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Note: To provide residential accommodations for miners in Western Australia, Roy Hill (Mining Company) contracted with Blue Ridge WA Pty Ltd (Contractor), which was in turn subcontracted with Transerve Pte Ltd (Subcontractor), its agent, and PT Mulya Surya (Manufacturer). Both the contract and subcontract required advance payment and performance bank guarantees for a percentage of any payment to be made. Contractor intended to use Subcontractor’s bank guarantees as collateral for its bank guarantee in favor of Mining Company in a back-to-back manner.

Manufacturer provided what the opinion describes as a “confirmation letter from Bank DKI (Indonesia) to Alan Neil McKenzie (Contractor’s Director) confirming that bank guarantees would be issued to Manufacturer for the purpose of satisfying Subcontractor’s obligations under any subcontract.” In the meantime, work commenced and continued even though no payments were made without the bank guarantees. When Subcontractor provided English translations of the Indonesian bank guarantees, Contractor’s bank, National Australia Bank, stated that they were unacceptable. A series of disputes arose between Contractors and Subcontractor over non-payment and non-performance, which led to the cancellation of the subcontract by Contractor.

Subcontractor then sued Contractor and Director for wrongful termination of the subcontract. Among other things, Subcontractor alleged that Contractor’s Director “represented to the applicants that: (1) the second bank guarantees were acceptable to Roy Hill or had been substantially accepted by Mining Company and only minor details needed to be resolved; and (2) there was no disputed that [Contractor] owed the sum of $230,000 to [Manufacturer] pursuant to the bank guarantee contract between [Contractor] and [Manufacturer].”

The Federal Court of Australia, Western Australia District Registry, Barker, J., dismissed the case against Contractor’s Director.

The Judge found that the complaint against Director regarding the replacement bank guarantee was not proper. Taking into consideration the general conversation between the two parties, the Judge found that Director did not represent the replacement bank guarantee as being approved by the mining project, but rather was speaking only about a purchase order.

Legal Analysis:

Comment:

Pre Advices for Bank Guarantees: While the use of pre advices is rare with respect to standbys or independent guarantees, this case could give rise to an enforceable promise to issue one. Since there is no practice rule making such promises irrevocable, the question arises whether the promise was sufficiently specific and what terms it must contain. Under standard practice, parties issue fairly detailed and qualified contracts and the circumstances surrounding this case do not seem to support a general rule.

Back-to-Back Guarantees: This case provides an example of an intended use of a bank guarantee to support another bank guarantee.

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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.