Article

Factual Summary: Supplier/Applicant and Employer/Beneficiary executed a contract under which Supplier/Applicant was required to supply two boilers for a power plant in Brazil to Employer/ Beneficiary. The contract also required Supplier/ Applicant to obtain a performance guarantee for each of the two boilers in favor of Employer/Beneficiary which it did. The opinion described them as "on demand" guarantees, so the banks concerned are required to pay on receipt of a demand by Employer/ Beneficiary that complies with the requirements of the guarantee. The opinion is silent as to practice rules, suggesting that the guarantees were not subject to any. According to the opinion, each performance guarantee provided for expiry "on the issue of a Taking-Over Certificate for that unit or, under the current letters of guarantee, 31 December 2013, whichever is earlier." Under the terms of the contract, the Taking-Over Certificates were to be issued by Supplier/Applicant after Performance Tests had been satisfactorily completed and the boilers were put into commercial use.

On 10 July 2013, Supplier/Applicant requested Taking-Over Certificates, but Employer/Beneficiary refused. Supplier/Applicant asserted that it was entitled to Taking-Over Certificates because Employer/Beneficiary put the first boiler into commercial use on 30 November 2012 and the second boiler into commercial use on 10 May 2013, and they remained in use continuously thereafter. However, Supplier/Beneficiary subsequently drew on the guarantee claiming USD 57 million for delayed supply and defects in the boilers and asserted that it was permitted under the contract "to withhold a Taking-Over Certificate where the unit has been used by the employer only as a temporary measure in accordance with the terms of the contract".

Supplier/Applicant sued Employer/Beneficiary for breach of contract and an injunction against Employer/Beneficiary making a demand on the performance guarantees.

The High Court of Justice, Queen's Bench Division, Edwards-Stuart, J., granted a 14-day interim injunction in favor of Supplier/Applicant on 4 October 2013. On 18 October 2013, the court held a further hearing in which the Judge affirmed the interim injunction and extended it until 31 December 2013, the latest date of expiry for the performance guarantees. The Judge, however, did not decide on the issue of breach of contract, stating that he could and would not make a final finding on the facts or the proper meaning of the contract because the contract provided for arbitration.

Legal Analysis:

1. Good Faith; Injunction. Employer/ Beneficiary argued that Supplier/Applicant had misconstrued the contract and was required to show Employer/Beneficiary's lack of good faith in the nonissuance of the Taking-Over Certificates. Supplier/ Applicant argued that Employer/Beneficiary's ground for withholding the Taking-Over Certificates was spurious because "the units [had] been in commercial operation for several months, since when they have exported more than 7,500 hours of power at various loads to the local grid." The Judge agreed and found that Employer/Beneficiary took the boilers into commercial use and that Employer/Beneficiary did not comply with the contract requirements to show that the boilers were being used as a "temporary measure". Accordingly, the Judge granted an injunction in favor of Supplier/Applicant until the performance guarantees' latest date of expiry.

2. LC Fraud or Abuse; Injunction. Supplier/ Applicant noted that "injunctions concerning demands under performance bonds and guarantees have historically been treated differently to applications for other forms of interim injunction", because "a performance guarantee stands on a similar footing to a letter of credit". It also agreed that the same principles would apply to an interim injunction against a drawing by the beneficiary. It argued, however, that "the need to show fraud before an injunction would be granted in this type of case meant that, in the absence of fraud, an applicant for an injunction would have no realistic prospects of success because there would not be a serious issue to be tried". A different rule, however, was claimed to apply "where the Claimant can put in issue the validity of the guarantee or the beneficiary's right to make a call on it," as in where "the parties had expressly agreed that the beneficiary . . . would not draw down under a letter of credit unless one of two stipulated conditions was fulfilled." The submission was that "[t]hese are types of case[s] . . . where the parties have agreed expressly that the beneficiary's entitlement to make a demand on the guarantee was either qualified or would be extinguished if the certain events occurred." In which case, "a claimant would only have to show that he had a realistic prospect of proving that, in the events that had occurred, the beneficiary could not make a demand on [the] guarantee." Citing Simon Carves v Ensus UK [2011 BLR 340, Supplier/Applicant suggested that the principle was "that if the underlying contract, in relation to which the bond had been provided by way of security, clearly and expressly prevented the beneficiary from making a demand under the bond, he could be restrained by the court from making such a demand."

Employer/Beneficiary responded that there must be a "clear case of fraud" before a court can enjoin either guarantor or beneficiary. It distinguished the Ensus case on the basis that the relevant acceptance certificate on whose issuance the guarantee was to become null and void "had already been issued so that there was no right to call on the bond." A "critical distinction" was urged "between a situation where, on the one hand, the party has expressly agreed that it has no right to call on the bond, and on the other, where the court would have to determine disputes in respect of the underlying contract in order to determine if the claim could properly be made."

Referring to the statement by Akenhead, J., in Ensus to the effect that the decision was "whether there is at least a reasonably good or good arguable case or at least . . . a serious issue to be tried . . . whether there is a sufficiently good argument", the Judge concluded that in Ensus Akenhead, J., "was concerned with whether or not there had been a breach of the underlying contract." Recognizing that Ensus "has extended the law," he concluded that issuance of interim relief is justified "if the Claimant can show a strong case."

As an alternative rationale, the Judge suggested that a party could not be allowed to benefit from its own wrong. Concluding that there was a "strong case" that the Employer/Beneficiary's refusal to issue the Certificate was a breach of the underlying contract that placed the beneficiary in a position to draw on the demand guarantee, the Judge stated that it would not be just to permit a drawing "by setting up a state of affairs which, on the material before the court, has a strong likelihood of being shown to be the direct result of his own deliberate breach of contract." The wrongful state of affairs that was "set up" was the continuing validity of the bond as a result of "wrongful refusal to issue" the Certificate.

Concluding that the Supplier/Applicant had shown a "strong case" that the contract had been breached by the Employer/Beneficiary, the Judge thought that there was no need to decide whether the standard for relief was that the claimant need only show that the claim of breach "had a realistic prospect of success."

Comment:

This decision would be much easier to understand if the court had started with the proposition that the performance guarantee was dependent. That the decision says almost nothing about it as compared with detailed analysis of the contractual provisions regarding it only reinforces this impression. What it does say, however, raises questions about the undertakings and the soundness of the opinion. As described, the condition in the performance guarantees was that they were to expire on the issuance of the Taking-Over Certificate by the beneficiary. If such a non-documentary condition was as central to the undertakings as the court treats it, then the undertaking should be regarded as accessory. If it is not, then the condition should be disregarded and the provision is irrelevant and could hardly support an injunction and the applicant should be left to its remedies on the underlying contract in the arbitration.

[PT]

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