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Note: On 21 February 2014, Laing O’Rourke Australia Construction Pty Ltd (Subcontractor/Applicant) entered into a subcontract with Samsung C & T (Contractor/Beneficiary), a South Korean company, to complete the construction of the Roy Hill Iron Ore project by installing structural steel and related mechanical piping, electrical, and instrumentations for AUD 205,398,786. The subcontract stated that Subcontractor/Applicant was obliged to provide a performance security equal to 10% of the value of the Subcontract. Accordingly, Subcontractor/Applicant caused HSBC Bank Australia Limited (Guarantor) to issue two bank guarantees in favor of Contractor/Beneficiary, each for AUD 10,269,939.

After Contractor/Beneficiary terminated the subcontract “for convenience” on 21 February 2015, the parties entered into an Interim Deed, under which Guarantor issued a “replacement security” in the form of one Replacement Guarantee for AUD 7,500,000, with an expiry date of 20 February 2016, in favor of Contractor/Beneficiary.

In September 2015, Contractor/Beneficiary merged with Cheil Industries Inc, another South Korean company, and the new company, with the same name as Contractor/Beneficiary and with the same registration number of Cheil Industries Inc, took over all private and public assets, liabilities, contracts, and employment agreements.

Subcontractor/Applicant claimed that Contractor/Beneficiary owed it over AUD 90 million. The claims and counter claims arose from the Subcontract. On the other hand, Contractor/Beneficiary claimed that Subcontractor/Applicant owed it AUD 55 million. On 22 January 2016 Contractor/Beneficiary gave notice of its intention to draw on the Replacement Guarantee.

Subcontractor/Applicant applied in Australia for an interlocutory injunction against Contractor/Beneficiary restraining demand for or receipt of payment under the Replacement Guarantee and filed another similar action, seeking an injunction and a declaration that it was entitled to terminate the Interim Deed. Contractor/Beneficiary agreed not to draw without 48 hour notice to Subcontractor/Applicant.

The Supreme Court of Western Australia, Tottle, J., denied the application.

The Judge stated the general rule was that an injunction will not be granted to interfere with drawing on a performance bond but detailed exceptions: “first, the court will enjoin the party in whose favour the bond has been given from acting fraudulently; secondly, the party in whose favour the bond has been given may be enjoined from acting unconscionably in contravention of applicable statutory prohibitions against such conduct; thirdly, if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.”

In deciding whether to grant a requested injunction, the Judge observed that “[i]f a performance bond is intended to operate as a device for allocating the risk of being out of pocket pending the final determination of a dispute between the parties, such intention informs the task the Court must undertake in resolving whether or not to grant an injunction restraining the beneficiary of the bond from converting it into money.”

Considerable time was spent dealing with issues raised related to the succession of a new corporate entity. Subcontractor/Applicant asserted that the new corporate entity was not the beneficiary of the Replacement Guarantee. Applying South Korean law, the Judge decided that the successor corporation was the beneficiary and entitled to draw on it. Moreover, the Judge rejected the argument that the doctrine of strict compliance required the definition of “Contractor” in the Replacement Guarantee requires the conclusion that the predecessor corporation was the “Contractor” who was its beneficiary, and not the successor corporation. Applying “ordinary principles of construction” and looking at “the objective intentions of the parties and to the commercial sense of the competing constructions,” the Judge concluded that the definition of “Contractor” included the successor. The Judge then addressed Subcontractor/Applicant’s argument that a prerequisite to drawing on the Replacement Guarantee was advance notice to Subcontractor/Applicant if the drawing was made by a successor, since the successor should be treated as an assignee of the Replacement Guarantee. The terms of the Replacement Guarantee recognized an assignee as an entity that required advance notice. Noting that an assignment of rights differs from a transfer of rights by operation of law, the Judge rejected this argument. The Judge also rejected Subcontractor/Applicant’s argument that Contractor/Beneficiary’s violations of Australian law regarding a foreign corporation doing business affected the validity of the Replacement Guarantee, since such a result was beyond the legislature’s intent in enacting such regulations.

The Judge concluded that Contractor/Beneficiary could not properly draw on the Performance Guarantee unless it had a bona fide belief that it was entitled to draw on it.

To determine the nature of the Guarantee, the Judge characterized the Performance Guarantee as “more than merely the conferring of security” but as “an allocation of risk provision.” Subcontractor/Applicant argued that Contractor/Beneficiary could not have concluded that it was entitled to the amount claimed, and that this represented a claim for an overpayment.

The issues of the case were split in two categories: (1) whether Contractor/Beneficiary could be considered the beneficiary of the Replacement Security since Contractor/Beneficiary had reformed as a new company; and (2) if conditions of the replacement security had been satisfied, whether the Replacement Security must be returned to Issuer as consequence of termination and if the balance of convince favored granting an injunction restraining a drawing on the Replacement Security.

