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Note: As part of an electrical power supply agreement, Westmont Power Ltd. (Supplier/Principal) agreed to provide Bangladesh Power Development Board (Buyer/Beneficiary) with a Performance Bond (referred to as the "Bond" or "Guarantee") which was to be a continuing security of US$1,500,000 to ensure performance of Supplier's obligations under the contract, including those to pay liquidated damages.

The contract stated:

"16.6.2 [Supplier] shall maintain the Performance Bonds at all times during the Term [of 15 years] from the full Commercial Operation Date; provided that [Supplier] may have 15 days to replenish the Performance Bonds so as to return it to the designated level, in the event that [Beneficiary] retains or collects funds from the Performance Bonds."

The contract further stipulated the Performance Bond had to be valid for the full 15 years that the contract would be irrevocable and unconditional.

Greenland Bank Ltd. (Supplier's Bank), located in Kampala, Uganda, was not a "scheduled bank" in Bangladesh, making its undertaking unacceptable. As a result, Supplier's Bank contracted with American Express Bank Ltd. (Guarantor) to issue the Performance Bond for Supplier. Supplier's Bank deposited US$1,500,000 with Guarantor and agreed to pay an annual commission of US$15,000. While Supplier's power purchase contract required it to procure an irrevocable and unconditional Bond valid for 15 years, Guarantor wanted to issue the Bond with a validity of only two years initially, with yearly roll-overs thereafter. Supplier's Bank agreed, and the Bond's provision for renewal read:

"On 10 June 2000, this Guarantee shall expire. On such date this Guarantee shall become null and void, whether or not returned to us [Guarantor] for cancellation, unless we shall have agreed, on receipt of your [Beneficiary's] written request therefore, not later than one month prior to such date, to renew this Guarantee for a further period of one year. Thereafter, this Guarantee may be renewed for successive periods of one year on the terms hereof, or on such other terms as we may from time to time agree, until 10 June 2013."

With the initial date of expiry approaching, Supplier sent a telefax dated 9 May 2000 to the London office of Guarantor, copied to Beneficiary, and, referring to the Bond, wrote:

"We refer to the captioned matter and write to advise that the Beneficiary of the Guarantee, [Beneficiary], requires that the Guarantee is to be renewed for a further period of one year up to 10 June 2001. Kindly ensure that the necessary action is taken to ensure that the validity period of the Guarantee is extended before the current expiry date of 10 June 2000. [The beneficiary] is to be advised of the renewal of the Guarantee."

Guarantor denied having ever received the telefax and consequently telefaxed Beneficiary on 11 June 2000, writing:

"Since the subject guarantee has expired, we absolve ourselves from all liabilities against this guarantee. All your rights to claim against the subject guarantee ceases [sic] to exist. Kindly return us the original of the said guarantee at your earliest. If the original guarantee cannot be traced by you please sign and return the statement below. Please treat this as most urgent."

Supplier's Bank, which had been placed in liquidation, wrote to Guarantor and demanded repayment of the deposit. Guarantor responded to Supplier's Bank, indicating its willingness to return the deposit.

Subsequently, Supplier brought a claim against Guarantor in Bangladesh challenging Guarantor's assertion that the Bond had lapsed and sought to have Guarantor directed to extend the Bond for another year. Meanwhile, Beneficiary wrote to Guarantor and requested that it arrange for the Bond to be extended for another year. As a result, Guarantor wrote to Supplier's Bank and asked, "To enable us to adhere to [Beneficiary's] request we would appreciate if you could provide us with your instructions to do so." Supplier's Bank refused because it had already ceased trading at that point and could not give an extension. Responding to Guarantor, Supplier's Bank added: "

We expect remittance of the matured deposit of US$ 1.6 million. We have received a statement of our [account with Guarantor] which indicates a debit of US$15,000 dated 21 July 2000 as Guarantee commission. We insist that you reverse this debit because we are not renewing the Guarantee."

