Article

Factual Summary:

Oil Company/Beneficiary hired Contractor/Applicant to drill and complete twenty-three production wells in West Qurna, Iraq on a turnkey basis for USD 142,300,680. To assure its performance, Contractor/Applicant delivered to Oil Company/Beneficiary “an irrevocable, unconditional, on demand bank guarantee” for five percent of the total contract price, or USD 7,115,034. The bank guarantee provided that Guarantor would honor Oil Company/Beneficiary’s first presentation “on the condition that no amendment has been made to the Contract concluded between [Oil Company/Beneficiary] and [Contractor/Applicant] impacting the timely performance of the Works under the Contract” and that Guarantor waived its rights to be notified of any amendments to the contract. [Excerpts from the bank guarantee follow this summary].

The expiration date of the guarantee was extended multiple times by the Guarantor. Claiming the Contractor/Applicant had failed to perform its obligations under the contract, Oil Company/Beneficiary demanded payment on the guarantee five days before the final expiration. The demand, in relevant parts, stated that Contractor/Applicant failed to perform its obligations Oil Company/Beneficiary had demanded, that Contractor/Applicant failed to pay, and Oil Company/Beneficiary recited a claim for liquidated damages of USD 14,230,068. Oil Company/Beneficiary’s demand further stated that Oil Company/Beneficiary did not need to provide justifications for its demand and that it considered the letter a complete presentation under the Guarantee. [The Text of Demand reproduced from the opinion is at end of this summary].

Guarantor refused Oil Company/Beneficiary’s demand in a letter dated two days prior to the final expiration date. Guarantor stated that Oil Company/Beneficiary’s presentation was refused because “[t]he condition that no amendment has been made to the Contract concluded between [Oil Company/Beneficiary] and [Contractor/Applicant] impacting the timely performance of the Works under the Contract” was not mentioned in the demand. Oil Company/Beneficiary was unable to cure the presentation before the guarantee expired. [Excerpts from Guarantor’s refusal letter contained in the court opinion appear at the end of this summary].

Oil Company/Beneficiary sued Guarantor in England for wrongful dishonor. Guarantor claimed that the clause in the guarantee requiring that there be no amendment affecting timely performance meant that Guarantor was only obligated to pay out if Oil Company/Beneficiary expressly stated that no amendment to the contract had been made “impacting timely performance of the [w]orks.” Oil Company/Beneficiary moved for summary judgment, and Guarantor made a counter motion for summary judgment. The court denied Contractor/Applicant’s motion and granted Oil Company/Beneficiary’s motion.

Legal Analysis:

1. Wrongful Dishonor: The Judge concluded that within the context of the guarantee as a whole, Guarantor was obligated to disburse the proceeds on first presentation by Oil Company/Beneficiary. He noted that the fifth term of the guarantee waived all rights of the Guarantor to be notified of amendments to the contract between Oil Company/Beneficiary and Contractor/Applicant, and so came into direct conflict with the fourth term of the guarantee. The Judge considered the meaning of the fourth term in the context of all of the other terms and determined that enforcement of that term to the exclusion of all of the others was not commercially feasible. Therefore, the Judge concluded that Guarantor had wrongfully dishonored Oil Company/Beneficiary’s presentation.

2. Independence: The Judge noted that it was the terms of the guarantee itself that determined the formal requirements with which a demand/presentation must comply. To demonstrate the primacy of the guarantee’s text, the Judge cited Rayner (JH) & Co Ltd v. Hambros Bank Ltd, in which parties presented multiple instruments showing different formal requirements for a demand. [1943] KB 37. The Judge agreed with the judgment in that case that the true question was what requirements were laid out in the guarantee itself, to the exclusion of other instruments. He observed that, in practice, the relationship between Oil Company/Beneficiary and Contractor/Applicant was merely incidental to the relationship between Guarantor and Oil Company/Beneficiary, and the former only impacted the latter as much as is allowed by the guarantee itself.

