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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2017 LC CASE SUMMARIES [2017] EWHC 2228 (Comm) [England]
Topics: Arbitration; Character of Guarantee; Demand; Independence; Suretyship
Article
Note: In conjunction with a project to widen the Panama Canal, Autoridad del Canal de Panamá (Canal Authority) contracted with Grupo Unidos por el Canal S.A. (Contractor). A group of companies owning the Contractor (Owners/Guarantors) undertook a Joint and Several Guarantee (JSG) of the Contractor’s obligation to perform and to repay all advance payments to Canal Authority. Both the underlying contract and the JSG required disputes to be resolved by arbitration under ICC rules in Miami, USA.
Between 2012-2016, Contractor experienced cash flow problems and Canal Authority provided multiple cash advances for a total of USD 288,275,465.20. These advance payments were initially secured by individual guarantees by Owners/Guarantor sunder which they agreed to be jointly and severally liable for the Contractor’s performance in terms similar to the JSG. As the project experienced further problems, the advance payment guarantees and the main contract were amended to defer repayment until December 2016, with the possibility of extended deferment if Contractor could obtain acceptable standby letters of credit. The amendments, while expressly affirming the provisions of the JSG and the main contract, also provided for disputes regarding the guarantees to be resolved exclusively in England.
In anticipation of the imminent repayment deadline, Canal Authority sued Owners/Guarantors in an English court seeking a declaration of its right to demand repayment. When the December deadline passed, and when the conditions for deferment were not met, Canal Authority made a demand on Owners/Guarantors and moved for a summary judgment for the total amount secured by the multiple advance payment guarantees. Owners/Guarantors sought a stay of the proceedings under s.9 Arbitration Act 1996.The High Court of Justice, Queen’s Bench Division, Commercial Court, Blair, J., denied Owners/Guarantor’s motion for stay of proceedings under s.9 Arbitration Act 1996, and also denied Canal Authority’s motion for summary judgment.
The Judge rejected Canal Authority’s claim that Owners/Guarantors were liable to repay the advance payments on demand. The guarantee contracts made Owners/Guarantors jointly and severally liable for repayment “as primary obligor and not as surety”. The Judge noted that, although such language typically indicates liability on-demand, proving that the payments are due upon first demand requires proving that liability is triggered by demand unconditionally. The Judge pointed to an important clause of the guarantee contracts where each guarantor “jointly and severally guarantees to the Employer the payment by the Contractor of the Guaranteed Amount as and when due pursuant to the Contract”. The underlining, added by the Judge, indicated to him that Owners/Guarantors were only liable to pay depending on the main contract, and not upon demand. The Judge was unconvinced by arguments pointing to other contractual terms related to demands on interest. Since the advance payment guarantees did not explicitly define Owners/Guarantor’s liability as a consequence of Canal Authority’s demand, the Judge denied Canal Authority’s summary judgment motion.
The Judge recognized an alternative case that was brought by Canal Authority which claims that liability is triggered by Owners/Guarantor’s failure to repay “as and when” determined by the main contract construed under English law. This alternative case was brought by Canal Authority shortly before the hearing, and both parties agreed to limit the summary judgment claim to the “first demand” point. The alternative case was left undecided.
Owners/Guarantors had requested that the entire proceedings be stayed under English law, s.9 Arbitration Act 1996, which defers jurisdiction to arbitration when legal proceedings are brought in respect of a matter that parties agreed to refer to arbitration. Owners/Guarantors claimed that the JSG required the issue to be resolved by arbitration in Miami, and further argued that the issue depended upon the result of multiple arbitration proceedings which began in 2013 related to the main contract and the JSG. The Judge ruled that the matter at issue in the proceedings is whether Owners/Guarantors are liable under English law of advance payment guarantees, which is “not a matter which the parties have agreed to refer to arbitration” because the parties unambiguously negotiated for the guarantees to be resolved by English courts.
The Judge further noted that the proceedings may be stayed by the authority of a case management stay, which is invoked by discretion of the court when one or more issues must be resolved in arbitration before a decision can be made about the matter-at-hand. The Judge requested a Note on Case Management document from each party detailing how they planned to move forward on the issue if the court denied both the s.9 stay and summary judgment applications. After reviewing the proposals, the Judge ruled that a case management stay is not appropriate because a viable path forward exists to resolve the guarantee matter without depending on other disputes of the main contract. The Judge concluded that a case management stay would be likely if, in the multiple arbitration proceedings which were ongoing at the time, the Contractors’ liability to repay the advance payments is found to depend on disputes relating to the main contract.
Comment:
How viable is Canal Authority’s “alternative case”? Although the issue is not fully addressed due to its untimely presentation, the possibility of the alternative case’s success is used to justify further proceedings. The fact that the alternative case is a potential avenue forward indicates that Owners/Guarantors’ liability may be triggered by the main contract as “construed under English law”, despite the main contract’s provisions for arbitration under ICC rules in Miami. A potential reconciliation of jurisdiction issues has yet to be considered. Canal Authority’s legal counsel was unable to offer comment due to confidentiality.
TEXT:
The opinion contained the following excerpts from the JSG:
“1.1 Each of the Guarantors, jointly and severally:
“2.3 The obligations of each of the Guarantors hereunder are primary and not by way of surety and none of the Guarantors shall be entitled as against the Employer to any right of set-off or counterclaim…”
“2.5 None of the Guarantors shall have any greater liability to the Employer under the Guarantee than such Guarantor would have had to the Employer had such Guarantor been an original party to the Contract in place of the New Contractor…”
“3.2 Determinations of interest rate and amounts under this Guarantee shall be made by the Employer, which determinations shall be conclusive and binding hereunder in the absence of manifest error.”
