Article

Factual Summary: In connection with a construction contract in Macau under which disputes were to be settled by arbitration subject to the law of Macau, an advance payment was made by Developer to Contractor in return for which Contractor provided an Advance Payment Bond issued by Guarantor. The Bond was expressly subject to the law of Hong Kong and itself backed by guarantees and indemnities from three of Contractor's directors. The Bond provided that it was to be reduced against interim certificates of completion issued by Developer, but Contractor alleged that Developer refused to issue them even though it was alleged that the interim work had been completed.

When a demand was made on the full amount of the Bond a week before its expiry, Contractor sought ex-parte relief with notice to the Guarantor, requesting, among other things, an injunction against payment pending resolution of current arbitration of the dispute between Contractor and Developer. The application also sought to prevent the guarantee from expiring by having Guarantor pay into an interestbearing account in the High Court of Hong Kong Special Administrative Region the sum of MOP33,459,407.19 on or before the deadline. Additionally, the application was made to enjoin Guarantor from seeking reimbursement under the Deed of Guarantee and Indemnity. The Judge denied the petition.

Legal Analysis:

1. Hong Kong, Jurisdiction

Under a new statutory provision, HK courts are able to exercise jurisdiction over matters that have been or will be commenced outside of HK. High Court Ordinance s 21M confers on the Court of First Instance the ability to provide interim relief for matters that will be or have been commenced outside of HK when the proceedings may result in a judgment that will be enforced in HK. Additionally, Arbitration Ordinance s 2GC(1a) provides such courts with interim injunction and other interim relief capabilities when the arbitration may result in an arbitral award enforceable in HK. Given that the Bond is subject to HK law and that HK and Macau are parties to the NY Enforcement Convention, a Macau arbitration award is enforceable in HK. Thus, the court has the ability to grant interim relief with respect to the Macanese arbitration proceedings.

Nonetheless, the court established that general principles governing interim injunctions and interim relief grants are still relevant. With respect to injunctions for 'on demand bonds,' the Judge stated that "obligations under ['on demand'] bonds must be honoured unless it can be shown that the demand was fraudulent. It would only be in exceptional cases that Courts would interfere to grant interlocutory injunctions in the case of irrevocable obligations under such 'on demand' bonds."

2. Independent Undertaking; On Demand Guarantee

Relying on case law, Contractor argued that the Bond was a traditional suretyship undertaking and not independent. Guarantor responded that the bond in the case which Contractor cited to support its position was conditional, and as Guarantor asserted, the Bond at issue was not conditional nor a default bond, making it an 'on demand' bond. The Judge quoted extensively from the text of the Bond, concluding that it was an 'on demand' bond, "which does not require any proof of breach...The Bond is in effect a promissory note payable on demand and on similar footing to a letter of credit."

3. LC Fraud

Given the judge's ruling, Contractor conceded that it could not assert fraud on behalf of Developer although it argued that the amount of the drawing was excessive. The Judge stated that to succeed, Contractor must "establish that [Guarantor] has knowledge of clear fraud on the part of [Developer]...."

Text of the Bond:

The Judge quoted extensively from the text of the Bond. It provided:

"'2. Guarantor's obligations

(a) The [Developer] has agreed to pay the Trade Contractor the sum of MOP33, 459.407.19 (thirty three million four hundred fifty nine thousand four hundred and seven Macau patacas and nineteen cents) as an advance payment of sums due to the Trade Contractor under the Trade Contract (Advance Payment).

(b) The Advance Payment must immediately be reimbursed to the [Developer] by the Guarantor:

(i) when the Guarantor receives a written demand signed by an authorised officer of the [Developer];

(ii) for the sum demanded by the [Developer] up to the amount specified in clause 3(a).

(c) The Guarantor waives any and all benefit of discussion and any rights it may have of first requiring the [Developer] to commence proceedings or enforce any other rights against the Trade Contractor. Notwithstanding any other provisions in this Bond, the Guarantor's liability is limited to the payment obligations contained in this Bond and does not extend to the performance of any other obligations or liabilities of the Trade Contractor under the Trade Contract.

...

4. Liability of Guarantor

(a) The liability of the Guarantor and the rights of the [Developer] in relation to this Bond are in addition to, and do not merge with or otherwise prejudice or affect and are not prejudiced or affected by, any other right, judgment, guarantee or security now or at any time held by the [Developer] in relation to the Trade Contract.

(d) Payment under this Bond must be made by the Guarantor to the [Developer], despite any notice by the Trade Contractor to the Guarantor not to pay the whole or any part of the sum:

(i) free and clear of and without any deduction for or on account of any present or future taxes, levies, duties, charges, fees, set-off, counterclaims, deductions or withholdings of any nature; and

(ii) to an account nominated by the [Developer] and in freely transferable funds which must be either Macau patacas or Hong Kong dollars.

(e) Payments due under this Bond must be made notwithstanding any dispute between the [Developer] and the Trade Contractor and whether or not the [Developer] and the Trade Contractor are or might be under any liability one to the other.

...

9. Governing law

This Bond will be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region (Hong Kong). Each party irrevocably and unconditionally submits to the exclusive jurisdiction of the courts of Hong Kong subject to the rights of the parties to enforce a judgment obtained in the courts of Hong Kong in any other jurisdiction.'"

Comment:

1. This Advance Payment Bond and the court's treatment of it illustrate the fundamental difficulty inherent in the use of "guarantees" as independent undertakings. It is necessary for courts to sift through a morass of text in the undertaking itself and an even greater morass of case law or statutory provisions. The result is not entirely predictable. To make its determination, the court must examine the transactional context which gave rise to the bond, an exercise that is fundamentally inimical to an independent undertaking and the text of the undertaking itself. That exercise does not turn on any label, classification, or phrase but the undertaking as a whole. Thus, the decisions typically recite much of the text of the undertaking and do not shed any particular light on what it is that leads to the decision that the undertaking is independent. Indeed, the terminology used does not necessarily make it clear that the court is making a determination that the undertaking is independent or that it recognizes that it is doing anything more than distinguishing types of guarantees without reference to letter of credit jurisprudence. In such a welter of confusion, the advantages of standby letters of credit are apparent. There is little doubt in most cases as to the independent character of the undertaking.

2. The confusion experienced by courts is well illustrated by this court's comparison of the Bond to a promissory note, which it is said "in effect" to be. While there are similarities between an independent conditional undertaking (a letter of credit-type undertaking) and an unconditional undertaking (promissory note), there are also many differences both in theory and practice.

[JEB/anf]

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