3. Interpretation: The Judge stated that he must interpret the terms of the guarantee as a whole. He observed that the conflict between Oil Company/Beneficiary and Guarantor arose primarily because the fourth term conflicted with the rest of the guarantee. He stated that the fourth term’s requirement that the guarantee would be honored on first presentation provided that there was no amendment to the contract between Oil Company/Beneficiary and Contractor/Applicant “impacting the timely performance of the Works under the Contract” conflicted with the fifth term, which provided that Guarantor waives its rights to be notified of any amendments to the contract and that “any contractual documents made by [Contractor/Applicant or Oil Company/Beneficiary] shall relieve us from our responsibilities under this Guarantee.” The Judge weighed the impact of the terms in the context of the whole guarantee, and concluded that requiring Oil Company/Beneficiary to declare something that was not relevant to Guarantor’s obligation under the guarantee lacked any “commercial or principled legal justification.” The Judge also mentioned that a court would not endorse “an interpretation that is commercially absurd unless compelled to do so by very clear words.” The Judge stated that, given the realities of construction contracts, enforcing a term that impacted “timely performance” would invalidate the guarantee and be commercially absurd.

Text of Contract:

“[Art. 6.18] Bank Guarantee. Within 10 days from the Effective Date of this Contract [Contractor/Applicant] shall deliver to [Oil Company/Beneficiary], as security for [Contractor/Applicant’s] performance of its obligations under this Contract and its insolvency, an irrevocable, unconditional, on demand bank guarantee issued by an international bank rated not lower than B+ by international ratings agencies Fitch, Moodys or Standard and Poors and being in the form acceptable to [Oil Company/Beneficiary], for 5% of the estimated Contract Price… Such bank guarantee shall provide that, and [Contractor/Applicant] shall ensure that, the bank guarantee remains valid until the 90th day following handover, in accordance with Article 6.17, of the last well to be drilled and Completed under this Contract. [Contractor/Applicant] shall bear all costs and charges related to the issue and maintenance of the said bank guarantee.”

[Art. 22.1] The scheduled Completion Dates established pursuant to this Contract and Key Dates shall be subject to adjustment only in accordance with the provisions of this Article 22 (Variations). Any Variation shall be governed by all the provisions of the Contract.

Any Variation is effective only when it is made in writing and agreed or determined in accordance with this Article 22.

[Art. 22.2] At any time during the term of validity of the Contract, the Company shall be entitled to initiate the introduction of changes in the Work, including: (a) changes to any Detailed Drilling Program once it has been approved by the Company in accordance with Article 5.1.2; (b) omission of any Work, cancellation of the supply of any equipment; (c) change in the nature, quality, or kind of any Work or equipment to be supplied as part of the Work; (d) execution of Additional Work or supply of additional equipment.

For the Purposes of the Contract the matters described in this Article 22.2, including items (a) to (d) inclusive, shall be referred to as a “Variation.” Any changes made through Variation shall be in a written form and shall be signed by the authorized representative of the Parties.

[Art. 22.11] If the Contractor considers himself to be entitled to any extension of time under the Contract, the Contractor shall give notice to the Company, describing the event or circumstances giving rise to the claim. The notice shall be given as soon as practicable.

Subject to the foregoing paragraphs of this Article 22.11, the Contractor shall be entitled to an extension of the Key Dates as shall be reasonable in all the circumstances if and to the extent that completion of Work is or will be delayed by any of the following causes: (a) a variation (unless an adjustment to the Completion Date or Key Date has already been agreed under Articles 22.1 to 22.10); (b) any delay, impediment, or prevention caused by or attributable to the Company or the Company’s personnel (including as a result of breach of this Contract); or (c) force majeure (as such term is defined in Article 19), in each case whether occurring before or after the relevant Completion Date or relevant Key Date has expired, but, in any event, excluding delay which is due to any breach, neglect, or default of the Contractor or any person for whom the Contractor is responsible in accordance with the Contract.”

Text of Bank Guarantee:

“To: [Oil Company/Beneficiary]

[1.] Whereas [Contractor/Applicant] … has undertaken obligations under Contract No. CY-11–8015–0600. For Drilling and Completion of Production Wells Mishrif Formation in West Qurna (Phase 2) (hereinafter referred to as “the Contract”), and whereas the mentioned Contract states that [Contractor/Applicant] shall provide a bank guarantee for the amount defined therein to secure the fulfilment of [Contractor/Applicant's] obligations under the Contract, and whereas we Barclays … agreed to provide [Contractor/Applicant] with such a bank guarantee, we hereby unconditionally and irrevocably declare that we are the Guarantor and on behalf of [Contractor/Applicant] we bear responsibility and obligations to you for the total amount of USD 7,115,034.00 … and this amount shall be paid in the same currencies and proportions as the Contract price. We undertake to pay you, at your first written request, without any disputes or objections, any amount or amounts within the limit of USD 7,115,034.00 … as stated above, not requiring from you to provide any proof or justification of your request for the amount defined in this document.

