Article

Note: PT OKI Pulp & Paper Mills (Buyer/Beneficiary), an Indonesian company, engaged Sunrise Industries (India) Ltd. (Seller/Applicant), for Seller/Applicant to supply Buyer/Beneficiary with a complete set of fiberglass-reinforced plastic piping (Supply Contract), and for Seller/Applicant to supervise and install the piping at Buyer/Beneficiary’s new Indonesian pulp mill (Installation Contract). Both contracts were subject to the law of Singapore. To secure its performance under the Supply Contract, Seller/Applicant obtained a bank guarantee from Dena Bank Inc. (Issuer), an Indian bank, in favor of Buyer/Beneficiary that was, as amended, for USD 832,413, representing 10% of the total value of the amended Supply Contract. No guarantee was required under the Installation Contract.

Subsequently, a dispute arose regarding delays in shipment and delivery of non-conforming goods. Months after the parties’ relationship collapsed, Buyer/Beneficiary made a full demand on the bank guarantee. Before Issuer honored the presentation, however, Seller/Applicant sued for and obtained an injunction from an Indian court, preventing Issuer from paying. Before the Indian injunction expired, Seller/Applicant sued Buyer/Beneficiary in Singapore, alleging various breaches of the Supply Contract while also suing for an ex parte injunction regarding the bank guarantee. The same day, a Singapore court granted injunctions against Issuer and Buyer/Beneficiary. Subsequently, Buyer/Beneficiary counterclaimed seeking relief of the injunction and alleging various breaches of the Supply Contract by Seller/Applicant. The High Court of Singapore, Tan Lee Meng, J., discharged the injunctions.

The Judge began by discussing the law of “performance bonds”, noting that the courts of Singapore may provide injunctive relief based on fraud and the “separate ground” of unconscionability. Unconscionability has come to “include elements of abuse, unfairness and dishonesty” with a “standard of proof…of a strong prima facie case” of unconscionability in order to “restrain a call on a performance bond”. The Judge noted that the appropriate inquiry is whether a demand was made with a lack of bona fides; moreover

the court’s discretion to grant such an injunction must be sparingly exercised and it should not be an easy thing for an applicant to establish a strong prima facie case. In view of this, it may be rather difficult to set aside a call on a performance bond but that is the nature of the contractual terms agreed upon between the parties.

The Judge then turned to whether the injunctions should be discharged. Neither party argued that the guarantee was anything other than an “on demand” guarantee, and the Judge noted that Buyer/Beneficiary’s demand “complied with the formal requirements for making the call.” Seller/Applicant based its claim of unconscionability on three grounds, namely: that (1) Buyer/Beneficiary improperly demanded payment based on losses under the Installation Contract, and not the Supply Contract for which the guarantee was obtained; (2) Seller/Applicant had not even breached the Supply Contract warranting a demand by Buyer/Beneficiary; and (3) in any event, the amount demanded was “excessive.”

The Judge rejected Seller/Applicant’s first argument by referring to the pleadings and an affidavit by Buyer/Beneficiary which noted that Seller/Applicant had acknowledged in its own affidavit that the written demand to Issuer only referenced the Supply Contract. Accordingly, the Judge noted that “only the alleged breaches of the Supply Contract by [Seller/Applicant] will be considered for the purpose of determining whether or not the Injunctions should be discharged.”

Seller/Applicant advanced several arguments to demonstrate that it was not in breach of the Supply Contract. Buyer/Beneficiary, however, argued that Seller/Applicant had failed to meet the original delivery date under the Supply Contract. In support, Buyer/Beneficiary presented evidence that, due to the delay in shipment, Buyer/Beneficiary had to have shipment deadlines amended under letters of credit opened in favor of Seller/Applicant. While Seller/Applicant argued that Buyer/Beneficiary’s delay in opening the LCs caused the shipment delay, Buyer/Beneficiary insisted that by the time the amendments were made, the goods were late, and the changes were made so that Seller/Applicant could present complying documents, less the overall progress of the project be indefinitely delayed. The Judge noted that there was clearly a “dispute as to whether the change of the shipment date in the L/Cs relieved [Seller/Applicant] of its obligation to deliver the goods and additional goods before the expiry of the original delivery deadlines.” As there was a genuine dispute, Buyer/Beneficiary was “entitled” to demand payment on the guarantee.

Seller/Applicant forwarded other arguments that the demand was unconscionable. After reviewing these arguments, the Judge concluded that a finding of unconscionability “on the basis of affidavit evidence” would be improper as opposed to a trial allowing for cross-examination of the parties’ witnesses.

Seller/Applicant also argued that the full demand on the guarantee was excessive, and thus unconscionable. The Judge noted that prior cases had acknowledged that demands “should not be made for an excessive amount.” In those instances, a court “may, in the exercise of its equitable jurisdiction, reduce” the demand. Buyer/Beneficiary argued that by the terms of the Supply Contract, it was entitled to claim liquidated damages amounting to 10% of the price of the goods due to delayed shipment. Moreover, Buyer/Beneficiary pointed to damages resulting from the delivery of non-confirming goods and modification costs resulting therefrom; in other words, there was “nothing unfair or dishonest” in demanding full payment on the guarantee. The Judge agreed noting that “it cannot be said at this juncture that the call on the entire amount of the Bank Guarantee [was] excessive or was made in bad faith.” Seller/Applicant forwarded a final argument that, were the court to allow for payment under the guarantee, it would damage its business and reputation. The Judge noted that the parties had agreed to the provision of the bank guarantee and any inquiry into supposed reputational damage to Seller/Applicant if Issuer paid Buyer/Beneficiary was “not relevant” to the issue of fraud or unconscionability.

[MJK]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.