Article

Factual Summary: To assure completion of a lignite-fired power facility with two units in Galabovo, Bulgaria, for AES-3C Maritza East 1 EOOD (Purchaser), Alstom Power Systems GmbH and Alstom Bulgaria EOOD (Contractors) obtained an "on-demand bond" issued by Crédit Agricole Corporate and Investment Bank (Guarantor) as required by the contract.

Claiming that the first unit had not been timely completed, Purchaser/Beneficiary drew on the ondemand bond on 20 December 2010. The demand stated:

Pursuant to Clause 2 of the Performance Bond we hereby demand payment of Eur93 million (ninetythree million Euros). The Contractor has failed to comply with its obligations in accordance with [the EPC Contract], including the following breaches: - The Date of Unit 1 Performance Acceptance was not achieved at the latest on the Guaranteed Unit 1 Performance Acceptance Date or by the Target Unit 1 Performance Acceptance Date; - The Date of Unit 2 Performance Acceptance was not achieved at the latest on the Guaranteed Unit 2 Performance Acceptance Date or by the Target Unit 2 Performance Acceptance Date; and - Late Completion Payments have not been paid when due. In accordance with Clause 4(f) of the Performance Bond, we attach and incorporate the following notices and claims relating to the breach of the Contractor's obligations referred to above . . . [¶8]

It also contained:

For the avoidance of any doubt: - neither the Date of Unit 1 Performance Acceptance not the Date of Unit 2 Performance Acceptance has been achieved at the date of this demand; and - the Warranty Period has not expired. We reserve the right, as permitted by Clause 8 of the Performance Bond, to serve more than one demand. [¶10]

It was accompanied with letters and demands for payments and invoices that totaled EUR 27,000,000.

No payment was made and Contractors obtained an injunction dated 28 December 2010 from the French Tribunal de Commerce de Nanterre preventing Guarantor from honoring. Nevertheless, the Purchaser/Beneficiary sued Guarantor in England.

Subsequently, on 17 January 2011, Purchaser made a second demand. It stated:

Pursuant to Clause 2 of the Performance Bond we hereby demand payment of the sum of Eur96,604,166.83 (Ninety-six million, six hundred and four thousand, one hundred and sixty six Euros and eighty three cents). The Contractor has failed to comply with its obligations in accordance with [the EPC Contract], including the following breaches: - the Date of Unit 1 Performance Acceptance was not achieved at the latest on the Guaranteed Unit 1 Performance Acceptance Date or by the Target Unit 1 Performance Acceptance Date; - the Date of Unit 2 Performance Acceptance was not achieved at the latest on the Guaranteed Unit 2 Performance Acceptance Date or by the Target Unit 2 Performance Acceptance Date; - Late Completion Payments have not been paid when due; - failure to make payment for construction power and/or electricity via the Grid System supplied by us in accordance with [the EPC Contract];and - Failure to pay interest on sums due. In accordance with Clause 4(f) of the Performance Bond, we attach and incorporate the following notices or claims relating to the breach of the Contractor's obligations referred to above . . . [¶15]

Subsequently, the French court ruled that the injunction applied to the second demand. Purchaser/Beneficiary, however, sued Guarantor on the second demand in England and moved for summary judgment. Contractors moved to be joined as Defendant. The Judge granted summary judgment to Purchaser/Beneficiary, but ordered that enforcement be delayed while the French court injunction was in effect.

Legal Analysis:

1. Invalid Demand

Applicant argued that the required notice must support the demand by indicating a failure to comply with the construction contract. The Judge concluded that there was no "valid demand" given that the notices referred to EUR 27,000,000 whereas the demand was for EUR 97,000,000. The Judge ruled, "...that the First Demand was not a valid demand because it did not comply with Cl 4(f) of the Bond as it made a claim for which there was no notice to or claim against [Contractors]". [¶41] The Judge observed, "There was therefore no document, whether a notice to or a claim against [Contractors] in respect of the balance of some Eur66 million." [¶38]

Beneficiary argued that the full amount was due in the immediate future and that the default would not have been remedied. The Judge stated, "The purpose of the documentation under the URDG strongly supports the fact that prospective claims for sums payable by [Contractors] at a future date are not to be the subject of demands under the Bond, even if those sums might inevitably be due and payable at a future date." [¶39]

2. LC Fraud or Abuse

Applicant argued that the first demand was fraudulent since the evidence showed that Beneficiary knew that the full amount demanded was not yet due. The Judge ruled,