“Recital (A) The Guarantors […] and the Employer have entered into a contract, on a joint and several basis, for the design and construction of a third set of locks dated August 11th, 2009 (as amended, modified or supplemented, “Contract”)”
“2.2 Each of the Guarantors authorizes the Contractor and the Employer to make any addendum, variation or amendment to the Contract or the Works without reference to it or any other Guarantor, and agrees that this Guarantee shall apply to such addendum, variation or amendment.”
“2.4 Each of the Guarantors’ obligations under this Guarantee are continuing and accordingly shall remain in full force and effect […] until all obligations, warranties, duties and undertakings now or hereafter to be carried out or performed by the Contractor under the Contract shall have been satisfied or performed in full…”
“[a]ny dispute arising out of, under or in connection with this Guarantee or out of the subject matter of this Guarantee shall be finally settled”
The opinion contained the following excerpts from the advance payment guarantees:
“2.3 The obligations of each of the Guarantors hereunder are primary and not by way of surety and none of the Guarantors shall be entitled as against the Employer to any right of set-off or counterclaim …”
“1.1 …wherever used in this Guarantee, “Guaranteed Amount” shall mean the Advance Payment for VO No. 149 Suppliers Outstanding Amount less any amount of the Advance Payment for VO No. 149 Suppliers Outstanding Amount secured by the Advance Payment for VO No. 149 Suppliers LOC, if any.”
“2.1 Each of the Guarantors, jointly and severally:
“3.3 The obligations of each of the Guarantors hereunder are primary and not by way of surety and none of the Guarantors shall be entitled as against the Employer to any right of set-off or counterclaim whatsoever and howsoever arising. The Employer shall not be obliged to take any action in any court or arbitral proceedings against the Contractor or any Guarantor, to make any claim against or any demand of the Contractor or any Guarantor, to enforce any bond, security, insurance, surety or guarantee held by it in respect of the obligations of the Contractor under the Contract or to exercise, levy or enforce any distress, diligence or other process of execution against the Contractor or any Guarantor. Without prejudice to the obligations of any of the Guarantors under this Guarantee, in the event that the Employer brings proceedings (including any counterclaims) against the Contractor, each of the Guarantors will be bound absolutely by any findings of fact, interim or final award or judgment made by an arbitrator or arbitrators or court in such proceedings or counterclaims or any decision of the DAB where such decision has become final and binding under the Contract.
3.4 Each of the Guarantors’ obligations under this Guarantee are continuing and accordingly shall remain in full force and effect (notwithstanding any intermediate satisfaction by the Contractor, any of the Guarantors or any other person) until all obligations, warranties, duties and undertakings now or hereafter to be carried out or performed by the Contractor under the Contract shall have been satisfied or performed in full and are not revocable and are in addition to and not in substitution for and shall not merge with, otherwise prejudice or affect or be prejudiced by, any other right, remedy, guarantee, indemnity, insurance, surety or security which the Employer may at any time hold for the performance of such obligations and may be enforced without first having recourse to any such right, remedy, guarantee, indemnity or security. Accordingly this Guarantee may be enforced notwithstanding the existence of all or any of the same and also notwithstanding the Employer at any time releasing or abstaining from perfecting or enforcing or otherwise dealing or omitting to deal with all or any of the same.”
“4.2 Determinations of interest rate and amounts under this Guarantee shall be made by the Employer, which determinations shall be conclusive and binding hereunder in the absence of manifest error. For the purposes of this Guarantee, “LIBOR” shall mean a rate per annum (calculated on the basis of a 360 day year and actual days elapsed) equal to (a) the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the offered rates which appear on Bloomberg Page BBAM1 (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, for purposes of providing quotations of interest rates of leading reference banks in the London interbank market, as designated from time to time by the Employer) as of 11:00 A.M. (London time) for deposits in U.S. dollars for a period equal to the relevant period for calculation of interest hereunder on the day two (2) Business Days prior to the first day of such period, or (b) if fewer than two (2) such offered rates appear which are relevant to the applicable period, the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates at which the Employer in its reasonable discretion shall determine at approximately 11:00AM (London time) on the date that is two (2) Business Days preceding such period are the applicable rates offered for U.S. dollar deposits by at least two (2) prime banks in the London interbank market for a period comparable to such period.”
“8.1 The Employer’s rights under this Guarantee are cumulative and are in addition to and not in substitution for any rights provided by law or the Contract or any other guarantee, surety, bond, insurance or security that the Employer may have or hold in relation to the Contract, and the Employer may exercise its rights under this Guarantee from time to time without first having recourse to any such right, guarantee, surety, bond, insurance or security.”
“9.1 This Guarantee, and any non-contractual obligations arising out of or in connection with it, are governed by, and shall be construed in accordance with, English law.
9.2 Jurisdiction of the English Courts
“jointly and severally guarantees to the Employer the payment by the Contractor of the Guaranteed Amount as and when due pursuant to the Contract”
“if the Contractor is in breach of any of its obligations as set out in sub-paragraph (a), [the guarantors] shall upon demand by the Employer from time to time, forthwith perform the obligations of which the Contractor is in breach in the same manner that the Contractor is required to perform such obligations according to the terms of the Contract”
“[t]he Guarantors shall pay interest on any amount due under this Guarantee from the date of demand to the date of full payment”
“[d]eterminations of interest rate and amounts under this Guarantee shall be made by the Employer, which determinations shall be conclusive and binding hereunder in the absence of manifest error.”
[EHM]
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