Court Involvement in Construction Demand Guarantees in Ethiopia: The Law and Practice

Abstract

Nowadays, construction industry is becoming one of the fastest growing economic sub sectors in Ethiopia. Minimizing the expected contractual risk is the right strategy to develop the industry. To this end, in construction contracts presenting bank demand guarantee by the contractor is a common trend in our country and in other countries of the world. This demand guarantee/Unconditional bond is chosen due to its being payable by the bank immediately and unconditionally where the beneficiary demands the payment in an alleged nonperformance of the contract by the side of the contractor. Thus, due to its being fast source of money where this problem happens, demand guarantee is said to be “as good as cash in hand.” Accordingly, the nature and purpose of this instrument is supplemented by the “principle of autonomy” which states that, the rights and obligations created by the guarantee are independent from the main construction contract. As a result, the idea of the stated principle presupposes that the operation of demand guarantee will not be interfered with by courts in injunction order to stop its payment to the beneficiary on grounds immaterial with the guarantee. On the other hand, there are exceptional circumstances acknowledged by different jurisdictions which opens a room to court involvement, the two most of these are; where there is “Fraud”, and “Illegality”, in the demand guarantee, and/or on underlying contract. So, the aim of this research is to examine for the practice of Ethiopian Federal Courts regarding court involvement in the operation of demand guarantee instrument, and the existence of a legal basis. To this end, court cases and the available legislations are analyzed in comparing other countries practice in case laws and legislations. In course of this, the findings reveal that in Ethiopia, there is no an adequate legal framework which covers all aspects of demand guarantees issue, and court involvement is unlimited and even unreasonable. And also there is legal interpretation gap in differentiating the nature and purpose of unconditional and conditional bonds in court cases. Finally, the research findings show that court interference in demand guarantee payment cases is unlimited that, the study recommends the promulgation of new specific law governing this area, the inclusion of the fraud and illegality exception in the new law and training to relevant stakeholders as possible solutions for the problem.