Article

Factual Summary: To assure Contractor/Applicant's ability to refund periodic advance payments made by Purchaser/Beneficiary for a self-elevating off-shore rig, the Construction Contract required Contractor/Applicant to provide Refund Guarantees for each of five advance payment installments. Contractor/Applicant did so using three different banks. The Refund Guarantees were set to expire one month following the original scheduled delivery date of the unit. The contract provided that if Contractor/Applicant anticipated a delay in unit delivery, the Refund Guarantees were to be extended at least 14 working days before the Refund Guarantees expired. This extension would extend the Refund Guarantees for "a further thirty days, always ensuring that the Refund Guarantee(s) is valid until the date falling thirty days beyond the delivery of the rig".

The Refund Guarantees provided for three types of situations under which Beneficiary could draw on the guarantee and demand a refund of the advanced payments to Applicant:

The first, "Initial Demand", obliged the Guarantors to make a payment to Beneficiary "within 14 Singapore banking days following a receipt of a written demand from Beneficiary for refund...stating that the Construction Contract has been cancelled or rescinded by [Beneficiary]."

The second, "Deferred Demand", entitled the Guarantors to defer payment to Beneficiary if they received notice from Beneficiary that Applicant disputes Beneficiary's demands for refund and that the matter had been referred to arbitration, provided that notice is received within five days from the "Initial Demand".

The third, "New Demand", could be made in the event of any possible delay in the delivery of the rig by Applicant, or if an "Initial Demand" had been made and Beneficiary's claim was disputed by Applicant and the ensuing arbitration was not expected to conclude 30 Singapore banking days before the Refund Guarantees expired.

Because there was a delay in the performance by the Contractor/Applicant, the Beneficiary/Purchaser sent letters to the Contractor/Applicant stating that the original Refund Guarantees were no longer in accordance with the Construction Contract and that the Contractor/Applicant would need to extend the Refund Guarantees accurately to reflect the anticipated delivery date of the rig. The final day for Contractor/Applicant to provide an extension of the Refund Guarantees was 12 April 2011 as dictated by the Construction Contract. On 8 April 2011, Issuers extended the Refund Guarantees to 31 May 2011 but did not inform Beneficiary/Purchaser until 12 April 2011. However, because Beneficiary/Purchaser was not informed of the extension until 12 April 2011, it inquired of Beneficiary/Purchaser on 11 April 2011 as to the status of the expiring guarantees and was told by an agent of Beneficiary/Purchaser that the new guarantees would be "issued" the next day, which was when Beneficiary/Purchaser actually received notice of the extension.

Despite this information, Beneficiary/Purchaser sent Contractor/Applicant a Notice of Rescission on 12 April 2011 purporting to rescind the contract on the ground that Contractor/Applicant had failed to secure replacement guarantees in accordance with the Construction Contract and the original guarantee and that Contractor/Applicant had failed to deliver the rig within the maximum allowable delay under the Construction Contract.

The next day, Beneficiary/Purchaser sent the Contractor/Applicant made two demands seeking payment under the Refund Guarantees; a "New Demand" on the grounds that the Contractor/ Applicant "failed to provide replacement guarantees at least 14 Singapore banking days before the expiry of the Refund Guarantees and an "Initial Demand" on the basis "that the Construction Contract had been validly rescinded". Contractor/Applicant applied for an injunction to stop Guarantors from paying Beneficiary/Purchaser and to enjoin Beneficiary/ Purchaser from receiving payment.

The trial court granted the injunction and placed the matter in abeyance pending resolution of the arbitration.

Legal Analysis:

The Judge ruled that Beneficiary/Purchaser had rescinded the contract on 12 April 2011, indicating whether the rescission was proper was a question for the arbitration tribunal. Accordingly, the Judge addressed only the question of whether the Beneficiary/Purchaser properly made a drawing under the New Demand provisions of the Refund Guarantee on a rescinded contract.

The Judge ruled that Beneficiary/Purchaser could only have made a Deferred Demand and not a New Demand since the Issuer had received notice that the claim for refund was disputed. The issue before the court, therefore, was the propriety of a New Demand and whether the options (possible delay or possible arbitration commenced and not likely to conclude in 30 days) involved mutually inconsistent situations.

The Judge ruled that a draw for possible delays (would only be available where there had not been rescission. He stated, "The plain language of [the contract] (i) shows that it is premised on a delay in delivery of the Rig, with the replacement guarantees to have an expiry date of 30 calendar days from the 'new anticipated date of delivery'." Moreover, the Judge found that Beneficiary/Purchaser's interpretation "was inconsistent with [the] overall scheme" of the Refund Guarantees.

Applicant/Contractor argued that making the New Demands was unconscionable and abusive. The Judge, however, noted that it was not necessary to reach this question since he had concluded that Beneficiary/Purchaser had "no legal right under the Refund".

