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Note: BlueOak Arkansas LLC (Buyer/Beneficiary) engaged Tetronics International Limited (Supplier/Applicant) whereby Supplier/Applicant promised to design, engineer and deliver an electronic waste plasma-processing system to Buyer/Beneficiary’s Arkansas, U.S. plant (Supply Contract). To secure the performance of its design, Supplier/Applicant caused its bank, HSBC Bank Plc (Issuer), to issue a GBP 3,080,000 “advanced payment guarantee” (Guarantee) in favor of Buyer/Beneficiary. After the original Guarantee expired, Buyer/Beneficiary and Supplier/Applicant began negotiations with Issuer on replacing the Guarantee. Issuer, however, “wished to ensure that any further guarantee was not being used as a mechanism to obtain immediate payment by [Buyer/Beneficiary].” Accordingly, Buyer/Beneficiary sent a letter to Issuer on 13 November 2017, stating that there were “no current circumstances that would give rise to a demand for breach of the underlying supply contract.” On 21 November 2017, Issuer issued a new Guarantee with identical terms, subject to the law of England and Wales, and silent as to practice rules.

The terms of the Guarantee required Buyer/Beneficiary to present an original signed statement that Supplier/Applicant was in breach of the underlying contract and “the respect in which” Supplier/Applicant was in breach. The Guarantee also required that Buyer/Beneficiary’s bankers confirm the authenticity of Buyer/Beneficiary’s signature on the documents. The Supply Contract stipulated that Buyer/Beneficiary was to allow Supplier/Applicant an opportunity to cure before drawing on the guarantee.

Subsequently, a dispute arose and Buyer/Beneficiary sent a notice of default to Supplier/Applicant and made its first demand on the Guarantee, which Issuer dishonored. Buyer/Beneficiary made a second demand on 17 January 2018. The next day, Supplier/Applicant, alleging fraud by Buyer/Beneficiary, sued Issuer for, and was granted, an emergency ex parte injunction, preventing Issuer from honoring the demand. Buyer/Beneficiary intervened in the lawsuit, and on the return date, 31 January 2018, it argued that the injunction against Issuer should be vacated on the basis that:

[although] the law provides that circumstances arising in relation to the underlying contract between the applicant and the beneficiary may sometimes justify an order restraining the beneficiary from calling on the bond, no injunction may be granted against the bank in those circumstances because such an order would contradict the autonomy principle which is fundamental to this area of law. (Emphasis added.)

Buyer/Beneficiary, however, did not introduce countervailing evidence to rebut Supplier/Applicant’s assertion of fraud. Accordingly, the trial court proposed to continue the injunction in its “first draft judgment” circulated to the parties. Before the judgment was approved, however, new evidence going to the appropriateness of the injunction emerged from ICC arbitration proceedings initiated by Supplier/Applicant regarding the Supply Contract. Thereafter, the High Court of Justice, Fraser, J., discharged the ex parte injunction against Issuer.

The Judge noted that for the injunction to continue, the fraud exception would have to be met as well as a continued balance of convenience favoring Supplier/Applicant. The Judge noted that meeting the fraud exception meant: (i) based on available evidence, it must be “seriously arguable” that Buyer/Beneficiary could not have honestly believed in the validity of its demand under the guarantee; (ii) Issuer must have been aware of the fraud; and (iii) extraordinary facts shifted the balance of convenience in favor Supplier/Applicant, justifying an injunction.

After determining that the second demand on the Guarantee complied with its terms, the Judge turned to the question of fraud. The Judge summarized evidence offered by Supplier/Applicant which:

[Amount[ed] to a detailed description setting out that nothing had in reality changed from the date of 13 November 2017 when [Buyer/Beneficiary] itself told the [Issuer] that [Supplier/Applicant] w[as] not in breach and there were no grounds to make a call on the guarantee – which led to the [Issuer] issuing the guarantee – and the making of the two calls which stated directly to the contrary that [Supplier/Applicant] was in breach.

