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Note: In the process of constructing a "turn key" coal fired electricity and steam generating power plant in West Java, Indonesia, PT Merak Energi Indonesia (Contractor) engaged Shanghai Electric Group Co Ltd (Subcontractor) to design, engineer, manufacture, construct and test the power plant for the sum of US $ 108 million. The contract required Contractor to make an advance payment of 10%. To assure Subcontractor's performance, Contractor required Subcontractor to post a "Bond" entitled "Advance Payment Security" No. 065-311-1-00479- 0(001) for US $ 10.8 million issued by the Singapore branch of the bank (Guarantor).

The Bond was conditioned on the receipt of the Contractor's first written demand stating (i) the amount to be paid to the Contractor; (ii) that such amount is due to the Contractor pursuant to the Agreement; and (iii) that notice of default was previously given to Subcontractor. The Bond also provided that "[t]his [Bond] shall be governed and construed in accordance with [the] laws of England. We hereby irrevocably submit to the non-exclusive jurisdiction of the courts of [Singapore] for the purposes of any . . . proceedings arising out of this [Bond]." The Bond was also subject to URDG 458.

Claiming little progress, failure to meet milestones, and numerous difficulties, Contractor sent various letters to Subcontractor and eventually terminated the contract. Contractor also made a demand on the Bond. Subcontractor sought and obtained an ex parte injunction from the High Court of Singapore. Contractor then applied to set aside the injunction. The High Court of Singapore, Lee Seiu Kin, J., granted the application and set aside the injunction.

The case involved two issues: (i) whether Singapore law governs an application to restrain on drawing of a guaranty if the guaranty provides that English law is the governing law (but grants Singapore courts non-exclusive jurisdiction over any proceeding pertaining to the guaranty); and (ii) whether the demand by Contractor was fraudulent.

Contactor argued that since the guaranty expressly provides that English law is the governing law, the court should apply English law to the issue of whether to restrain Contractor from making the demand under the bond. Subcontractor argued that the application to set aside the injunction is governed by the procedural law of the forum and therefore Singapore law should apply, notwithstanding that English law is the governing law of the guaranty. The Judge noted that which law to apply is significant since English law recognizes fraud as the only ground on which the court could restrain the enforcement of a guaranty and Singapore law, in addition to fraud, recognizes unconscionability as a separate ground for injunction. The Judge noted that in light of the difference between Singapore law and English law, Contractor would prefer to have the guaranty be governed by English law rather than Singapore law since it would be more difficult to obtain an injunction, fraud being a higher threshold to clear than unconscionability under English law.

The Judge concluded that English, not Singapore law governs the restraint on the drawing on the guaranty. The Judge noted that the general principle of choice of law is that procedural matters are governed by the lex fori (using law of the jurisdiction where the claim is brought), while substantive matters are governed by the law to which the court is directed by the choice of law rule. The Judge explained that lex fori must regulate procedure because a court can only use its own procedure and have no power to adopt alien procedures. To determine whether a provision is substantive or procedural, a court must look at the effect and purpose of that provision; if the provision regulates proceedings rather than affecting the existence of legal right, it is a procedural provision.

Judge concluded the grant of an injunction to restrain the drawing on the on-demand bond is a substantive right because the injunction is a form of substantive relief and determines the rights of the beneficiary under the bond. Judge reasoned that the underlying purpose of a guaranty (on-demand bond) is to provide security which is readily, promptly, and assuredly realizable when the prescribed event occurs. Any restraint on the right of the beneficiary to receive immediate payment upon a demand on the guaranty would effectively deprive the beneficiary of such right to immediate payment. Thus, because the application by Subcontractor for an injunction concerns a substantive right vested in Contractor under both the contract and the terms of the bond, English law governs restraints on the drawing of the bond.

Judge next ruled that Contractor's demand was regular and valid. The court concluded that the demand satisfied the requirements of URDG 458, Article 20. The court reasoned that the demand is a: (i) "written demand"; (ii) the demand stated "the amount to be paid to [Contractor] pursuant to the Contract"; (iii) the demand stated "that such amount is due to [Contractor] pursuant to the Contract"; (iv) the demand stated that Notice of Default was previously given to [Subcontractor]"; (v) Contractor had complied with the requirements of Article 20 of URDG 458 by stating: (a) that [Subcontractor] was in breach of the contract, and (b) by setting out, in general terms, the respect in which [Subcontractor] was in breach.

Finally, the Judge ruled that the demand on the guaranty by Contractor cannot be considered fraudulent. Judge explained that in light of its ruling that English law applies on the issue of restraint on the exercise of the bond, it only needed to address the issue of fraud, not unconscionability. The Judge pointed out that the Singapore standard for establishing fraud is no different from the English one. To establish fraud, the party seeking an injunction must show that the beneficiary was privy to the fraud. The mere assertion or allegation of fraud would not be sufficient. The party seeking the injunction must establish that the only realistic inference is that the beneficiary could not have honestly believed in the validity of its demand on the bond. The Judge reasoned that Subcontractor's allegations of fraudulent or unconscionable behavior on the part of Contractor constituted genuine disputes of fact between the parties. For example, the parties disputed which, if any, of the letters sent out by Subcontractor constituted the Contractor Remedial Plan. The submission of the Contractor Remedial Plan was one of the conditions precedent to Contractor's right to terminate the contract.

The Judge also determined that Subcontractor's allegation that Contractor stated in its demand that it had made a prior demand for repayment of the bond to Subcontractor (when it had not in fact done so) has no merit. The court concluded that based on the hours adjusted for international time difference Contractor made the demand for repayment to Subcontractor prior to the demand on the guaranty to the bank.

The text of the Bond as reported by the court reads as follows:

"We hereby agree to make payment to the [Contractor] upon our receipt of the [Contractor's] first written demand stating: 1. The amount to be paid to the [Contractor], 2. that such amount is due to the [Contractor] pursuant to the contract, AND 3. That notice of default was previously given to the [Subcontractor]."

[JEB/avk]

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