Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd

Case •

[2022] NSWSC 1125

•

29 August 2022

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Pty Ltd [2022] NSWSC 1125
Hearing dates: 18 August 2022
Date of orders: 29 August 2022
Decision date: 29 August 2022
Jurisdiction:Equity - Commercial List
Before: Rees J
Decision:

Application to extend interlocutory injunction dismissed.

Catchwords:

BANK GUARANTEE – shipbuilder builds floating production and storage offloading facility in Timor Sea for defendant – shipbuilder obliged to arrange bank guarantee for US$328.5 million – defendant claims liquidated damages and defects exceeding guarantee – nature of bank guarantee at [5]-[10] – nature of risk allocation device.

INTERLOCUTORY INJUNCTION – defendant issues request for arbitration – shipbuilder obtains ex parte injunction restraining defendant from calling on bank guarantee – whether injunction should be continued – shipbuilder experiencing financial trouble due to sanctions on Russia following invasion of Ukraine – principles when injuncting call on bank guarantee at [70]-[87] – risk allocation device – defendant entitled to hold money while dispute resolved – application refused.

INTERNATIONAL COMMERCIAL ARBITRATION – interim measures – section 7, International Arbitration Act 1974 (Cth) – Article 9, Article 17J, UNCITRAL Model Law – principles at [59]-[66] – whether sufficient to raise prima case that defendant not entitled to call on bank guarantee – whether Court can construe contract – reconciling CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd (No 2) [2017] WASCA 123 and Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; [2017] NSWCA 291 – Court to exercise power ‘in accordance with own procedures’ – entitled to form view of meaning of contract to extent necessary to determine application for interim measures – Court’s view does not bind arbitral tribunal.

Legislation Cited:

Civil Execution Act of Korea, art 26(1)

Civil Procedure Act of Korea, art 217(1)

Commercial Arbitration Act 2010 (NSW)

Foreign Judgments Act 1991 (Cth)

Foreign Judgments Regulation 1992 (Cth)

International Arbitration Act 1974 (Cth) s 7

UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006), arts 9, 17J.

Cases Cited:

Austrak Pty Ltd v John Holland Pty Ltd [2006] QSC 103

Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; [2001] HCA 63

Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; [2006] HCA 46

Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420; [1998] VSCA 40

Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493; [2000] WASC 284

Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1

Best Tech & Engineering Ltd v Samsung C&T Corp (No 3) [2015] WASC 459

Bond v Larobi Pty Ltd (1992) 6 WAR 489

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

Brooks v Burns Philp Trustee Co Ltd (1968) 121 CLR 432

BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352; [2012] SGCA 28

Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; (2013) 298 ALR 666

Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334

Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd (No 3) [2018] QSC 60

Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458

CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112

CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd (No 2) [2017] WASCA 123

Dobbs v National Bank of Australia Ltd (1935) 53 CLR 643

Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812

Guo v Xu [2021] NSWSC 460

Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd [2020] NSWSC 178

Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; [2017] NSWCA 291

KR & C Co Ltd v Soon Ok Hwang [2021] NSWSC 551

Ku-ring-gai Council v Ichor Constructions Pty Ltd (2019) 99 NSWLR 260; [2019] NSWCA 2

Laing O’Rourke Australia Construction Pty Ltd v Kawasaki Heavy Industries Ltd [2017] NSWSC 541

Leviathan Shipping Co Ltd v Sky Sailing Overseas Co Ltd [1998] 4 HKC 347

Lucas Stuart v Hemmes Hermitage Pty Ltd [2010] NSWCA 283

Marnell Corrao Associated Inc v Sensation Yachts Ltd (2000) 15 PRNZ 608

Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105

NCC International AB v Alliance Concrete Singapore Pte Ltd [2008] 2 SLR (R) 565; [2008] SGCA 5

Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540

P Co v R LLC [2021] HKCU 1199

Permasteelisa Japan UK v Bouyguesstroi [2007] EWHC 3508 (TCC)

Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45

Pharmaceutical Processing Technology Inc v Sci-Chem International Pty Ltd [2021] NSWSC 1078

Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158

Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238; [2011] FCAFC 156

Scott v Avery (1956) 5 HLC 810

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596

Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Windfarm Pty Ltd [2019] VSCA 318

Simic v NSW Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47

Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (2015) 246 FCR 479; [2015] FCA 1028

Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318; [2010] WASCA 222

Sugar Australia Pty Ltd v Lendlease Services Pty Ltd [2015] VSCA 98

Swift-Fortune Ltd v Magnifica Marine SA [2006] SGCA 42

TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533; [2013] HCA 5

Tech-System Design & Contract (S) Pte Ltd v WYWY Investments Pte Ltd [2014] 2 SCR 1309; [2014] SGHC 57

The Lady Muriel [1995] 2 HKC 320

Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443

Texts Cited:

UNCITRAL Secretariat, ‘Independent Guarantees and Stand-by Letters of Credit: Discussion of Further Issues of a Uniform Law: Fraud and Other Objections to Payment, Injunctions and Other Court Measures: Note by the Secretariat’ (1991) 22 Yearbook of the United Nations Commission on International Trade Law 352

Category:Principal judgment
Parties: Daewoo Shipbuilding & Marine Engineering Co Ltd, a duly organised company under the laws of the Republic of Korea (Plaintiff)
INPEX Operations Australia Pty Ltd (Defendant)
Representation:

