Legal Case Summaries

Article

Factual Summary: Sub-Contractor/Applicant undertook to build living quarters on a gas production platform being built by Contractor/Beneficiary. Under the construction agreement, Sub-Contractor/Applicant provided two bank guarantees issued by Guarantor in favor of Contractor/Beneficiary, which were subsequently replaced by one “Bank Guarantee.” The contract stated, “[t]he guarantee shall be valid for its full amount until the Completion Certificate is issued, and thereafter it shall be valid for half its amount.”

Upon delivery of the living quarters, Contractor/Beneficiary determined that they deviated from the construction agreement and entered into a Memorandum of Agreement with Sub-Contractor/Applicant stipulating that the remaining work would be completed by Sub-Contractor/Applicant at Contractor/Beneficiary’s yard in South Korea with the assistance of Contractor/Beneficiary. They further agreed that each party’s obligations would be specified on a punch list.

Sub-Contractor/Applicant submitted its punch list from 2 July 2014 with the figure “0” printed, indicating that it had completed all work assigned in the Memorandum of Agreement. The parties disputed whether, and to whom, extra payment was owed, and Contractor/Beneficiary refused to issue the Completion Certificate. Nonetheless, the gas production platform was commissioned. To determine liability, Sub-Contractor/Applicant initiated arbitration proceedings against Contractor/Beneficiary in Norway.

On 17 December 2014, Contractor/Beneficiary drew on the bank guarantee. Guarantor dishonored because the request was based on one of the original Bank Guarantees that had been replaced. Before a complying presentation was made, Sub-Contractor/Applicant sought and obtained an injunction.

Subsequently, Sub-Contractor/Applicant sued Contractor/Beneficiary and Guarantor in judicial proceedings in Oslo, Norway. The trial court granted a provisional injunction against payment of the guarantee. The Norwegian Supreme Court ultimately decided that it did not have jurisdiction to hear the dispute.

On 27 January 2016, Contractor/Beneficiary re-presented documents, claiming the maximum amount. Sub-Contractor/Applicant brought additional proceedings under which Guarantor was temporarily restrained from making payment. After being restrained, Guarantor informed Contractor/Beneficiary that “it considered itself obliged to pay but that it was not able to pay because of the injunction of 27 January 2016.” The court ruled that Guarantor was forbidden from honoring the Guarantee until an arbitral award was issued that ordered payment, or a judgement was entered.

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Legal Analysis:

Legal Analysis: Noting that the case involved an abstract bank guarantee, the Judge observed that “in principle, the Bank Guarantee should be abstracted from the underlying facts.” Although the bank guarantee was subject to Norwegian law, the parties differed as to the standard for exceptions to the principle of abstraction, and whether they differed from the law of the Netherlands, which was the forum, and that of Norway. Guarantor and Contractor/Beneficiary disagreed on whether the standard was that the drawing was “disloyal and unfounded or – as the equivalent in Dutch law according to [Guarantor] and [Contractor/Beneficiary] – obviously fraudulent or arbitrary.” Sub-Contractor/Applicant argued that the Guarantor “is obliged, also in view of its duty of care towards [Sub-Contractor/Applicant], and before paying under guarantee, to test on the basis of the underlying legal relationship whether the request for payment under the Bank Guarantee is legitimate.”

To determine the standard, the Judge considered whether Contractor/Beneficiary was obligated to issue the Completion Certificate which it was agreed should have been issued when Sub-Contractor/Applicant finished the work on the punch list. The Judge stated that, while Sub-Contractor/Applicant had indicated that there was “0” work to be completed on the punch list, Contractor/Beneficiary “has not made a reasonable case to the contrary.” The Judge also noted that, “[Contractor/Beneficiary] has not been able to specifically name the work which [Sub-Contractor/Applicant] still had to perform.”

Concluding that Contractor/Beneficiary was contractually obligated to issue the Completion Certificate, the Judge observed that a further investigation of the Guarantor was unnecessary and the amount of the bank guarantee should have been reduced by half. The Judge then ruled that, since Contractor/Beneficiary “requested payment of the maximum amount, it should for the time being, be held that according to Norwegian law, its claim under the Bank Guarantee is disloyal and unfounded, as a result of which its claim cannot result in payment.”

The Judge, however, determined that an order providing that any subsequent request cannot be honored was “too absolute” and ruled that payment was prohibited until an arbitral award was issued to the effect that Contractor/Beneficiary is entitled to draw on the bank guarantee or a Norwegian court so orders in further proceedings.

Texts: The opinion contained the following excerpt from the contract:

19.3 Contractor shall issue the Completion Certificate on its own initiative when the Work (in de Overeenkomst gedefinieerd als "all work which Sub-Contractor shall perform or cause to be performed in accordance with the Sub-Contract") - with the exception of guarantee work - has been completed in accordance with the Sub-contract. The Completion Certificate shall be issued at the date of conclusión of the Delivery Protocol, if the conditions for issuing Completion Certificate have been fulfilled (...)

20.2 Sub-Contractor shall (...) provide a guarantee from a bank or insurance company (hierna ook wel de Bankgarantie of de performance guarantee, vzr.) (...). The guarantee shall amount to ten percent (10%) of the Sub-Contract Price at the conclusión of the Sub-Contract. The guarantee shall be valid for its full amount until the Completion Certificate is issued, and thereafter it shall be valid for half its amount. From the expiration of the Guarantee Period the guarantee shall be valid for an amount equal tot the cost of any remaining guarantee work. (...)

23.2 The Guarantee Period commences at the conclusión of the Delivery Protocol and expires three years thereafter. (...)"

It also contains the following excerpt from the Bank Guarantee:

“(…)

Expiry Date: This guarantee expires the date we receive notice in writing from the Beneficiary (Samsung, vzr.) stating that the Principal (CKT, vzr.) has fulfilled its obligations under the Contract (…)

On behalf of the Principal, we, Nationale Borg-Maatschappij N.V. (…) hereby irrevocably undertake to pay to the Beneficiary any amount up to the Aggregate Maximum Amount upon his first demand in writing, waiving all rights of objections and deference arising from the Principal, provided that such claim including the above mentioned Documentation is received by us not later than on the Expiry Date. (…)”

“A declaration from the Beneficiary stating that the Principal is in breach of his obligation(s) under the underlying Contract.”

[CEF]

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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.