Rechtsanwältin, Senior Associate
Rechtsanwalt, Legal Director
Out-Law Analysis | 26 May 2022 | 1:08 pm | 5 min. read
A recent decision highlights how contractors intending to engage or already engaged in arbitration proceedings against their employers can employ interim relief available under their applicable arbitration rules to prevent expensive ‘on-demand’ bank guarantees from being called on.
The ruling by an ICC tribunal, enforced before a court in New York, is important because of how often contractors face the prospect of ‘on-demand’ bank guarantees being called on by developers. It is also important because it provides an option to circumvent the difficulty of preventing such guarantees being called on before courts, especially in common law jurisdictions, and the financial consequences for contractors if those court proceedings fail.
General Electric (GE) and its partner, Mytilineos, succeeded in preventing a call on performance bank guarantees in the sum of $17 million by applying for, and obtaining, interim measures under the ICC Arbitration Rules.
The underlying disputes arose on a project in Algeria, where GE and Mytilineos were contracted by Société Algérienne de Production de l'Electricité (SAPE) for the construction of a gas and fuel power plant in Hassi R’Mel, Algeria. The bank guarantees were procured by the contractors, GE and Mytilineos, in SAPE’s favour under the terms of the construction contract.
There had been delays in construction of the power plant since 2015. This led to disputes between the parties. ICC arbitration proceedings were commenced in May 2020 in which GE and Mytilineos sought to recover additional costs and expenses incurred on the project.
On 24 March 2022, SAPE threatened to call on the bank guarantees in the event that the contractors did not agree to sign terms of settlement and to terminate the ICC arbitration. On 4 April 2022, SAPE made the call on the guarantees.
Faced with the call and the financial consequences that would follow if the issuing bank paid out, the contractors had to try to stop it. Many international contractors will be familiar with the circumstances and difficulties of trying to prevent calls on bank guarantees, particularly when the terms of the guarantee are “on-demand.”
International contractors and developers alike will be familiar with the features of an “on-demand” bank guarantee. Essentially, it is a guarantee that imposes a primary obligation on the issuing bank to pay the beneficiary of the guarantee on its first demand. This obligation to pay is unaffected by disputes arising under the underlying contract.
Common law courts have historically been reluctant to intervene in a beneficiary’s call on an on-demand guarantee. Generally, there are only two recognised exceptions: where there is fraud, or unconscionability.
Many international contractors will be familiar with the circumstances and difficulties of trying to prevent calls on bank guarantees, particularly when the terms of the guarantee are ‘on-demand’
Fraud generally requires the contractor to show that the calling party – i.e. the employer – called on the guarantee either with the knowledge that its demand was invalid; without belief in the validity of its demand; or with indifference to whether the demand was valid or not.
On the other hand, unconscionability denotes elements of unfairness, reprehensible conduct or acts lacking in good faith such that the court would restrain the employer from calling on the guarantee. Courts in Singapore and Australia have both developed different standards for a contractor seeking to establish that a call on a guarantee is unconscionable, while the exception is considerably less established in the UK. By way of illustration, the Singapore High Court recently provided some examples for when an injunction might be granted to restrain the call of a performance bond for unconscionability:
There are therefore limited scenarios in which a contractor may invoke the “unconscionability exception” to prevent a call on an on-demand bank guarantee. To compound matters, the Singapore Court of Appeal has stated that parties can contract out of the unconscionability exception, which, depending on the parties’ relative negotiating power, may make it even more difficult for contractors to restrain an impending bond call.
The challenges faced by contractors in preventing a call on an on-demand performance bond are therefore considerable.
Instead of seeking court intervention, GE and Mytilineos followed a different path. They applied to the ICC tribunal under Article 28 of the ICC Rules for interim measures to restrain the call on the guarantees made by SPE. Article 28 provides that, once the arbitration is transferred to the arbitral tribunal, it can “order any interim or conservatory measures that [the arbitral tribunal] deems appropriate”.
The tribunal granted the contractors an order that SPE withdraw its request for the enforcement of the bank guarantees. In doing so, it referred specifically to its jurisdiction under Article 28, as well as referring to the general recognition of a tribunal’s jurisdiction to order interim measures in many national codes of civil procedure and other arbitral rules. The tribunal’s reasoning to make the order for the withdrawal of SPE’s call was two-fold:
Whilst the behaviour of SPE was the type that would likely meet the test of “unconscionability” under, say, Singapore law, it is apparent that the tribunal reached beyond domestic legal principles of fraud, unconscionability and abuse of process. Article 28 provided the tribunal with the jurisdiction to consider all the circumstances to determine what was appropriate in the circumstances. This included the principle of maintaining the status quo in the arbitration, pending the final resolution of the substantive disputes.
The outcome in this case suggests it may be easier for contractors to prevent a call on an on-demand bank guarantee in arbitration than to argue before the courts that intervention is justified under the conventional exceptions of fraud and unconscionability. Whether this would succeed will in turn depend on the underlying contract having an arbitration clause in it and on the arbitral rules agreed.
In the case of GE and Mytilineos, the substantive arbitration was already commenced, and the tribunal constituted. Where there is a more urgent need and the tribunal is not yet constituted, the appointment of an emergency arbitrator under Article 29 of the ICC Rules can open up the potential to obtain urgent interim measures.
Although the ICC tribunal in this case did not employ an analysis through the lens of unconscionability, their description of the actions taken by SAPE as “abusive” and “serious” certainly appears to fit within the ambit of what some common law jurisdictions consider to be unconscionable behaviour. This case may provide useful precedent for contractors seeking to restrain a call on performance bonds.
Co-written by Horace Ng of Pinsent Masons.
Out-Law Legal Update
10 Jan 2020
25 Jul 2017
Rechtsanwältin, Senior Associate
Rechtsanwalt, Legal Director