I consider that there is no basis for the allegation of fraud in this case. The evidence provides no support whatsoever for an assertion that [Beneficiary's employee] did not honestly believe the demand which was made to be a correct demand made under the Bond. This is not a case where there is any evidence that a party has deliberately made a claim which that party knew to be invalid when it made it. A mistaken belief that the Bond covered prospective loss may, as I have found, be a mistaken belief but I see no basis for drawing any inference that such conduct was dishonest or amounted to a fraudulent demand. [¶48]

3. Re-Presentation

Applicant argued that since the first demand was defective, Beneficiary could not make a second demand. Noting that the first demand was not valid, the Judge stated that, "There was only one valid demand, the Second Demand." [¶56]

4. Complying Presentation; Supporting Statement

Principal argued that a second letter of notification should have also accompanied the demand. The Judge rejected this argument, stating, "It is not a condition of the Bond that every notice to or claim against [Contractors] made by [Purchaser/ Beneficiary] should be attached to the demand. It is only notices or claims which relate to the breach of [Contractors'] obligations to which the demand refers. It is not a possible commercial interpretation of that provision that [Purchaser/Beneficiary] has to provide every notice or claim." [¶61] The Judge, therefore, determined that the second demand complied.

5. Injunction, Conflicting Court Orders

Since the Judge found that the Guarantor owed EUR 96,604,166.83 on the second demand, Guarantor urged that judgment not be awarded because the French court had enjoined honor. It contended, "...it is a well established principle of English law that the English Courts will not enforce performance of an English law governed contract that requires a party thereto to perform actions, the performance of which would be illegal under the law of the county of their place of performance". [¶65]

Noting that Guarantor was a French bank whose head office in Paris issued the bond, the Judge accepted that it was subject to orders which were "...equivalent to an interim injunction issued by the French Court which evidently has jurisdiction over [Guarantor]". The Judge, however, noted, "...a distinction to be drawn between a judgment which determines what, as a matter of contractual obligation, a party is obliged to do and the enforcement of any payment obligation under that judgment. In this case, as a matter of contractual obligation [Guarantor] is obliged to pay to [Purchaser/Beneficiary] the sum of Eur96,604,166.83. I see no reason why this court cannot express a judgment in those terms. What the French injunctions do is to prevent [Guarantor] from currently complying with their obligations under the Bond or that judgment." [¶67] The Judge stated that an "...English court will not, in such circumstances, require [Guarantor] to act in a manner which is illegal under French law because of the existence of the injunctions". [¶67]

Excerpts of the Text of the Bond from the Opinion:

(1) By Cl 2:
"Subject to Clauses 6 below, the Bank irrevocably undertakes that, on receipt of a demand from the Company which satisfies the requirements of Clause 4 below, but without any further condition, it will pay the amount specified in the demand to, or to the order of, the Company and that the payment will be made on and with value within three Banking Days after the date on which the Bank receives the demand."

(2) By Cl 4:
"The Bank shall have no liability in respect of a demand which does not satisfy all the following requirements: . . . (b) the demand contains a statement (or statements) to the effect (or substantially to the effect) that either: (i) the Contractor has failed to comply with its obligations in accordance with [the EPC Contract]; . . . (f) the demand contains any notice to or claim against Contractor relating to the respective breach of its obligations to which the demand refers."

(3) By Cl 7:
"This Bond is independent of [the EPC Contract] and shall remain in full force and effect notwithstanding any initial or subsequent illegality or invalidity, termination, disclaimer or discharge of [the EPC Contract] or any reconstruction, reorganisation or liquidation of the Contractor or any form of judicial, quasijudicial or nonjudicial arrangement or suspension of payments which discharges, reduces or otherwise affects the obligations of the Contractor under [the EPC Contract]."

(4) By Cl 8 "Subject to Clauses 4 and 6 above, more than one demand may be served under this Bond."

(5) By Cl 10 "This Bond is not a contract of suretyship but an undertaking to make payments against presentation of conforming demands."

(6) By Cl 13:

"This Bond is subject to the Uniform Rules for Demand Guarantees of the International Chamber of Commerce (Publication No 458), except that Article 20(a) of those Rules is hereby excluded and Article 10(a) of those Rules, which allows the Bank a reasonable time to examine a demand and to decide whether to pay or refuse a demand, shall apply within the time limits fixed by this Bond for payments by the Bank."

(7) By Cl 14 "This Bond is governed by English law and the courts of England shall have nonexclusive jurisdiction to settle any dispute connected with it." [¶7]

[JEB/jsc/njd]

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