Article

Factual Summary:

1. The Public Works Contract

Boustead Singapore Limited (“Principal”) and Organisation for Development of Administrative Centres (“Local Beneficiary”), a state entity controlled by Muammar Gaddafi, entered into a contract for the construction of a housing development in Al-Marj, Libya in 2007 (“Public Works Contract”). The contract provided that Principal, acting through a joint venture with a Libyan company, would construct the development.

2. The Credit Facilities Agreement

Under the Public Works Contract, Principal was to furnish a performance bond (“PB”) and advance-payment guarantee (“APG”) (collectively “Local Guarantees”). Principal arranged for the issuance of the PB and APG through two banks: the Arab Banking Corporation, located in Bahrain (“Counter-Guarantor”), which issued two counter-guarantees (“CGs”) in favor of Bank of Commerce and Development, a Libyan bank (“Local Guarantor”), which issued the performance bond and advance-payment guarantee (Local Guarantees). Principal and Counter-Guarantor entered into a credit facilities agreement (“CFA”), whereby Principal agreed to reimburse or indemnify Counter-Guarantor on its demand for any amounts demanded or paid under the CGs. Singapore Law governed the CFA, Libyan law govern the PB and APG, and English law and URDG 458 governed both CGs.

The CFA included three clauses pertaining to Principal’s indemnification of Counter-Guarantor and the extent of Counter-Guarantor’s liability in identifying and accepting documentation. Clause 6.6 of the CFA required that Principal indemnify Counter-Guarantor “on demand for any loss that [Counter-Guarantor] may suffer, or any expense it may incur in relation to any of the CGs that were issued under the [CFA]. [*1]. Clause 6.8 of the CFA provided that Counter-Guarantor held no responsibility for making any factual determinations about any documents presented to it in order to insure their validity or genuineness. Finally, Clause 6.9 provided that Principal must pay Counter-Guarantor “immediately upon demand” and that Counter-Guarantor’s demand would be “conclusive evidence of the amount owing.” [*2].

The PB was in the amount of USD 3,760,387.95 and had an expiration date of 28 July 2011, and the APG was in the amount of USD 15,021,093.25 and had an expiration date of 30 June 2011. The CGs issued in favor of Local Guarantor each mirrored the sums and expiration dates of the PB (“CG 1”) and the APG (“CG 2”). The PB, APG, and both CGs were demand guarantees, which required, subject to each guarantee’s individual requirements, payment immediately upon any demand.

The relationship between the banks, Principal, and Local Beneficiary in regard to the PB and APG was such that in the event of a demand by Beneficiary, Beneficiary would issue the demand to Local Guarantor, which would then inform Counter-Guarantor. Counter-Guarantor would then pay Local Guarantor the demand price, which Local Guarantor would then transfer to Local Beneficiary. After this exchange, Principal would then, as dictated by the CFA, reimburse or indemnify Counter-Guarantor upon Counter-Guarantor’s first demand for any amount demanded or paid under the CGs.

3. Demands for Payment and Injunction

In 2011, Libya encountered social unrest, which ultimately transformed into civil war. Principal claimed that the construction site in Al-Marj encountered major looting and destruction. In February of 2011, Principal’s crew evacuated Libya and all construction activities were suspended. One month later, the United Nations Security Council passed Resolutions 1970 and 1973, which froze the assets of Muammar Gaddafi, his close advisors, and entities over which they held control.

After Principal’s crew evacuated Libya, Local Beneficiary demanded payment on the PB and APG from Local Guarantor (“Beneficiary Demands”). Local Guarantor then, after receiving Local Beneficiary’s demands, requested that Counter-Guarantor extend CG 2’s expiration date or, in the alternative, pay the full its full sum. A month later, Local Guarantor issued a second extend or pay request to Counter-Guarantor, which Counter-Guarantor relayed to Principal on the same day. Three days later, Principal obtained an ex parte injunction from the Singapore High Court (“High Court”) against Counter-Guarantor to enjoin Counter-Guarantor from validating or paying either CG, and then informed Counter-Guarantor of the injunction. On 28 June 2011, Local Guarantor made a demand for full payment on CG 2 (“CG 2 Demand”). Guarantor subsequently issued an extend or pay requests for CG 1 and then a CG 1 full sum payment demand on July 11, 2011 (“CG 1 Demand”).

Principal then requested, through Counter-Guarantor, copies of Local Beneficiary Demands from Guarantor. On July 14, 2011, Counter-Guarantor received the Local Beneficiary Demands and forwarded them to Principal four days later.

4. Counter-Guarantor’s Appeal and Further Legal Action

On April 24, 2012, ten months after Principal had received its ex parte injunction, Counter-Guarantor successfully challenged the Singapore High Court’s jurisdiction. After Principal appealed this decision, the High Court dismissed the appeal and lifted the injunction. The next day, August 30, 2012, Principal’s request for a second injunction was granted.

