Article

Factual Summary: To assure construction of a USD 140 million façade to the King Abdullah Petroleum Studies and Research Center in Saudi Arabia, Subcontractor (registered in Dubai) was employed by Contractor/Assignor, Aramco Overseas Company BV (registered in the Netherlands). Pursuant to the agreement, Subcontractor obtained a USD 14,000,000 performance guarantee from Guarantor in favor of Contractor/Assignor.

The performance guarantee provided:

2. "The Bank hereby irrevocably and unconditionally undertakes to pay Buyer within four (4) Business Days after it receives a written demand from Buyer ("the Due Date")..."

"3. The Bank's obligation to make payments under this Guarantee shall arise on receipt of a demand made in accordance with Clause 4 below notwithstanding any contest or dispute by Vendor and the Bank shall not be required or permitted to make any investigation or enquiry. The Bank is required to accept any notice of the Guarantee Amount given to it by Buyer from time to time as conclusive evidence that the Guarantee Amount that the Bank shall not be required or permitted to make any other investigation or enquiry as to the Guarantee Amount."

4. "Each demand shall be: (a) substantially in the form set out in Schedule 2; (b) signed by a director, attorney or authorized signatory of buyer; and (c) delivered to the Bank on a Business Day and during normal banking hours at the Bank's offices [in Linz, Austria]."

It also provided that "Buyer [Aramco] shall be entitled to assign its interest under this Guarantee or any rights or benefit under this Guarantee to any permitted assignee or transferee of the Contract, without the consent of the Bank, provided that the Bank shall be notified of such assignment". The opinion stated, "[t]here are several other clauses which appear to recognise the possibility of assignment". The guarantee chose English law and provided for non-exclusive jurisdiction in England.

Saudi Aramco, a Saudi Arabian company, had hired the General Contractor/Beneficiary for the construction of the remainder of the Research Center. It is unclear what, if any, relationship there is between Saudi Aramco and Contractor/Assignor. Contractor/Assignor assigned its contract for overseeing the façade construction to the General Contractor/Beneficiary and the contract was said to be novated accordingly. Contractor/Assignor notified the Guarantor of the assignment and subsequently notified General Contractor/Beneficiary of the notice to Guarantor.

As a result of a dispute, General Contractor/ Beneficiary and Subcontractor terminated their contract at which point Subcontractor notified the Issuer "that any demand that was going to be made under the Bond would need to be signed 'for and on behalf of AOC'." When General Contractor/ Beneficiary subsequently made a demand in its own name for payment against the performance guarantee of USD 14,000,000, Subcontractor sought an ex parte injunction to prevent payment on grounds that it would possibly cause Subcontractor to face insolvency and that Contractor/Assignor did not agree to the draw demand. The court declined to grant the injunction.

Legal Analysis:

Injunction Against Issuer Honoring Assignee's Draw: The court found that the guarantee allowed for assignment of the Contractor/Assignor's interest and was reluctant to allow an injunction for a drawing demand signed by the General Contractor/Beneficiary. It conceded that Contractor/Assignor retained some rights under the subcontract with General Contractor/ Beneficiary, but was reluctant to find a serious issue with the assignment. Subcontractor argued that Saudi Aramco is a principal of Contractor/Assignor, but the court refused to draw the inference in the absence of evidence.

Comments:

Injunction. Absent allegation of LC fraud or abuse, there is no basis for enjoining a drawing.

Compliance. Even if the drawing does not comply, an injunction is not appropriate. If this is a material non-compliance that is not waived, it must be sorted out between the issuer and the applicant.

Assignment; Transfer. The most significant problem with the guarantee and the decision relates to the person drawing on the guarantee, the Assignee. It is not clear from the text of the guarantee but the term "assign" does not unambiguously confer the right to draw. It should, therefore, be treated as merely assignment of proceeds. Accordingly, the drawing should have been by the named beneficiary and not the assignee. Nonetheless, a drawing by the wrong person is not a basis for enjoining honor.

Text of Performance Guarantee:

"The Bank hereby irrevocably and unconditionally undertakes to pay to Buyer within four (4) Business Days after it receives a written demand from Buyer ("the Due Date") in accordance with Clause 4 below, an amount equal to the lesser of: (a) the amount specified in such demand; and (b) the Guarantee Amount."

"3. The Bank's obligation to make payments under this Guarantee shall arise on receipt of a demand made in accordance with Clause 4 below notwithstanding any contest or dispute by Vendor and the Bank shall not be required or permitted to make any investigation or enquiry. The Bank is required to accept any notice of the Guarantee Amount given to it by Buyer from time to time as conclusive evidence that the Guarantee Amount that the Bank shall not be required or permitted to make any other investigation or enquiry as to the Guarantee Amount.

4. Buyer [Aramco at that stage] may make one or more demands under this Guarantee. Each demand shall be:

(a) substantially in the form set out in Schedule 2 ;

(b) signed by a director, attorney or authorized signatory of buyer; and

(c) delivered to the Bank on a Business Day and during normal banking hours at the Bank's offices [in Linz, Austria]."

"9. The Bank shall not in any way be released or discharged from any liability under this Guarantee by any illegality or unenforceability of the Contract ...

10. Buyer [Aramco] shall be entitled to assign its interest under this Guarantee or any rights or benefit under this Guarantee to any permitted assignee or transferee of the Contract, without the consent of the Bank, provided that the Bank shall be notified of such assignment."

"...The Bank and Buyer irrevocably agreed that the courts of England shall have the non-exclusive jurisdiction to hear and determine any suit, action or proceedings and to settle any dispute which may arise under or in connection with this Guarantee and for such purposes irrevocably submit to the non-exclusive jurisdiction of such courts."

Form of Demand:

"To: [Bank]

Dear Sirs

Re: Performance Guarantee dated [•] issued by [Bank] in favour of [Buyer] (the "Guarantee")

We hereby demand the amount of $[•] under the Guarantee.

Payment should be made to the following account:

[•]

Yours faithfully

For and on behalf of

Aramco Overseas Company BV by [director, attorney or authorized signatory]"

Text of Demand:

"Dear Sirs,

Re: Performance Guarantee No.610.752 dated 25th June 2010 issued by Raiffeisen Landesbank in favour of Aramco Overseas Company BV, Scheveningsweg ... The Hague, Netherlands (The Guarantee)

We refer to the Guarantee, notice of assignment of which to Drake & Scull International Saudi Co. was given to you on 18 April 2011.

We hereby demand the amount of $14,000,000.00 ... under the Guarantee.

Payment should be made to the following account ... "

"...yours faithfully

For And On Behalf Of

Drake & Scull International Saudi Co ... "

[ALC/jbb]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.