Texts:

The opinion contains the following excerpt from the Guarantee:

“Appendix 1

THE UNDERTAKING AT THE REQUEST OF THE SUBCONTRACTOR AND IN CONSIDERATION OF THE CONTRACTOR ACCEPTING THIS UNDERTAKING BY WAY OF SECURITY TO THE CONTRACTOR FOR THE PERFORMANCE BY THE SUBCONTRACTOR OF ITS OBLIGATIONS UNDER THE AGREEMENT, THE BANK UNDERTAKES UNCONDITIONALLY AND IRREVOCABLY TO PAY THE CONTRACTOR ON DEMAND ANY SUM OR SUMS WHICH MAY FROM TIME TO TIME BE DEMANDED IN WRITING BY THE CONTRACTOR TO A MAXIMUM AGGREGATE OF THE AMOUNT.”

DURATION OF UNDERTAKINGTHIS UNDERTAKING IS TO CONTINUE UNTIL THE FIRST TO OCCUR OF THE FOLLOWING:

(A)  A WRITTEN NOTIFICATION HAS BEEN RECEIVED BY THE BANK FROM THE CONTRACTOR THAT SUCH SUM IS NO LONGER REQUIRED BY THE CONTRACTOR; (B) THIS UNDERTAKING IS RETURNED TO THE OFFICE OF THE BANK AT 188 - 190 ST GEORGE'S TERRACE, PERTH A 6000 (“THE OFFICE”); OR (C) PAYMENT TO THE CONTRACTOR BY THE BANK OF THE WHOLE OF THE AMOUNT; OR

(D)  4PM (LOCAL TIME- IN THE PLACE OF THE OFFICE ON THE 20 FEBRUARY 2016 (THE EXPIRY DATE).

PAYMENT TO THE CONTRACTOR (A) THE BANK MUST MAKE PAYMENT OF THE AMOUNT OR ANY PART OR PARTS OF THE AMOUNT TO THE CONTRACTOR; (I) IMMEDIATELY UPON THE BANK RECEIVING A WRITTEN DEMAND PURPORTING TO BE SIGNED BY OR FOR AND ON BEHALF OF THE CONTRACTOR; (II) SO THAT IT IS IMMEDIATELY AVAILABLE AND FREELY TRANSFERABLE IN AUSTRALIAN DOLLARS CLEAR OF AND WITHOUT ANY DEDUCTIONS; (III) WITHOUT REFERENCE BY THE BANK TO THE SUBCONTRACTOR;

(IV)  DESPITE ANY NOTICE GIVEN TO THE BANK BY THE SUBCONTRACTORS NOT TO PAY THE CONTRACTOR ANY PART OF THE AMOUNT; AND

(V)  IRRESPECTIVE OF THE PERFORMANCE OR NON-PERFORMANCE BY THE SUBCONTRACTOR OT THE CONTRACTOR OF THE AGREEMENT IN ANY RESPECT.

(B)  THE BANK ACKNOWLEDGES ITS OBLIGATIONS UNDER THIS UNDERTAKING CONSTITUTE DIRECT PRIMARY, IRREVOCABLE AND UNCONDITIONAL OBLIGATIONS. THE BANK FURTHER ACKNOWLEDGES ITS OBLIGATIONS UNDER THIS UNDERTAKING WILL NOT BE ABATED, SUSPENDED, ABROGATED, VARIED, DISCHARGED OR OTHERWISE PREJUDICED OR AFFECTED BY ANY MATTER OR THING WHICH, IN THE ABSENCE OF THIS PROVISION, WOULD OR MIGHT HAVE THAT EFFECT, EXCEPT FOR A DISCHARGE OR AMENDMENT EXPRESSLY MADE OR AGREED TO IN WRITING BY THE CONTRACTOR.

(C)  THE BANK MAY AT ANY TIME, WITHOUT BEING REQUIRED TO DO SO, PAY TO THE CONTRACTOR THE AMOUNT LESS ANY AMOUNT OR AMOUNTS IT HAS PREVIOUSLY PAID UNDER THIS UNDERTAKING AND WHEN IT HAS DONE SO THE LIABILITY OF THE BANK UNDER THIS UNDERTAKING WILL IMMEDIATELY CEASE AND DETERMINE.

(D)  IF TWO OR MORE PERSONS ARE NAMED AS THE CONTRACTOR, THIS UNDERTAKING TAKES EFFECT FOR THE BENEFIT OF THEM JOINTLY AND A DEMAND UNDER THIS UNDERTAKING BY ANY ONE OR MORE OF THEM IS DEEMED TO BE A DEMAND BY BOTH OR ALL OF THEM JOINTLY.

(E)  THE CONTRACTOR MAY ASSIGN THIS UNDERTAKING TO ANY PERSON [AND UPON RECEIPT OF NOTIFICATION TO THE BANK IN WRITING, THE BANK UNDERTAKES TO MAKE PAYMENT CLAIMED UNDER THIS UNDERTAKING TO THE PERSON SPECIFIED IN THE NOTICE WHICH WILL CONSTITUTE A FULL AND VALID DISCHARGE TO THE BANK IN RELATION TO THE PAYMENT.]

GOVERNING LAW

THIS UNCONDITIONAL UNDERTAKING IS GOVERNED BY AND IS TO BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF WESTERN AUSTRALIA”

[GAC, ZLK, 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.