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

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.