Article

Note: Marketing Ways Services Limited (Contractor), a Saudi company located in Saudi Arabia, contracted with the government of Saudi Arabia for the construction of a slaughterhouse waste treatment facility. Contractor entered into a sub-contract with Todaysure Matthews Limited (Sub-Contractor), an English company, for the supply of incinerators. To assure its performance, a US affiliate of Sub-Contractor applied for and obtained a standby LC issued by RBS Citizens Bank NA (Standby/Issuer) that served as collateral for a counter-guarantee provided by RBS UK (Counter-Guarantor). The beneficiary of the counter-guarantee was National Commercial Bank of Riyadh (Local Bank) which, in turn issued, its Local Guarantee in favor of Contractor/Local Beneficiary. Sub-Contractor provided the incinerators and “[it] claims to have received only part of the agreed price. Some [GBP 2,300,000] is said to be owing.” Nonetheless, Contractor made a demand on the Local Guarantee for the maximum amount of GBP 8,570,000.

Sub-Contractor and LC Beneficiary/U.S. Sub-Contractor Affiliate obtained an order from the High Court of Justice Queen’s Bench Division Commercial Court, Walker, J., requiring Contractor to withdraw its demand on the performance guarantee, enjoining Contractor from making any further demands on the guarantee, and a worldwide freezing order. Deeming Contractor’s demand fraudulent, the Judge granted the injunction (English Injunction) and the freezing order on 22 September 2014.

Sub-Contractor and LC Beneficiary/U.S. Sub-Contractor Affiliate also obtained a temporary restraining order from a U.S. Court in Pennsylvania (American Injunction). The American Injunction was issued on 23 September 2014 and enjoined LC Issuer from “honouring any demand on the letter of credit.” Contractor was unaware of the existence of the American Injunction until it was informed of the injunction’s existence by Counter-Guarantor on 1 December 2014.

Before Contractor/Local Beneficiary was informed of the American Injunction, it entered a consent order in the English action, dated 21 October 2014, with Sub-Contractor and Sub-Contractor’s Affiliate. The consent order permitted Contractor/Local Beneficiary to make additional demands on the performance guarantee, but required Local Bank/Counter-Guarantee Beneficiary to pay the proceeds into a court trust fund “to stand as security for any judgment any party may obtain in these proceedings against any other party.”

Upon learning of the American Injunction, Contractor/Local Beneficiary applied for an order discharging the consent order and releasing Contractor from its obligations contained therein. The High Court of Justice Queen’s Bench Division Commercial Court, Teare, J., decided not to set aside the consent order.

Contractor sought discharge of the consent order on the grounds that the application for the American Injunction was illegitimate, and that Sub-Contractor’s failure to disclose its application for the American Injunction during the English Injunction proceedings was a material breach of Sub-Contractor’s duty to disclose. Contractor further argued that had it been aware of the American Injunction, it would not have agreed to the October consent order.

The Judge ruled that Sub-Contractor should have disclosed its intent to use the English Injunction in support of its application for the American Injunction because the duty to disclose “extends to disclosure of all facts which reasonably could or would be taken into account by the Judge in deciding whether to grant the application,” [internal quotation marks and citations omitted]. The Judge specifically stated, “Where a person who applies ex parte for an injunction intends to use the grant of the injunction to support an application for an injunction from another court in a foreign jurisdiction such intention is a matter which ‘reasonably could or would be taken into account by the Judge in deciding whether to grant the application.’ That is because the intention affects or may affect the consequences of granting the injunction.”

The Judge noted that the general rule is to set aside an ex parte order that is obtained without giving full and frank disclosure, but observed that the court had authority to continue or re-grant a consent order in the interest of justice. In the circumstances of this case, the Judge ruled that although the American Injunction was a change in circumstances of which Contractor was not aware, the interests of justice did not require him to set aside the consent order. Though the failure to disclose the intent to seek the American Injunction was a “serious breach of duty to the court”, and the direct and indirect effects of preventing both the Counter-Guarantee Issuer and the LC Issuer from paying were apparent to the Sub-Contractor, the Judge found it likely that Contractor still would have agreed to the consent order if Sub-Contractor was willing to withdraw the American Injunction.

[MJS/MJK]

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