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Note: To assure performance of its contractual obligation to deliver 100,000 mt +/- 5% of Argentine hard red wheat C & F JNPT Nhava Sheva in India, Tradigrain S.A caused Union Bank of Switzerland (Counter Guarantor) to issue its counter guarantee in favor of the State Bank of India (Local Bank) which, in turn, issued its local performance bond for US$908,250 in favor the State Trading Corporation of India (Buyer). The bond was subject to Indian law and jurisdiction.

The contract provided that the determination of quality would be made at the time of loading, to be indicated by inspection certificates issued by an independent entity. Of the two shipments made, the percent of damaged kernels in one shipment exceed the contract maximum and a price discount of US$100,699.55 was agreed.

After discharge of the goods, however, Buyer asserted damages were due of US$680,920 and dispatch monies of US$115,834.71, whereas Seller admitted owing only US$100,669.55.

Subsequently, Buyers demanded and received payment from Local Bank of the full amount of the local performance bond. Local Bank demanded payment on the counter guarantee, but Seller obtained an ex parte injunction in Geneva that ordered Counter Guarantor not to pay its counter guarantee. This order was upheld on appeal by the Swiss Federal Supreme Court in 1998.

Since it had not been reimbursed, Local Bank commenced proceedings in India against Seller and Buyer for the US$908,250 paid under the bond.

In the meantime, Seller commenced arbitration against Buyer under the contract which was subject to GAFTA arbitration. The tribunal issued an award in favor of Seller in November 2000. An appeal was made by Seller, additionally claiming an amount paid to Buyer which had been omitted from the original arbitral claim. The Board of Appeal allowed the additional claim, finding that Buyer's claim for the full amount of the bond was wrongful and without justification and that retention of all funds except for the amount agreed was wrongful. The Board also awarded attorney's fees of US$98,148 but ruled that Seller was not yet entitled to the funds since they had not paid them. Sellers appealed this ruling.

The Commercial Court, Clarke, J., allowed the appeal, varying the award by requiring Buyer to pay the Sellers US$807,580.45. Seller argued that it was entitled to immediate return of the overpayment since it was a debt owed to them. Buyer contended that Seller was only entitled to an indemnity for any loss occasioned by them.

In considering this issue, the court quoted Cargill International S.A. and Another v. Bangladesh Sugar & Food Industries Corp. [1996] 2 Lloyd's Rep. 524:

it seems to me implicit in the nature of a bond, and in the approach of the Court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an "accounting" between the parties in the sense that the rights and obligations will be finally determined at some future date...As a matter of general principle, therefore, in the light of the commercial purpose of such bonds, the authorities to which I have referred and the text-book comments, I take the view that if there has been a call on the bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment.

The court concluded

[t]hose authorities are to the effect that it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, there will at some stage in the future be an "accounting" between the parties to the contract of sale in the sense that their rights and obligations will finally be determined at some future date. The bond is a guarantee of due performance; it is not to be treated as representing a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract giving rise to the right to call for payment under the bond. If the amount of the bond is not enough to satisfy the seller's claim for damages, the buyer is liable to the seller for damages in excess of the amount of the bond. On the other hand if the amount of the bond is more than enough to satisfy the seller's claim for damages, the buyer can recover from the seller the amount of the bond which exceeds the seller's damages.

The court accepted the proposition that

there is an implied term in the contract of sale that the Buyers will account to the Sellers for any amount that has been paid under the bond to the extent that the amount paid exceeds the true amount of the Buyer's loss. The amount is due to the Sellers as a debt, whether or not the sellers have indemnified either the paying bank or the indemnifier of the paying bank. In essence this is because, by calling for too much under the bond, the Buyers have procured payment to themselves from the paying bank (acting, for this purpose, on the Sellers' behalf) of an amount that is not due, and must, obviously, return it to their contractual counterparty from whom they should not have procured it in the first place. Otherwise they will have retained a windfall in the form of money to which they were not entitled since, to the extent of the overpayment, there has been either no breach or no loss entitling them to retain it... I incline, however, to the view that the overpayment is due when the fact that it is an overpayment has been established either by agreement or judgment.

Comments by James E. BYRNE:

1. One wonders about the injunction by the Swiss court. Whether or not the drawing on the local guarantee was proper, it is unlikely that the drawing on the counter guarantee was improper since the Indian bank had paid. Moreover, it appears that what was at issue was essentially a contract dispute. Such rulings will compromise the reputation and acceptability of Swiss Instruments.

[JEB]

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