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Note: Turbo Dynamics Corporation (Seller) contracted with Societe de Maintenance Équipments Industriels SPA (Buyer) located in Algeria to provide spare parts for Mistsubishi gas turbines for USD 4,691,925. The contract required Seller to provide Buyer with a performance bond. Seller obtained a counter guarantee issued by the Paris branch of Deutsche Bank A.G. (Seller’s Bank) in favor of Banque National d’Algerie (Local Bank) which issued its Local Guarantee in favor of Buyer. The Application for the Counter Guarantee contained a “Special Conditions” clause with a forum selection clause that designated the Commercial Court in Paris, France “as the exclusive forum for all disputes and providing for the application of French law to such disputes.

Seller’s Bank/Counter Guarantor informed Seller/Applicant that Local Bank had issued a “call for payment” on the Counter Guarantee for the remaining balance of the performance bond. Seller/Applicant then sued Seller’s Bank/Counter Guarantor and Buyer in New York seeking to enjoin honor. The New York Supreme Court, New York County had granted a temporary restraining order that temporarily enjoined any payments on the Counter Guarantee until a hearing was held to determine whether injunctive relief was warranted. At that hearing, the New York Supreme Court, New York County, Moulton, J., denied Seller/Applicant’s motion for a preliminary injunction and vacated the temporary restraining order, thereby enabling Seller’s Bank/Counter Guarantor to draw on the Counter Guarantee.

The Judge noted that a party seeking a preliminary injunction must demonstrate the “likelihood of success on the merits, irreparable injury absent the preliminary injunction, and that the balance of equities weighs in [Seller/Applicant’s] favor.”

Seller’s Bank/Counter Guarantor argued that New York State’s separate entity rule codified in US UCC § 5-116 (Choice of Law and Forum) barred a preliminary injunction operating against its Paris branch. Under this rule “even if a bank is subject to personal jurisdiction due [to] the presence of a New York branch, the other branches of the bank will be treated as separate entities for certain purposes, including attachments, restraints and turnover orders.” Seller/Applicant argued that the separate equity rule is “anachronistic” or old fashioned, citing cases that doubt the rule’s viability. The Judge stated that it was not necessary to decide the applicability of the separate entity rule whose continued operation was currently at issue in a case certified to the New York Court of Appeals because of the “Special Condition” that elected France as the exclusive forum where “interpretation or performance” would be determined. The Judge observed that such clauses are regularly enforced “where, as is the case here, there was no showing of fraud or overreaching.” The Judge concluded that Seller/Applicant would be unable to demonstrate likelihood of success due to the forum clause.

Seller/Applicant claimed that it had fulfilled its obligations under the underlying contract and that accordingly the Local Guarantee should be released. Seller produced evidence that Buyer stated that Seller/Applicant “has completed this order in a timely manner to our best satisfaction with high quality of service” and authorized reduction of the Local Guarantee to USD 126,548.10. The Judge, however, noted that Buyer had not released the Local Guarantee despite repeated requests to do so from Seller/Applicant and that there was a balance of USD 126,548.10 outstanding.

Seller/Applicant also argued that there is “no dispute about either the interpretation of, or performance on, the guarantees.” The Judge rejected this claim, noting that Seller’s Bank/Counter Guarantor had submitted an affidavit stating that “it is obligated under the terms of the counter-guarantee to honor [Local Bank’s] demand for the balance” and observing that there is a very lively dispute concerning the parties’ rights and responsibilities under the guarantees.”

The Judge also found that Seller had not demonstrated that it would suffer irreparable harm absent the preliminary injunction. The Judge observed that Seller/Applicant sought payment of money and offering “only conclusory statements that it cannot obtain money damages against [Buyer] for the balance.” The Judge observed that “[w]here Seller can be made whole with money damages, it cannot show irreparable harm.”

Legal Analysis:

Comments:

  1. Counter Guarantees. The risk of using a counter guarantee structure is that there will be a drawing on the Local Guarantee that is debatable but a drawing on the Counter Guarantee that complies. That is the point of using the structure, namely to shield the Local Beneficiary and the Local Bank from injunctions issued by courts in the Applicant’s country. It is an inherent risk of using that model. Absent proof of material fraud in the drawing on the counter undertaking or of collusion between the Local Bank and the Local Beneficiary, a complying drawing on the Counter Guarantee should not be enjoined.
  2. No Reference to NY § 5-109. Although the result in these case is correct, the analysis relies on case law and traditional principals of equity. Regrettable there is no reference to New York’s Version of U.C.C. § 5-109 (Fraud and Forgery). Given the forum selection clause, it is unclear whether New York law would apply to the availability of the injunction but to the extent that it did, that law is contained in N.Y. UCC § 5-109. Under that provision, the paramount question is not irreparable damages or likelihood of success but whether there is material fraud. The opinion implies that there was none but does not expressly address this question, and, having done so, need not have considered whether there was irreparable harm or whether monetary damages would have been inadequate.
  3. Forum Clause. It should be noted that the exclusive forum clause appeared in a “Special Conditions form incorporated by reference in the Application” and that it was signed separately from the Application “application” by Seller/Applicant to Counter Guarantor requesting it to issue the Counter Guarantee. It is unclear whether the clause appeared in the Counter Guarantee but since the dispute was between the Seller/Applicant and the Counter Guarantor, it should make no difference in which one it was contained.
  1. “purchased”. The opinion states that the Seller/Applicant “purchased” a performance bond from Counter Guarantor. The “performance bond” was the Counter Guarantee and it was not “purchased” in any normal sense of the word. This casual usage is imprecise and problematic since it echoes claims in prime bank or high yield fraudulent schemes or advance fee scams that independent undertakings can be “purchased”. As is obvious from the opinion, however this bond was not “purchased” but issued at the request of seller who was obligated to reimburse Counter Guarantor for payments

[SJD]

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