5. Counter-Guarantor’s Event-of-Default Notice

On September 3, 2012, Counter-Guarantor issued a demand under the CFA to Principal seeking the total sums of both CGs (“CFA Demand”). The next day, Principal reminded Counter-Guarantor of the injunction barring Counter-Guarantor’s payment to Guarantor, stated that it would not reimburse Counter-Guarantor, and further disputed the validity of the CG 1 and CG2 Demands by the Local Guarantor as well as the Local Beneficiary Demands. Based on Principal’s non-payment, Counter-Guarantor issued an event-of-default notice on Principal terminating the CFA (“EOD Notice”). Counter-Guarantor also commenced a claim seeking reimbursement owed by Principal under the CFA.

Legal Analysis:

1. Guarantor’s Fraud

Principal argued that, when issuing its demand under the CFA, Counter-Guarantor ignored the fraudulent behaviors of Local Guarantor, Local Beneficiary or both, or in the alternative, Counter-Guarantor ignored “the lack of authority, validity, genuineness, accuracy or correctness of [Local Guarantor]’s demands for payment under the CGs.” [*3] Principal explained that it held no liability to Counter-Guarantor under the CGs because either the CG 1 and CG 2 Local Guarantee Demands were made fraudulently or they did not conform with the CGs’ terms.

The Singapore High Court, Li J. presiding, determined that according to Libyan law, the Beneficiary Demands, on which the CG 1 and CG 2 Counter Guarantee Demands relied, failed to comply with the terms of the PB and APG Local Guarantees. The High Court then turned to English law, which governed the CGs, to determine the effect that the non-complying Local Beneficiary Demands had on the CG1 and CG 2 Demands. The High Court explained that three fundamental principles of English law applied to the Counter Guarantees. First, that Counter Guarantees are completely separate transactions from the contract or guarantees to which they are related and are thus not bound by them. Second, a counter guarantor need not consider outside facts when determining whether it must pay a demand; the counter-guarantor is only concerned with the documents specified under the Counter Guarantee. Third, the counter-guarantor need only inquire about the specified documents’ apparent conformity to the terms of the Counter Guarantee. These fundamental principles ensure that payment be rendered in almost all instances.

The High Court then stated that under English law, the only narrow exception abrogating the right to receive payment is fraud, which occurs with either knowledge or through recklessness. The Judge stated that a bank may (or must) “refuse to pay on a demand where: (a) the beneficiary to the guarantee (or counter-guarantee) is a party to the fraud; (b) the bank has knowledge of the fraud by a particular time; and (c) the beneficiary has been given an opportunity to answer the allegation of fraud. “[¶57] Noting the tests for fraud set in the English cases, the Judge noted that “

One must be careful, however, not to overstate the narrowness of the fraud exception. “ [¶59]

The High Court held that because the Local Beneficiary Demands did not comply with the terms of the PB and APG Local Guarantees, the Counter-Guarantor was at least reckless in stating in its demands to Principal that Counter-Guarantor was obligated to pay under the terms of the Counter Guarantees. The Judge said that Local Bank “could and ought to have made further inquiries as to the specific allegations of fraud that were made against it if it was truly unaware of and concerned about the specificity of the allegations. “ [¶88] Though Counter-Guarantor may not have knowingly committed fraud, its recklessness satisfied the standard for fraud that applied, and as a result, Counter-Guarantor was not obligated to pay Local Guarantor (which the Judge determined even though Local Guarantor and Local Beneficiary were not actually before the Court).

2. CG 1 and CG 2 Demands and Non-Conformity

Once the High Court held that Local Guarantor committed fraud, the issue of whether the CG 1 and 2 Demands complied with the Counter Guarantees was moot. However, the High Court still conducted an analysis of this issue and explained that while both Demands contained errors in their reference numbers, and referenced the incorrect underlying guarantees, Guarantor still complied with the Counter Guarantee terms as provided under English law. The Judge held that it was clear that the Demands substantially complied with the terms of the Counter Guarantees. Furthermore, it was not clear to the Judge that the terms of URDG 458 were incorporated into the Local Guarantees by Libyan law, and thus the Court was not required to examine the supposed failure under URDG 458 Art. 20(b) of the Counter Guarantee Demands to state that the demands under the Local Guarantee were made in accordance with its terms and with URDG A458 Article 20.

3. Counter-Guarantor’s Knowledge of Guarantor’s Fraud

Having established that Guarantor’s conduct in making the CG1 and 2 Demands constituted fraud, the High Court examined whether Counter-Guarantor had knowledge of this fraud or was reckless when issuing the CFA Demand.

