Article

Note: Kawasaki Heavy Industries Ltd (Surety/Mechanical Subcontractor) and Laing O’Rourke Australia Construction Pty Ltd (Applicant/Civil Subcontractor) contracted with JKC Australia LNG Pty Ltd (Contractor) to provide project management, engineering and other services regarding the construction of four cryogenic tanks to store liquefied natural gas near Darwin, Australia. There were two contracts: one between Contractor and the subcontractors (JKC Subcontract), and another between Surety/Mechanical Subcontractor and Applicant/Civil Subcontractor (Consortium Agreement).

Under the JKC Subcontract, the subcontractors were required to provide performance bonds and advance payment bonds to Contractor to assure performance of their obligations. Per the Consortium Agreement, Surety/Mechanical Subcontractor obtained performance bonds on behalf of both subcontractors in favor of Contractor (Kawasaki Bond).The Consortium Agreement also provided that Applicant/Civil Subcontractor would obtain security bonds in favor of Surety/Mechanical Subcontractor issued by Swiss Re International SE, National Australia Bank Ltd and CGU Insurance Ltd (Issuer)for 10 percent of the value of the relevant provisions of the JKC Subcontract (Laing O’Rourke Bond) related to Applicant/Civil Subcontractor’s obligations. The terms of the Consortium Agreement were such that if Contractor made a demand on the Kawasaki Bond, Surety/Mechanical Subcontractor could draw on the performance bond that Applicant/Civil Subcontractor had provided to Surety/Mechanical Subcontractor.

This case relates to the question of whether there is a link between dependent surety bonds, the Laing O’Rourke Bond, and independent bank guarantees, the Kawasaki Bond, such that the surety bonds cannot be drawn on until the independent guarantee is drawn on.

When the parties had a dispute, Contractor claimed damages from Surety/Mechanical Subcontractor and Applicant/Civil Subcontractor in excess of AUD 102 million, but did not draw on the Kawasaki Bond. Surety/Mechanical Subcontractor remained on site to try and complete the work, but subsequently, Surety/Mechanical Subcontractor drew on the Laing O’Rourke Bond for AUD 52.3 million.

Applicant/Civil Subcontractor then sued Surety/Mechanical Subcontractor to enjoin it from drawing on the Laing O’Rourke Bond without Applicant/Civil Subcontractor’s consent or an arbitral award. The Supreme Court of New South Wales, Ball, J., granted an ex parte injunction. Subsequently, the Supreme Court of New South Wales, Stevenson, J., continued the injunction. Surety/Mechanical Subcontractor appealed and the Court of Appeal, Supreme Court New South Wales, Meagher, Payne and White JJA., affirmed.

Surety/Mechanical Subcontractor claimed that the construction of the Consortium Agreement was such that the Laing O’Rourke Bond and the Kawasaki Bond were independent, while Applicant/Civil Subcontractor claimed that the construction was such that Surety/Mechanical Subcontractor’s ability to draw on the Laing O’Rourke Bond was contingent on Contractor first drawing on the Kawasaki Bond.

The JKC Subcontract referred to the Kawasaki Bond as follows: “(1) an unconditional and irrevocable performance bond, described as Bank Guarantee(s), initially equal to 10 per cent of the JKC Subcontract Price, comprising an Initial Bank Guarantee and a Warranty Bank Guarantee, with each equal to five per cent of the JKC Subcontract Price (Article 35.1); and (2) an Advance Payment Guarantee to secure the obligation of the Subcontractor to repay an advance payment made by JKC to the consortium by way of an interest-free loan (Article 34.9).”

The Court noted, “[Surety/Mechanical Subcontractor] is correct that the terms of the performance bonds themselves are to be taken into account when considering the obligations of the parties. In this case, the terms of the performance bonds are unequivocal in relation to the issuing bank's obligation. They are neutral as to the circumstances in which the beneficiary may make a demand upon the bank for repayment.”However, the Court agreed with Applicant/Civil Subcontractor and ruled that the parties “intended that surety bonds be security for [Surety/Mechanical Subcontractor’s] liabilities or obligations as the party having procured the [Surety/Mechanical Subcontractor] Bonds. That potential liability is only engaged upon [Contractor] making a call upon those bonds.”

[VLG]

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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.