The Judge distinguished unconscionability: "In contract, the doctrine of Unconscionability applies where a party ITALICS does have certain legal rights but the court finds that it would be unconscionable in equity for the party to assert these legal rights - the threshold for this is high...".

Beneficiary/Purchaser stated that the basis for the New Demand was a possible delay in delivery of the rig while Applicant/Contractor and Guarantors argued that making a New Demand was inconsistent with rescission there was no possibility that the contract could be completed. Beneficiary/Purchaser argued that the ability to draw for possible delay was not affected by rescission.

Text:

The construction contract contains detailed provisions regarding the refund guarantees. The Judge's summary is:

"[U]nder Art 3.8 of the Construction Contract, the contract price was to be paid in six installments, the first five of which were deemed "advances". In respect of these advances, Labroy was obliged to provide Refund Guarantees for its repayment upon certain contingencies. The Refund Guarantees were initially set to expire one month following the original delivery date, ie, 31 September 2010. However, if Labroy anticipated that delivery of the Rig would be delayed, the Refund Guarantees were to be extended at least 14 working days before the Refund Guarantee(s) expired. The extension was to be "for a further thirty (30) days, ITALICS always ensuring that the Refund Guarantee(s) is valid until the date falling thirty (30) days beyond the delivery of the rig" [emphasis added]. Failure to extend the Refund Guarantees at least 14 working days before the expiry of the Refund Guarantees is itself an event of default under the Construction Contract, entitling MM to rescind the Construction Contract and demand a refund of the advances.

The "demands" under the Refund Guarantees

The Refund Guarantees (and not the Construction Contract) provide for three types of "demands", ie, three sets of circumstances in which MM may demand for a refund of the relevant advances. While each of the advances is secured by three Refund Guarantees by the Banks (each as to one-third of the advance), the Refund Guarantees are in identical terms pertaining to the "Demands" as set out below.

The first type of "demand" is the "Initial Demand": under sub-para (b) of the first sub-para of para 3 of the Refund Guarantees - the sub-clauses are unfortunately not numbered - the Banks are obliged to make payment to MM within 14 Singapore banking days following the receipt of a written demand from MM for refund, such demand stating that the Construction Contract has been cancelled or rescinded by MM.

However, if within five Singapore banking days from the date of the receipt of an Initial Demand the Banks receive notification from MM that Labroy disputes MM's claim for refund and that the matter has been referred to arbitration, the Banks are entitled to defer payment of the sum claimed under the Initial Demand. The Banks would then only be liable to make payment of the sum eventually adjudged to be due to MM pursuant to an arbitration award or agreed pursuant to a settlement agreement. The sum would be payable immediately upon receipt from MM of a further written demand for such a sum. This is the second type of "demand", ie, a "Deferred Demand", referred to in the second sub-para of para 3 of the Refund Guarantees.

The third type, the "New Demand", is that which gave rise to the contention between the parties. The fourth sub-para of para 3 of the Refund Guarantees set out the circumstances in which a New Demand may be made, and they are linked to Labroy's obligation to provide replacement guarantees to MM. Under the Refund Guarantees, MM was entitled to request replacement guarantees from Labroy:

(a) in the event of any possible delay in the delivery of the Rig; or

(b) if an Initial Demand has been made and MM's claim for a refund of its advances was disputed and referred to arbitration but the said arbitration could not reasonably be expected to conclude 30 Singapore banking days before the Refund Guarantees expired.

The replacement guarantees were: (a) to be issued by the Banks on similar terms; (b) had to carry an expiry date 30 calendar days from the new anticipated date of delivery of the Rig or the conclusion of the arbitration, as the case may be; and (c) had to be furnished to MM no later than 14 Singapore banking days before the expiry date of the existing Refund Guarantees. If Labroy did not comply, MM was entitled to make a written demand to have its advances refunded (ie, a New Demand). Under this New Demand, the entire sum claimed by MM had to be paid immediately by the Banks."

Comments:

Injunction for Improper Drawing: This injunction was issued because the court decided that the beneficiary drew on the wrong basis but declined to consider whether there was letter of credit fraud, abuse or, Singapore (and Australia and Malaysia)'s odd contribution to letter of credit jurisprudence, "unconscionability". The court, however, stated that it need not reach the question of unconscionability since the beneficiary had "no legal right" to make demands. [¶ 40]

This basis for granting an injunction is new and odd. If there is a breach of the underlying contract, the parties are left to sort things out unless there is letter of credit fraud or abuse (or "unconscionability" in Singapore-whatever it is). How is the lack of a "legal right" to draw different from a breach of contract? Here, the court inserts itself into the legal details. While this happens, the proceeds of the demand guarantee should be in the hands of the beneficiary.

[JEB/med]

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