Article

Factual Summary: Purchaser contracted with Contractor to construct a berth for a vessel. To protect Purchaser from loss or damage resulting from breach by Contractor, the Construction Agreements required two bank guarantees in favor of Purchaser.

As issued, the guarantees could be drawn upon Applicant/Contractor’s default of the contract or upon other occurrences such as failure to remedy construction irregularities in the eighteen months following completion. The opinion stated that “[t]he guarantees were to be enforceable without any requirement to place any demand on the [Applicant/Contractor] for any amount and notwithstanding any dispute between the parties in respect of the alleged default”. Both guarantees “unconditionally and irrevocably” undertook to pay to Beneficiary/Purchaser the available amounts, "against any loss or damage caused to or suffered or would be caused to or suffered by [Beneficiary/Purchaser] by reason of any breach by the contractor of any of the terms and conditions contained in the [contract]. The bank undertook to pay the amounts without demur merely on a demand from the [Beneficiary/Purchaser] stating that the amount claimed is due by way of loss or damage by such reason” (internal quotation marks and citations omitted).

Beneficiary/Purchaser issued an “experience certificate” confirming Applicant/Contractor’s completion of the work and did not inform Applicant/Contractor of any grievances regarding the timeliness or quality of the work.

Nine months later, Beneficiary/Purchaser sent two letters to Applicant/Contractor alleging breach of contract. On the same day, Applicant/Contractor received notice from Guarantor that Beneficiary/Purchaser had drawn on both bank guarantees. Claiming that the drawing was fraudulent and would cause Applicant/Contractor irretrievable injustice, Applicant/Contractor sued Beneficiary/Purchaser and Guarantor seeking an interim injunction. The petition was denied.

Legal Analysis:

  1. Fraud. Applicant/Contractor argued that Beneficiary/Purchaser had committed fraud since the scope of fraud is broader and includes evidently wrongful drawings. Applicant/Contractor argued that if drawing on the guarantees was viewed as “unconscionable and lacking in bonafides” by the court, the court should bar invocation. Applicant/Contractor relied on previous cases ruling that fraud held a wider meaning in equity than in law and indicated that the court should expand the definition for fraud to include instances of evidently wrongful drawings. The Judge rejected this argument, and stated that the cases cited by Applicant/Contractor no longer represented good law.

Although Applicant/Contractor cited several foreign cases in support of expanding the definition of fraud, the Judge either differentiated those cases from the facts or ruled that due to the lack of ambiguity in Indian law on matters concerning fraud and injunctive relief, Indians courts need not rely on foreign case law. The Judge stated that Applicant/Contractor had no basis for questioning Beneficiary/Purchaser’s motive in drawing on the guarantees.

Applicant/Contractor also argued that because Beneficiary/Purchaser certified the completion of the contract, Beneficiary/Purchaser had to consult with Applicant/Contractor first before drawing on the guarantees. Beneficiary/Purchaser disagreed, however, stating that the experience certificate was not for the completion of the contract but functioned only as a certificate required by another contract. The Judge, in agreeing with Beneficiary/Purchaser, ruled the certificate did not affect the guarantee because the guarantee was a separate and independent contract. The Judge opined that Applicant/Contractor may seek a refund of the amount paid under the guarantee afterward, which rendered Applicant/Contractor’s harm not irretrievable.

The Applicant/Contractor asserted that Beneficiary/Purchaser should be enjoined from drawing on the guarantees to order to repair the damaged work. The damages were the result of an earthquake and could be remedy under the contract. The Judge disagreed stating “[t]hese are all matters pertaining to the underlying contract, with which the guaranteeing bank is not in any way concerned.

2. Independence. The Judge stated that “[t]he law concerning invocation of, and payment under, a bank guarantee is now well settled and hardly admits of any ambiguity or doubt”. Noting that a bank guarantee is “an independent contract between the bank and the beneficiary thereof” that must be honored provided that the drawing complies “[i]rrespective of any dispute between the beneficiary and the party at whose instance the bank guarantee is furnished…”. In discussing the independence principle, the Judge noted that “[t]he only two exceptions are fraud and special equities which imply an irretrievable injury or injustice. The fraud itself must be of an egregious nature so as to vitiate the entire underlying transaction. Even irretrievable injury or injustice would imply some executional circumstance which would make it impossible for the guarantor to reimburse himself if he were to ultimately succeed, there being good prima facie case of such success.” [emphasis supplied]

EXCERPTS FROM TEXT OF GUARANTEES:

“against any loss or damage caused to or suffered or would be caused to or suffered by the client by reason of any breach by the contractor of any of the terms and conditions contained in the ‘[contract]’.”

“merely on a demand from the client stating that the amount claimed is due by way of loss or damage.”

Comment: “Unconditional”. The opinion stated that “Irrespective of any dispute between the beneficiary and the party at whose instance the bank guarantee is furnished, the bank is obliged to honour the guarantee, if such guarantee is unconditional and irrevocable.”

Independent undertakings are by their nature conditional on the timely presentation of complying documents.

[SRJ/MJK]

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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 the ICC or Coastline Solutions.