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New South Wales Supreme Court Allows Call On Bank Guarantee Despite Ongoing Arbitral Proceedings – Arbitration & Dispute Resolution



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In a recent decision, the Supreme Court of New South Wales held
that ongoing arbitral proceedings did not prevent a party from
calling upon a guarantee in relation to the primary contract. The
key takeaways are as follows:

  • A party will not, prima facie, be precluded from
    calling upon a guarantee for the sole reason that arbitral
    proceedings have been commenced and are pending determination,
    under Australian law.

  • The International Arbitration Act 1974 (Cth)
    (IA Act), which mirrors the UNCITRAL Model Law
    (Model Law), allows for ‘interim
    measures’ to be determined by an Australian Court, exercising
    ‘such power in accordance with its own procedures in
    consideration of the specific features of international
    arbitration
    ‘.

  • Allowing a party to call upon a guarantee where arbitral
    proceedings are ongoing is consistent with the IA Act and thus the
    Model Law.

  • The judgment considered and clarified the ‘apparent’
    divergence of Australian jurisprudence as to the treatment of
    guarantees where arbitral proceedings are ongoing.

Background

Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX
Operations Australia Pty Ltd
[2022] NSWSC 1125
(Daewoo v INPEX) concerned the sole issue
of whether an interim injunction, which prevented INPEX from
calling upon a US$328,510,832 bank guarantee, should be extended
pending the arbitral tribunal’s determination of the
parties’ rights and obligations in respect of the guarantee. In
March 2012, Daewoo and INPEX entered into an agreement whereby
Daewoo agreed to construct, and deliver to the Ichthys gas field, a
floating production storage and offloading (FPSO)
facility (Contract). The Contract relevantly
provided, amongst other things, a detailed provision regarding
Daewoo’s obligation to provide a bank guarantee, and the
circumstances in which INPEX was entitled to have recourse to the
bank guarantee. As to demands, the clause provided as follows:

35.3 Demands

(a) Company may have recourse to the Bank Guarantee(s) at
any time in order to recover any amounts that are payable by
Contractor to Company on demand.

(b) Other than in case of an application drafted and signed
by senior counsel for an injunction grounded on an allegation of
fraudulent attempt to be paid under a Bank Guarantee, Contractor
waives any right that it may have to obtain an injunction or any
other remedy or right against any party in respect of Company
having recourse to the Bank Guarantee.

In April 2012, a bank guarantee was issued by a Korean bank
(Guarantee). On 29 July 2022, in accordance with
the dispute resolution process under the (amended) Contract, INPEX
issued a Request for Arbitration to the Secretariat of the
International Court of Arbitration. The compensation sought by
INPEX before the tribunal exceeded the amount of the Guarantee. On
1 August 2022, Daewoo applied to the NSW Supreme Court, on an ex
parte basis, seeking urgent interlocutory relief restraining INPEX
from calling on the Guarantee. An interim injunction was granted,
restraining INPEX until 4pm on 3 August 2022 (which was
subsequently extended until 4pm on 18 August 2022).

On 5 August 2022, INPEX filed a Cross-Summons, seeking:

  • to restrain Daewoo from pursuing the claim in its summons or
    otherwise seeking to restrain INPEX from having recourse to the
    Guarantee;

  • an order that this prayer for relief be determined as a
    separate question; and

  • final declaratory relief that INPEX is not obliged to return
    the Guarantee to Daewoo.

On 9 August 2022, Daewoo filed a motion seeking an order
pursuant to section 7(2) of the IA Act that the Cross-Summons be
stayed, and the parties be referred to arbitration.

Decision

Upon hearing the applications, the Court decided to discharge
the interim injunction which had restrained INPEX from making a
call on the Guarantee. In making its decision, the Court noted its
power to hear interim matters brought before it, as compatible with
the parties’ wishes to have their disputes determined by
arbitration, as confirmed by Articles 9 and 17J of the Model Law.
This compatibility was reflected in the arbitration agreement
included in the Contract, by permitting applications to a court for
‘urgent relief’.

Referring specifically to article 17J of the Model Law, the
Court emphasised that the determination of interim measures (and
thus interlocutory injunctions) is to be conducted ‘in
accordance with its own procedures’
, meaning that to
uphold Daewoo’s interim injunction, Daewoo would be required to
satisfy the Court that:

  • there is a strong prima facie case justifying the
    Court’s interference; and

  • a balance of convenience analysis favours the granting of the
    injunction.

Prima facie case

Before addressing Daewoo’s interim injunction, the Court
identified the principles relevant to undertaking the first limb of
its analysis, observing that:

  • the Court’s approach to determining interim measures is no
    different where the parties have agreed to arbitrate;

  • bank guarantees fall to be considered in a special category of
    their own in the context of interlocutory injunctive relief, a
    position reflected in Australia;

  • in addressing whether to injunct the calling of a bank
    guarantee, the Court must consider whether the performance bond was
    intended to allocate risk pending the final determination of the
    parties’ rights; and

  • in undertaking the above analysis, the Court may be required to
    interpret contractual provisions, but any such contractual analysis
    should not be taken as binding on the arbitral tribunal.

The Court went on to review several provisions of the Contract,
and considered whether (among other things):

  • ‘rework’ was different to ‘repairs or
    replacements under warranties
    ‘;

  • Daewoo’s contractual waiver to seek injunctive relief from
    INPEX calling upon the Guarantee was in breach of public policy and
    thus unenforceable; and

  • the Guarantee was a ‘risk allocation
    agreement
    ‘ between the parties.

The Court acknowledged that Daewoo’s contentions were indeed
arguable, but ultimately found that Daewoo did not have a
sufficiently strong prima facie case to warrant the
interim injunction.

Balance of convenience

Finally, the Court considered the balance of convenience, having
regard to:

  • Daewoo’s financial difficulties;

  • the effect of a call on the Guarantee (resulting in interest
    being charged to Daewoo by the bank, and the immediate repayment of
    all loans to the bank); and

  • the ability of any judgment rendered by the Court to be
    enforced in Korea.

Despite acknowledging that ‘[w]hen agreeing to
give a bank guarantee a decade ago, Daewoo could not have foreseen
a global pandemic, let alone both a pandemic and a war’
,
the Court was not satisfied that the balance of convenience
favoured the extension of the interlocutory injunction. In this
regard, the Court observed that ‘INPEX did not agree to
take on a risk that it would lose its right to call on the bank
guarantee during periods of dispute nor take on further risks
associated with Daewoo’s financial difficulties or potential
insolvency
.’

Comment

The decision in Daewoo v INPEX solidifies the position
in Australia that a guarantee can be called, and retained, by the
party entitled to call upon it, while the parties await the final
resolution of their dispute(s) by an arbitral tribunal. Parties
considering calling upon a guarantee should carefully review the
provisions of the relevant contract, to ensure that there is a
sufficiently strong basis for calling upon a guarantee. The need
for caution in this regard is underscored by the depth of the
Court’s contractual analysis in Daewoo v INPEX,
indicating that a party’s ability to retain the guarantee
pending a final outcome will largely turn on the relevant provision
of the contract in question. The Court’s decision in Daewoo
v INPEX
may also be of interest to parties whose projects are
based in Western Australia and fall within the definition of a
‘construction contract’ under the Building and
Construction (Security of Payment) Act
2021 (WA). Under the
amended legislation, for contracts entered into on or after 1
August 2022, a party is required to provide notice of their
intention to call a guarantee 5 business days prior to having
recourse to the guarantee.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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