[2.] We hereby relieve you of the need to collect the debt from [Contractor/Applicant] before presenting a request to us.

[3.] [Barclays] is bound with this obligation in its own name.

[4.] From the date of the issuance of the Guarantee [Barclays] shall be responsible for the payment of the total above mentioned amount in full at [Oil Company/Beneficiary's] first written request submitted to [Barclays] before the expiry date if [Contractor/Applicant] fails to fulfil the Contract provisions, on the condition that no amendment has been made to the Contract concluded between [Oil Company/Beneficiary] and [Contractor/Applicant] impacting the timely performance of the Works under the Contract.

[5.] We hereby agree that no amendments nor addenda to the Contract, nor any contractual documents made by you and [Contractor/Applicant] shall relieve us from our responsibilities under this Guarantee, and we hereby waive the right to be notified of such amendments or addenda.

[6.] The conditions of this Guarantee are as follows:

[7.] The GUARANTEE shall be valid until April 30, 2014 (the “Expiry Date”)

[8.] This guarantee shall be governed by English law.

Yours faithfully…”

Text of Demand:

“In accordance with the terms of the GUARANTEE NO. MRGI55024596 issued by [Guarantor] on 2 November 2011, as amended and extended, [Oil Company/Beneficiary] hereby PRESENTS and DEMANDS that the Guarantor makes payment of USD 7,115,034.00.

In compliance with the Guarantee, upon receipt of this DEMAND the Guarantor is required to pay ‘…without any disputes or objections, any amount or amounts within the limit of USD 7,115,034.00 … not requiring from you to provide any proof or justification of your request for the amount defined in this document…’

The Guarantor should treat this PRESENTATION and DEMAND as COMPLETE.

Notwithstanding and without prejudice to the fact that the Beneficiary is not required to prove or justify any amount under the Guarantee, the Beneficiary makes this DEMAND as [Contractor/Applicant] is in breach of its obligations under the Contract referenced CY-11-8015-0060 signed on the 14 August 2011 between the Beneficiary and [Contractor/Applicant] for the drilling and completion of production wells in the Mishrif formation in West Qurna (Phase 2) Contract Area (Iraq) on a Turn-key Basis.

Specifically, [Contractor/Applicant] has failed to achieve any of the Key Milestones on or before the corresponding Key Dates set out in Appendix no. 12 of the Contract. Accordingly, Beneficiary notified and demanded Liquidated Damages due from [Contractor/Applicant] in the amount of USD 14,230,068 by way of notices issued on 22 February 2015 and 2 March 2015. [Contractor/Applicant] has failed to make payment of these Liquidated Damages and the Beneficiary hereby exercises its right under the Guarantee for the due performance of Contractor’s obligations by the Guarantor by reference to the following provisions of the Guarantee: ‘Guarantor relieves you of the need to collect the debt from [Contractor/Applicant] before presenting a request to Guarantor’; and ‘Guarantor is bound with this obligation in its own name’; and ‘Guarantor hereby agrees that no amendments or addenda to the Contract, nor any contractual documents made by Beneficiary and the [Contractor/Applicant] shall relieve guarantor from our responsibilities under this Guarantee, and Guarantor hereby waives the right to be notified of such amendment or addenda’.

We look forward to receiving Guarantor’s confirmation of remittance by return.”

Text of Refusal:

“Dear Sir(s)

We refer to your recent letter and advise that we do not consider your claim on our Performance Guarantee to be valid due to the following reason(s)

1. The Condition of “no amendment has been made to the Contract Concluded between [Oil Company/Beneficiary] and [Applicant] impacting the Timely performance of the Works under the Contract” is not mentioned in the demand.

If you have any questions please call our Customer Service Team on above mentioned telephone number.

Yours faithfully…”

[CTR/JLN]

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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.