commerce uniform rules for demand guarantees, in the revision effective July 2010, govern the form of the call without removing the risk.
In Edward Owen Engineering v Barclays Bank International in 1977, the English Court of Appeal held that a bank had to honor a performance guarantee called by a Libyan buyer even though the buyer had not opened the promised letter of credit, because an on-demand guarantee is autonomous except for fraud known to the bank: the ruling fixed in English law the risk that wrongful calling insurance covers.
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