Article

Note: In connection with a subcontract for the production of a curtain wall for office facilities for Exxon Neftgas Ltd, Permasteelisa Japan KK (Subcontractor/Applicant) procured a "first demand" Performance Bond subject to UK law in favor of Bouyguesstroi (Contractor/Beneficiary) issued by Banka Intesa SpA (Guarantor) for US$463,666 with provisions in the bond for automatic adjustment. The Subcontract provided for arbitration subject to the UNCITRAL Rules and was subject to the law of New York. When Contractor/Beneficiary drew on the Performance Bond, Subcontractor/Applicant commenced an action for an injunction and arbitral proceedings. An injunction was granted against Contractor/Beneficiary but not against Guarantor. Subcontractor/Applicant moved to continue the injunction. The Queen's Bench Division (Technology and Construction Court), Ramsey, J., discharged the injunction.

In refusing to continue the injunction, the Judge found that while the Claimant/Subcontractor had raised serious arguable issues whether the Contractor/ Beneficiary had complied with the contractual terms-which would be decided by an arbitral body- the Subcontractor/Applicant had failed to demonstrate that the Contractor/Beneficiary had fraudulently drawn on the bond. Thus, the Judge concluded that an injunction was unwarranted under English law.

In so holding, the Judge cited a similar case regarding an injunction to prevent drawing on a letter of credit. According to the Judge, "the commercial effectiveness of letters of credit would be eroded" if courts granted injunctions where violation of contract terms was arguable but not positive. The Judge applied these same principles to the Subcontractor/ Applicant's requested injunction against drawing under a performance bond-a dependent undertaking.

Comment by Mr. Manning:

It should be emphasized that the examination of compliance with the underlying contract should be more careful when an injunction is requested to prevent a draw on a letter of credit-an undertaking independent of the underlying contract.

Text: The text of the Performance Bond as reproduced in the Opinion stated:

In consideration of the signature by [Contractor/ Beneficiary] with [Subcontractor/Applicant] of the subcontract dated 19 February 2004 (hereinafter referred to as the Subcontract) for the curtain wall and associated works (hereinafter referred to as the subcontracted works) within the frame of the Exxon Neftgas Ltd permanent office facilities project in Sakhalin, Russian Federation, we, [Guarantor], acting through its Tokyo branch, hereby guarantee unconditionally and irrevocably undertake to pay to the [C]ontractor on its first demand, despite any objection of the [S]ubcontractor, such sum or sums as the [C]ontractor may claim to us, provided such sum or sums shall not in aggregate exceed the amount of this guarantee as defined hereunder.

This guarantee is issued for an initial amount of US$ 463,666 (herein after referred to as the amount of this guarantee). The amount of this guarantee shall be adjusted at the request of the [C]ontractor in the event of any increase of the subcontract price so that the amount of this guarantee shall always be equal to 10% of the subcontract price. The amount of this guarantee shall, however, be reduced to an amount equal to 5% of the subcontract price on receipt by us of a turnover notice of the subcontract works issued and signed by the [C]ontractor for the whole subcontracted works. This guarantee shall be construed and governed in accordance with the laws of the United Kingdom.

[JEB/jm]

* Jacob Manning is an Associate at Dinsmore & Shohl LLP.

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