The High Court cited several facts that tended to show that Counter-Guarantor knew of Guarantor’s fraud. The High Court noted that Counter-Guarantor’s response to the Beneficiary Demands was to point out to Guarantor that the Beneficiary Demands were invalid. Despite that, Counter-Guarantor later accepted the CG 2 Demand on June 28, 2011 and the CG 1 Demand on 11July 2011. Thus, the Judge concluded that the Counter-Guarantor was at least reckless in making the CFA demands, knowing that it had already previously determined the Beneficiary Demands to be invalid.

Importantly, though, the parties disputed whether the Counter-Guarantor had such knowledge at such a time as to justify a finding of recklessness. Principal argued that under English law, the relevant time period began when Counter-Guarantor had knowledge of Guarantor’s fraud and ended only upon issuance of payment. Because the second injunction remained in place, Counter-Guarantor had yet to render payment to Guarantor. Thus, according to Principal, Counter-Guarantor engaged in fraud because it knew the Beneficiary Demands were fraudulent but it made the CFA Demands regardless.

Counter-Guarantor, on the other hand, argued that under English law the relevant time period began when Counter-Guarantor took an “irrevocable step in reliance on the apparent conformity of the demands presented, in ignorance of any fraud.” [*4]. In Counter-Guarantor’s view, the relevant time period included the time between its issuance of the Counter-Guarantor Demand and its issuance of the EOD Notice on September 10, 2012. If Counter-Guarantor’s argument were accepted, Counter-Guarantor did not learn of Guarantor’s fraud until Principal’s filing on September 24, 2012, by which point it had already made the CFA Demands, and thus Counter-Guarantor did not engage in fraud.

The High Court established that in order to apply the correct relevant time period standard, it had to determine what constituted an irrevocable step. In analyzing the definition of irrevocable step, the High Court concluded that payment constituted an irrevocable step, but issuing the EOD Notice did not because Counter-Guarantor maintained all other rights it accrued under the CFA. Thus, Counter-Guarantor had yet to take an irrevocable step, and Counter-Guarantor fraudulently constructed the Counter-Guarantor Demand. The High Court explained that since Guarantor fraudulently created both CG Demands and Counter-Guarantor acquired knowledge of this fraud prior to issuing payment, Counter-Guarantor also committed reckless fraud.

4. Conspiracy Between Counter-Guarantor and Guarantor, Beneficiary, or Both

Principal also argued that Counter-Guarantor conspired with Guarantor, Beneficiary, or both when issuing its Counter-Guarantor Demand. Principal relied on several facts when attempting to reveal the conspiracy, including Counter-Guarantor’s disregard for the force majeure event in Libya that rendered Principal unable to pay the guaranteed sums of the CGs, Counter-Guarantor’s receipt of the Beneficiary Demands, Counter-Guarantor’s reminder sent to Guarantor reiterating the requirements necessary for a conforming CG demand, and Counter-Guarantor’s “indifference” to the false statements in Guarantor’s CG 1 and 2 Demands. The High Court dismissed these allegations, explaining that they were too speculative.

5. Unconscionability and Choice of Law

The High Court then addressed the issue of unconscionability in relation to the CG Demands and the CFA Demand. In addressing the CG Demands first, the High Court explained that in pursuing an injunction, when different laws governed the contract and the demand guarantee at issue, choice of law issues arose that remained unsettled. The High Court then held that when issuing an injunction, a court must use the law of the demand guarantee because by using that law, a court more closely follows the intent of the parties. The High Court then proceeded to consider unconscionability under English law. However, English law did not recognize unconscionability as available to issue injunctive relief, and thus Principal could not support a claim for unconscionability as to the CG Demands.

The High Court then determined that it would analyze the unconscionability argument as to the CFA Demand under Singapore law. The High Court held that it would be unconscionable to allow Counter-Guarantor to collect payment from Principal irrespective of whether or not Guarantor committed fraud. In arriving at this conclusion, the High Court pointed to the injunction that blocked Counter-Guarantor from paying Guarantor, the fact that Guarantor has yet to sue Counter-Guarantor for payment, Counter-Guarantor’s knowledge of Guarantor’s fraud, the ongoing force majeure event in Libya, and the non-compliant Beneficiary Demands. In totality, these facts warranted injunctive relief, since payment would place Principal in a “particularly malodorous” position. [*6]. The High Court also explained that while Principal did not plead that the CFA Demand was unconscionable, the fact that the Beneficiary Demands were invalid was enough to allow this argument because any payment to Counter-Guarantor would necessarily flow from these demands.

The High Court did reject Principal’s argument of unconscionability based on U.N. Resolutions 1970 and 1973. Principal argued that any payment by Counter-Guarantor to Guarantor would breach the Resolutions because these resolutions were meant to freeze Libyan assets. Thus, Guarantor made the CG Demands unconscionably. The High Court dismissed this argument, referring again to the fact that English law, which governed the CGs, did not acknowledge unconscionability for injunctive relief.