Because Buyer/Beneficiary argued for discharging the injunction as a matter of law given that Supplier/Applicant sued Issuer and not Buyer/Beneficiary, and otherwise did not introduce evidence or challenge the facts offered in Supplier/Applicant’s ex parte hearing, the Judge turned the question of whether Issuer was aware of the fraud at the time of the second demand. The Judge noted that the issue was “whether a bank is itself aware of the fraud being perpetrated, not whether that bank is itself engaged in wrongdoing.” The Judge concluded that Issuer had the requisite knowledge of fraud based on warnings made by Supplier/Applicant to Issuer, a legal memo supporting Supplier/Applicant’s position given to Issuer before the second demand and ultimately the “extraordinary facts” surrounding the mere twenty days between issuance of the second Guarantee (issued in reliance on Buyer/Beneficiary’s statement of no grounds for claiming default) and the notice of default sent by Buyer/Beneficiary to Supplier/Applicant.

Following circulation of the Judge’s “first draft judgment”, new evidence from arbitration proceedings went directly to the balance of convenience favoring Supplier/Applicant. The Judge noted that on this issue, “[Supplier/Applicant] faces very considerable difficulty in having that balance be found to be in favour of injunctive relief…because the authorities state…that such relief is extremely rare.” The new evidence, however, showed that Supplier/Applicant was willing to place the disputed funds into an escrow account and would otherwise not become immediately insolvent if Issuer honoured the demand. Supplier/Applicant had claimed the opposite in its ex parte hearing, and, as a result, the Judge concluded:

[T]he balance of convenience does not favour continuation of the injunction; rather it favours its discharge. The immediate insolvency of [Supplier/Applicant] was a significant factor in favour of continuing the injunction. Given that is no longer the case – at least, not on the basis of how the case was put most recently…in the emergency application before [the ICC] – there are few factors in favour of continuing the injunction.

Comment: The opinion notes that “[a]lthough the alternative word ‘bond’ has been used from time to time in the evidence, the instrument in question is actually entitled a guarantee (although the descriptive term used on the instrument is not determinative, as is well known).”

One wonders why Issuer would seek assurances that the second Guarantee would not be “used as a mechanism to obtain immediate payment” and subsequently issue an independent undertaking in the form of a demand guarantee.

Excerpts of Guarantee:

[UNDER THE [SUPPLY CONTRACT] … YOU ARE TO MAKE ADVANCE PAYMENTS TO THE SELLER [Supplier/Applicant] AND IN TURN, UNDER THE PROVISION OF CLAUSE 10A (SCHEDULE 3) OF THE CONDITIONS OF VARIATION AGREEMENT 02, THE SELLER WILL DEPOSIT WITH THE PURCHASER [Buyer/Beneficiary] A BANK GUARANTEE TO WARRANT ITS PROPER AND FAITHFUL PERFORMANCE.

[…IN CONSIDERATION OF THE PAYMENTS MADE BY THE PURCHASER [Buyer/Beneficiary], WE HSBC BANK PLC, GTRF SERVICES, LEVEL 28, 8 CANADA SQUARE, LONDON E14 5HQ UNITED KINGDOM, HEREBY GIVE YOU OUR GUARANTEE AND UNDERTAKE TO PAY YOU ANY AMOUNT OR AMOUNTS NOT EXCEEDING IN TOTAL A MAXIMUM OF GBP3,080,000.00 (POUNDS STERLING THREE MILLION AND EIGHTY THOUSAND) ON RECEIPT OF YOUR FIRST DEMAND IN WRITING OVER ORIGINAL HANDWRITTEN SIGNATURE(S) ACCOMPANIED BY YOUR SIGNED STATEMENT CERTIFYING THAT THE SELLER [Supplier/Applicant] IS IN BREACH OF ITS OBLIGATIONS UNDER THE UNDERLYING CONTRACT, AND THE RESPECT IN WHICH THE SELLER IS IN BREACH. ANY CLAIMS MUST BEAR THE CONFIRMATION OF YOUR BANKERS THAT THE SIGNATURE(S) THEREON ARE AUTHENTIC.

[FOR THE AVOIDANCE OF DOUBT, ANY DOCUMENT(S) RECEIVED BY WAY OF FACSIMILE OR SIMILAR ELECTRONIC MEANS, IS/ARE NOT ACCEPTABLE FOR ANY PURPOSE(S) UNDER THIS GUARANTEE.

[THIS GUARANTEE IS VALID FOR WRITTEN DEMANDS RECEIVED BY US ON OR BEFORE 19 JANUARY 2018 AFTER WHICH DATE OUR LIABILITY TO YOU UNDER THIS GUARANTEE WILL CEASE AND THIS GUARANTEE WILL BE OF NO FURTHER EFFECT.

[MJK/WMIV]

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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.