Guarantor responded in a letter that Supplier's Bank was mistaken; the commission debit was for the 1999-2000 period, not for the requested renewal period of 2000-2001. Guarantor further refused to remit the deposit while it was the subject of litigation in Bangladesh. Without this letter in evidence, the court in Bangladesh determined that the US$15,000 debit was the annual fee for the period of 2000-2001 and concluded that Guarantor had extended the duration of the Bond to June 2001. It also concluded that the bond was irrevocable and unconditional until 10 June 2013.

Meanwhile, Supplier's Bank sued Guarantor in England for the return of the deposit of US$1,500,000 plus accrued interest. The High Court of London, Evans-Lombe, J., ruled for Guarantor, noting that the contract is subject to the laws of Bangladesh and was subject to an appeal in that jurisdiction. The Judge added that because it is possible that the Bangladesh Appellate Division will uphold the trial court's ruling directing Guarantor to remain liable under the Bond until 10 June 2013, Guarantor may retain US$1,500,000 until that time. Because the translation of the Bangladesh court opinion was not satisfactory, the trial judge paraphrased portions of it with the assistance of experts, stating:

"It is to be noted that the last line of the Guarantee is to the effect that it will remain effective up to 10 June 2013 and that it was to be irrevocable and unconditional until that date. On a construction of the Guarantee it is established that it was to last for 15 years and that it was to be irrevocable and unconditional up to that date, notwithstanding that it would expire on 10 June 2000 unless extended to June 2001."

On appeal from the English trial court's ruling, the Court of Appeal of England and Whales (Civil Division), Ward, Hughes, and Rimer, LJJ., dismissed Supplier's Bank's appeal, upholding the judgment of the High Court of London, Evans-Lombe, J., for Guarantor. Ward, LJ., expressed reservations.

Legal Analysis:

Ward, LJ, considered the likelihood of the admissibility of the "fresh" evidence of the accounting records for the year for which the LC fee was paid and concluded that "there is a real as opposed to a fanciful prospect" that the Bangladeshi court would refuse to admit it. He used the same standard to assess the interpretation to be given to the renewal clause in the Guarantee. He confessed that he found it difficult to accept the basis for the Bangladeshi trial court's conclusion that an automatic renewal had taken place. In his opinion, "the ordinary, natural meaning of these words is that in each year after 2001 up to 2012, annual renewals can take place if the procedure prescribed for the first renewal is followed, namely that [Guarantor] agree to the extension following a written request by [Beneficiary] for renewal made not later than one month prior to the expiry of the year in question, the parties accepting that they can by agreement put some other procedure in place."

With apparent sympathy, the Judge noted the argument of Supplier's Bank that the renewal did not happen automatically and that Guarantor's construction of the clause was "unnatural". He stated "Were the decision mine to take, I would unhesitatingly prefer the arguments of [Supplier's Bank] and reject those of [Guarantor] but the decision is not for me."

Rimmer, LJ, agreed with dismissal of the appeal and with the imposition of a stay.

Regardless, with the appeal still pending in Bangladesh, Hughes, LJ., stated "The English courts would be wrong to pre-empt the decision in that litigation by making, in this country, the order sought by [Supplier's Bank] unless the outcome of that litigation is plain."

Comment:

The standard by which Ward, LJ has answered the question of whether the Guarantor is entitled to reimbursement is discomforting. It is whether or not the possibility of a decision contrary to the one that he thinks is proper is fanciful. With respect, that is not the standard that should be applied. The question is whether an interpretation has been made in Bangladesh that would require the Guarantor to honor its obligation. The Bangladeshi trial court so found. There is no reason that the appellate court could not so find. The standard for reimbursement is not whether the Guarantor should have been required to pay under English law as interpreted by an English judge but whether it is required to pay by a Bangladeshi court. If it is required to pay, then the Guarantor is entitled to reimburse itself against the funds deposited by Supplier's Bank in reliance on which it issued its Guarantee. Unless the prospect of a judgment against it has been finally resolved by the Bangladeshi courts, it is entitled to hold the funds.

[JEB/gdb]

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