Article

Factual Summary: The Project was substantially completed. Complaints were made that the Beneficiary delayed and dragged out payments, and refused to approve any variation order even though the variations were at the orders of the Beneficiary. There were unsuccessful negotiations. Beneficiary made a demand on the Guarantor Bank under the performance guarantee (PG).

The parties agreed that Sudanese law shall be the applicable law governing the contract and the PG. Fearing that an element of uncertainty might be introduced by reference to the law of Sudan, the parties had agreed in of the Contract under the title of "Laws to be Observed" that:

"If the CONTRACTOR (the second plaintiff here) discovers any discrepancy or inconsistency between the CONTRACT and the LAWS, the CONTRACTOR shall immediately report the same in writing to the OWNER [Beneficiary] setting out his proposals for overcoming the discrepancy or inconsistency (as the case may be). In the event that the OWNER [Beneficiary] disagrees with the proposals made by the CONTRACTOR under this Condition 13.2, he will advise the Contractor and will issue instructions as to how the discrepancy or inconsistency is to be overcome. The implementation of the CONTRACTOR'S proposals or the instruction of the OWNER (as the case may be) shall be undertaken by the CONTRACTOR at his own cost and without any right to an extension of time."

Claims:

· Fraud and unconscionability on the part of the Beneficiary in the contract such as to invalidate their call on the PG;

· Knowledge of the Guarantor Bank of the fraud and unconscionable conduct such that the Guarantor Bank would be a party to the fraud if payment was made;

· Balance of Convenience favouring the Applicant because irreparable damage and harm.

Legal Analysis:

On Demand Guarantees and the Law of Sudan - Sharia Principles:

Applicant submitted that under the Law of Sudan, Sharia principles are applicable in interpreting the PG. The PG was a conditional guarantee and the Beneficiary must prove breach and loss before it can demand or receive money under the Guarantee. The Applicant's counsel submitted expert opinion of Mr Abdul Mahmoud Salih Mahmoud, a Sudanese lawyer of 40 years of legal experience that:

· "As Sudanese Law requires the surety to ascertain the condition, restriction and description tied to the payment, and coupled with Sharia principles that prohibits unjust enrichment, it is practically impossible to perceive of a guarantee which qualify as an on-demand guarantee under Sudanese law.

· The effect of the application of Sharia principles in the context of the commercial law of Sudan is such that the Owner is not allowed by law to make a call on the guarantee without proof of default or damages, losses or expenses sustained due to default or amount of the damages, losses or expenses sustained thereby."

The Applicant also called Prof Dr Samy Abdelbaki, Assistant Professor in Commercial, Maritime and Aviation Law, Faculty of Law, Cairo University. Dr Samy said inter alia that a letter of guarantee is a Kafala contract under Islamic jurisdiction of Sharia principles whereby only confirmed liability of a guaranteed person creates a confirmed liability on the guarantee.

The judicial opinion on the expert statements was to state that: "If that were the position of Sudan law then I must say it is poles apart with respect to what is generally understood as the law with respect to PG and the principle of sanctity of bonds."

The concern was that the parties knew of the problem of the application of Sudanese law since 2006 and it was now unreasonable to raise the issue.

The Beneficiary's experts were Dr Mohamed El Fat, Head of Department of Commercial law, Faculty of Law, University of Khartoum and Dr Abdalla Idris Mohamed, former Dean, Faculty of Law, University of Khartoum and a past General Counsel and Director of the Legal Department of the Islamic Development Bank and a current Fellow of the Faculty of Law, University of Kartoum. Their written opinion provided that the terms of the Performance Guarantee "leaves no room for doubt that it is an unconditional on demand Guarantee". The "conditions" referred to by Mr Salih are "stipulations that reinforce the independent and unconditional nature of the guarantee." The court stated that the Applicant and Beneficiary "are at diametrically opposite poles and the twain shall never meet".

The Court held that the Applicant is "clearly estopped from denying that the PG is unconditional" on the basis that the Guarantor Bank agreed to provide an "approved, unconditional and irrevocable on-demand bank guarantee ..." and that the parties had proceeded on this understanding. The court stated that Applicant is "stopped from raising this novel argument that the unconditional on-demand guarantee is not a creature known under the law of Sudan". The court approved the argument that the Applicant is "clearly not entitled to the equitable remedy of injunction as they have not come before the Court with clean hands". The Applicant had maintained complete silence about their legal concern until the call on the PG was made in 2010. The PG had been renewed twice, each time asserting that it was a fulfilment of their obligation under the Contract which "is to procure for the benefit of the Beneficiary an approved, unconditional and irrevocable on-demand bank guarantee as a Performance Guarantee". Such behaviour was described by the court as "bad faith" by the Applicant.

Fraud and Unconscionability:

The leading decisions in Malaysia are of the Supreme Court in Esso Petroleum Malaysia Inc v Kago Petroleun Sdn Bhd [1996] 1 MLJ 149 and that of the Court of Appeal in LEC Contractors (M) Sdn Bhd v Castle Inn Sdn Bhd [2000] 3 AMR 2625 both indicating that injunctions to restrain the banks from making payment under a performance bond would only lie against the bank "if and only if there was a fraud of which the bank had notice".

The Court of Appeal in the LEC case stated: "in order to justify any injunction to stop payment there must be clear evidence of fraud on the part of the first defendant which comes to the knowledge of the second defendant. Bad faith or unconscionable conduct by itself is not fraud."

However there are some High Court decisions permitting unconscionability as sufficient grounds. The court noted the "unconscionability" trend of the Singapore Courts.

The Court's conclusion was that it was bound by the Supreme Court and Court of Appeal's decision and required proof of material fraud. On the facts the court stated that "viewed dispassionately" the factual allegations regarding crude oil qualities and misleading certain water stability tests were more in the nature of contract disputes and do "not lend itself to the only reasonable inference of fraud". The court held that the demand on the PG had been validly made.

On the issue of "balance of convenience" the court stated: "the balance of convenience is heavily tipped in favour of the [Beneficiary] as Performance Bonds are the lifeblood of commerce, a commercial bargain struck by both parties to provide for times of risk and one which the Courts are reluctant to interfere."

The Court set aside the Interim Injunction and ordered the sum of US$18 million in the Performance Guarantee be released, on conditions.

* Dr Alan Davidson, Solicitor and Barrister; Senior Lecturer TC Beirne School of Law, University of Queensland (Australia).

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