Article

Note: To encourage private sector development in its energy industry, the Islamic Republic of Pakistan (Pakistan) contracted with Sabah Shipyard Ltd (Contractor) to design, build, operate, and maintain a barge-mounted electric power plant in Karachi, Pakistan, which was to use fuel supplied by a stateowned energy company and to sell electricity to the Karachi Electricity Supply Corporation (Electric Company).

Among the various agreements, Contractor agreed to provide proof of financing and to provide a standby LC to Electric Company at which point Pakistan agreed to guarantee any amounts due.

In accordance with the agreement, Contractor obtained financial commitments for the project and caused Bank of America to issue a standby LC in favor of Electric Company in the amount of US$6,400,000. The agreement provided that the standby was to be drawn on to pay any liquidated damages not in dispute. As a result, Pakistan concluded that Contractor had met its financial obligations and issued its guarantee.

Subsequently, Electric Company drew on the standby. Claiming that it had failed to deduct amounts in dispute, Contractor commenced arbitration pursuant to the agreement which resulted in an award to Contractor for the full amount plus interest. Contractor unsuccessfully demanded payment of the award. It also obtained an ex parte injunction restraining Pakistan from pursuing proceedings outside the UK in light of the provision made in the agreements making them subject to the law of the UK.

Contractor then sued Pakistan in the UK to collect on it guarantee and moved for summary judgment. The Queen's Bench Division, Commercial Court, Clarke, J., denied the motion.

Pakistan contended that it had been induced to issue the guarantee as a result of fraudulent misrepresentation and that, pursuant to the terms of the guarantee, it is not obligated by an arbitral award against Electric Co. In considering the evidence and allegations before it, the court concluded that Pakistan had "realistic" defenses to the claim. It also interpreted the guarantee in a manner that required proof of default and not as merely payable due to the failure of Electric Company to pay the arbitral award. The judge stated "I do not regard the fact that the clause extends to monetary damages arising out of a failure to perform obligations under the agreement as amounting to the "very clear words indeed " required to make a surety liable to honour an award made against the principal. They are perfectly apt to make clear that the surety's obligation is not limited to paying any debts of the principal debtor but extends to paying any amount which the principal is bound to pay in respect of damages for breach of contract...."

[JEB/mm]

Textual Appendix

The opinion quoted some of the terms of the Pakistan Government's Guarantee:

1.1. Guarantee

In consideration of [Sabah] having entered into the Power Purchase Agreement with [Electric Co.] and the Fuel Supply Agreement with the Fuel Supplier, the Guarantor hereby irrevocably and unconditionally guarantees and promises to pay the Company any and every sum of money [Electric Co.] and the Fuel Supplier are obligated to pay to [Sabah] under or pursuant to the Power Purchase Agreement and the Fuel Supply Agreement that [Electric Co.] or the Fuel Supplier has failed to pay when due in accordance with the terms of those agreements, which obligation of [Pakistan] shall include monetary damages arising out of any failure by [Electric Co.] or the Fuel Supplier to perform its obligations under the Power Purchase Agreement or the Fuel Supply Agreement, respectively, to the extent that any failure to perform such obligations gives rise to monetary damages.

1.2. Waiver of Defenses

The obligations of the Guarantor under this Guarantee shall be absolute and unconditional and shall remain in full force and effect until all the covenants, terms, and agreements set forth in the Power Purchase Agreement, and the Fuel Supply Agreement have been completely discharged and performed, unless waived by [Sabah] in writing. The obligations of the Guarantor shall not be modified or impaired upon (and the Guarantor waives any defense to the performance of such obligations based upon) the happening from time to time of any event including the following: ... 1.2.4 The bankruptcy, insolvency, or other failure or financial disability of [Electric Co.], the Fuel Supplier or [Sabah]; ... 1.2.9 Any invalidity or unenforceability of the Implementation Agreement, the Power Purchase Agreement, or the Fuel Supply Agreement, or any of their respective provisions, terms or conditions; ...

1.3. Continuing Guarantee

This Guarantee shall be a continuing security and, accordingly, shall extend to cover the balance due to [Sabah] at any time from [Electric Co.], or the Fuel Supplier, as the case may be, under each of the respective Agreements. No demand made by [Sabah] hereunder shall prejudice or restrict the right of [Sabah] to make further or other demands.

1.8. No Set-off

No set-off, counterclaim, reduction, or diminution of any obligation that the Guarantor has or may have against [Sabah] nor any right of subrogation that the Guarantor has or may have against [Sabah] shall be available to the Guarantor against [Sabah] in connection with any obligation of the Guarantor to [Sabah] under this Guarantee.

1.9 Submission to Jurisdiction: Service of Process

1.9.1 Submission to Jurisdiction

Each Party hereby consents to the jurisdiction of the Courts of England for any action filed by the other Party under this Agreement to resolve any dispute between the Parties and may be enforced in England except with respect to the Protected Assets, as defined in the Implementation Agreement of the Guarantor.

...

1.9.3 Waiver of Defence of Inconvenient Forum

Each Party waives any objection that it may now or hereafter have to the venue of any action or proceeding brought as consented to in this Section 1.9, and specifically waives any objection that any such action or proceeding was brought in any inconvenient forum and agrees not to plead or claim the same.

[Signed on behalf of the Islamic Republic of Pakistan]

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