6. UCTA 2(2)

Principal also argued that Singapore Law rendered sections 6.6, 6.8, and 6.9 of the CFA invalid, because they limited Counter-Guarantor’s liability for negligence, which is not permitted under Singapore Law. However, the Court found that these sections did not exclude liability for negligence and were reasonable.

7. Implied Terms

Finally, the High Court concluded by addressing Principal’s argument that the CFA included two implied terms. However, the Court found that the implied terms were incorporated into the common law through the fraud exception and the doctrine of unconscionability. Thus it was not necessary to imply these additional terms in the CFA.

EXCERPTS FROM THE OPINION OF THE TEXT OF THE COUNTER GUARANTEES:

Our counter guarantee No. ILG/09/20038:-

In consideration of your issuing the above performance bond, we hereby unconditionally and irrevocably undertake to reimburse you on your first written demand communicated through authenticated SWIFT message or registered mail, despite any contestation on the part of the applicant or a third-party provided you confirm that you have received claim [sic] from [ODAC] in accordance with the terms of the above performance bond provided such amount does not exceed the guaranteed sum of USD 3,760,387.95 (as defined in the above performance bond). Such demand shall be supported by a written statement specifying that you have received a demand for payment under the above performance bond in accordance with its terms.

...

This counter guarantee is subject to the Uniform Rules for Demand Guarantees ICC Publication No 458 (the “Uniform Rules”) and shall, as to matters not governed by the Uniform Rules, be governed by and construed in accordance with English law. Any dispute arising from this counter guarantee shall be submitted to the non-exclusive jurisdiction of the English courts ...

CG39 reads:59

Our counter guarantee No. ILG/09/20039:-

In consideration of your issuing the above advance payment guarantee, we hereby unconditionally and irrevocably undertake to reimburse you on your first written demand communicated through authenticated SWIFT message or registered mail, despite any contestation on the part of the applicant or a third-party provided you confirm that you have received claim [sic] from [ODAC] in accordance with the terms of the above advance payment guarantee provided such amount does not exceed the guaranteed amount of USD 18,331,891.37 (as defined in the above advance payment guarantee). Such demand shall be supported by a written statement specifying that you have received a demand for payment under the above advance payment guarantee in accordance with its terms.

...

This counter guarantee is subject to the Uniform Rules for Demand Guarantees ICC Publication No 458 (the “Uniform Rules”) and shall, as to matters not governed by the Uniform Rules, be governed by and construed in accordance with English law. Any dispute arising from this counter guarantee shall be submitted to the non-exclusive jurisdiction of the English courts ...

EXCERPTS OF THE TEXT OF THE DEMANDS MADE ON THE COUNTER GUARANTEES:

Transaction Reference Number 10/21/LG008/2007

Related Reference ILG/09/20038

Narrative Claim under your LG NO ILG/09/20038

Attnt. Trade Finance Ops.

We hereby demand USDOLLARS 3,760,387.95 say USDOLLARS three million seven hundred sixty thousand three hundred eighty seven and ninety five cents, under your aforesaid counter guarantee which please credit our USDOLLARS account with your goodselves.

We confirm that we have received the a [sic] claim for USDOLLARS three million seven hundred sixty thousand three hundred eighty seven and 95 cents from [ODAC] in accordance with the terms of the above advance payment guarantee.

We hereby support our demand by our written statement specifying that we have received a demand for payment under the above advance payment guarantee in accordance with it,s [sic] terms.

As an alternative to the demand for payment submitted in accordance with terms and conditions of the guarantee, [ODAC], Tripoli, Libya had requested an extension of the validity of our advance guarantee No 10/21/LG00008/2007 until 31/12/2012.

The CG39 Demand reads:

Transaction Reference Number 10/21/LG00009/07

Related Reference ILG/09/20039

Narrative Claim under your LG NO ILG/09/20039

Attnt. Trade Finance Ops.

We hereby demand USDOLLARS 15,021,093.25 say USDOLLARS fifteen million twenty one thousand and ninety three USDOLARS [sic] and 25 cents, under your aforesaid counter guarantee which please credit our USDOLLARS acount [sic] with your goodselves.

We confirm that we have received the a [sic] claim for US DOLLARS fifteen million and twenty one thousand and ninety three and 25 cents from [ODAC] in accordance with the terms of the above advance payment guarantee.

We hereby support our demand by our written statement specifying that we have received a demand for payment under the above advance payment guarantee in accordance with it,s [sic] terms.

As an alternative to the demand for payment submitted in accordance with terms and conditions of the guarantee, [ODAC], Tripoli, Libya had requested an extension of the validity of our advance guarantee No 10/21/LG00009/07 until 31/12/2012.

[JAM/sjk]

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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.