Article

Factual Summary: Subcontractor/Applicant provided Contractor/Beneficiary with three bank guarantees to assure performance of its agent to design, manufacture, and supply equipment in connection with the construction of a power station near Mount Isa, Australia. Two guarantees were returned by Contractor/Beneficiary to Subcontractor/ Applicant, and the third was the subject of this litigation. The contract provided that Contractor/ Beneficiary could not draw on the guarantees "until (i) 5 Business days from the date of receipt by the Contractor of the demand referred to in Clause 7.5(c) have expired; and (ii) the Contractor has failed to pay the amount stated in such notice."

When Contractor/Beneficiary became insolvent, the subcontract was discharged by a Deed of Novation, and by the same instrument, the Subcontractor/ Applicant agreed to complete the terms of the subcontract with Substitute General Contractor. The Deed of Novation provided that, "its terms would not 'prejudice any accrued rights, obligations, claims or liabilities arising out of the Subcontract in connection with the performance of the Subcontract before the Novation Date which [Forge] and [Siemens] may have against each other.'"

As a result of alleged breaches by Subcontractor/ Applicant, the receivers and managers of the insolvent Contractor/Beneficiary notified Subcontractor/ Applicant of its intent to draw on the bank guarantees for AUD 35,819,594.38. Subcontractor/Applicant sought to enjoin the drawing. After a hearing, the trial court enjoined the drawing.

Legal Analysis:

1. Standard: Irreparable Injury; Inadequate Damages

Subcontractor/Applicant argued that without an injunction, it would suffer irreparable injuries due to the funds it would be forced to pay without the possibility of recovery from insolvent Contractor/ Beneficiary if litigation establishes that Contractor/ Beneficiary's claims against the guarantee are invalid. The Judge noted that Subcontractor/Applicant "has demonstrated the likelihood of losses for which it could not be adequately compensated by an award of damages...it is a loss which [Subcontractor/ Applicant] would have to recover from an insolvent party."

Subcontractor/Applicant argued that if Contractor/ Beneficiary's drawings on the guarantees are not enjoined, Subcontractor/Applicant will be without the benefit of AUD 1,700,000 during the remainder of litigation.

The Judge ruled that to successfully obtain an injunction, a party must establish that it would suffer an irreparable injury for which damages are not an adequate remedy if the injunction is not granted. The Judge also noted that for issuance of an injunction, the balance of convenience favors the granting of an injunction.

2. Balance of Convenience

The Judge concluded that the balance of convenience favors the injunction. The court stated that Subcontractor/Applicant has "demonstrated a serious case to be tried to the effect that, according to the parties' agreement, [Contractor/Beneficiary] is not entitled to call upon the securities." Due to the irreparable harm Subcontractor/Applicant is likely to suffer if an injunction is not granted, the court ruled that convenience necessitates that Contractor/ Beneficiary wait until the conclusion of the litigation before its draws are honored.

3. Reputation

Subcontractor/Applicant argued that absent an injunction, its professional reputation would suffer irreparable harm. It is customary within Subcontractor/Applicant's industry for parties such as Subcontractor/Applicant to be asked when tendering for new contracts whether it has had a drawing on a guarantee. If Subcontractor/Applicant answers this question in the affirmative, it is likely to be unsuccessful for its bid as a subcontractor. The Judge accepted this claim as a substantial prospect of damage to Subcontractor/Applicant, since the party liable for damages would be Contractor, an insolvent party.

4. Expiry

Contractor/Beneficiary argued that if its draws are not honored, it risks losing the benefit of the guarantees if they expired before the conclusion of the litigation. The Judge noted that the guarantees at question do not expire until 28 March 2016 and an injunction will not adversely affect Contractor/ Beneficiary's ability to draw upon the guarantees as its ability to do so is determined in future litigation.

Comments:

Who is the Beneficiary? Was there a transfer? Transfer by operation of law.

[MJS]

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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.