Counsel:
Mr TJ Breakspear SC / Dr SH Hartford Davis (Plaintiff)
Mr M Ashhurst SC / Mr D Meyerowitz-Katz (Defendant)

Solicitors:
King & Wood Mallesons (Plaintiff)
White & Case (Defendant)
File Number(s): 2022/226344

Judgment

  1. HER HONOUR: The plaintiff, Daewoo Shipbuilding & Marine Engineering Co Ltd, seeks to extend an interim injunction restraining the defendant, INPEX Operations Australia Pty Ltd, from calling on a US$328,510,832 bank guarantee (that is, some AU$467 million) until an arbitral tribunal has determined the parties’ rights and obligations in respect of the guarantee. INPEX opposes the extension of the injunction, in particular, where Daewoo has experienced financial troubles in recent times, including as a consequence of international sanctions imposed on Russia following its invasion of Ukraine.

  2. So far as the application concerns bank guarantees, it follows a well-trodden path comprehensively sign-posted by seminal judgments of the High Court and state and federal appellate courts. Less clear is how these principles are applied where the parties have agreed to arbitration, having regard to CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd (No 2) [2017] WASCA 123, on the one hand, and Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; [2017] NSWCA 291, on the other. In particular, does the Court need only be satisfied that there is a “serious question to be tried” in respect of a party’s right to call on the bank guarantee, or should the Court proceed to construe the contract “as if on a final basis”. For the reasons which follow, I consider that the suggested difference between CPB Contractors v JKC Australia and Kawasaki is more apparent than real.

  3. Where the parties have agreed to arbitrate, the Court has power to issue interim measures: section 7(3), International Arbitration Act 1974 (Cth); Article 17J, UNCITRAL Model Law on International Commercial Arbitration (the Model Law). In doing so, Article 17J of the Model Law requires the Court to exercise its power “in accordance with its own procedures”. Ordinarily, on an application to injunct a call on a bank guarantee, the plaintiff must demonstrate a strong or serious prima facie case: see [71]-[80]. For the Court to be satisfied that an interlocutory injunction should be granted, it will likely be necessary to examine the plaintiff’s suggested prima facie case critically, which may involve construing the contractual provisions. This should not be taken as binding on the arbitral tribunal but simply what the Court needs to do in order to satisfy itself that it should preserve the status quo until the arbitral tribunal can finally determine the matter.

  4. As such, the views I have here expressed on the meaning of the contract are simply for the purpose of deciding whether it is appropriate to issue interim measures and do not bind the arbitral tribunal. The tribunal will have the benefit of evidence in final form rather than that which may sustain an urgent interlocutory application, together with more extensive debate and additional time to consider the matter more fully.

BANK GUARANTEES

  1. It is convenient to first consider the nature of a bank guarantee, in particular, a guarantee said to provide a “risk allocation device”. The term “bank guarantee” has itself been described as “a complete misnomer” and “misleading”: Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 at 445 (per Barwick CJ); Simic v NSW Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [2] (per French CJ). A more accurate description is an unconditional bond or “performance bond” to pay money on demand up to a stated maximum amount, unqualified by the terms of the underlying contract between the party obliged to arrange the bank guarantee and the party entitled to call on it: Wood Hall at 445 (per Barwick CJ), 451 (per Gibbs J); Simic at [2] (per French CJ).

  2. Bank guarantees have been described as “as good as cash” or “providing an equivalent to cash”, awaiting only a demand before materialising as cash: Wood Hall at 457-459 (per Stephen J); Simic at [6] (per French CJ). Likewise in Simic, Gageler, Nettle and Gordon JJ observed, “such securities ‘create a type of currency’ and are … essential to international commerce and, in the absence of fraud, should be allowed to be honoured free from interference by the courts”: at [88].

  3. While the bank’s obligation to pay on demand is unqualified, the terms of the underlying contract may impose contractual limits on a party’s entitlement to call on the guarantee: Wood Hall at 451 (per Gibbs J), 459 (per Stephen J); Simic at [8] (per French CJ). As Austin J explained in Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 164:

… whilst the Court will not restrain the [bank] from acting on the unqualified promise to honour it, if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.

See likewise Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493; [2000] WASC 284 at [30] (per Owen J); Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458 at [77]. The Court will also injunct a call on a bank guarantee where the party making the call is acting fraudulently or unconscionably.

  1. There are broadly two reasons why parties agree that a bank guarantee will be provided, as Callaway JA explained in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 at 826-827: (emphasis added)

One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason … is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default. … It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. …

  1. In Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Windfarm Pty Ltd [2019] VSCA 318, the Court described the second reason – the “risk allocation mechanism” – as providing a ‘pay now, argue later’ regime: at [14]. See likewise Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420; [1998] VSCA 40 at [49]-[52] (per Brooking JA, noting the allocation of risk shows “which party was to be out of pocket pending resolution of a dispute”); Lucas Stuart v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [39]-[40] (per Macfarlan JA). The Secretariat of UNCITRAL has referred to this as “the maxim of ‘pay first, litigate later’”: ‘Independent Guarantees and Stand-by Letters of Credit: Discussion of Further Issues of a Uniform Law: Fraud and Other Objections to Payment, Injunctions and Other Court Measures: Note by the Secretariat’ (1991) 22 Yearbook of the United Nations Commission on International Trade Law 352 at 369 [101].

  2. As to whether a bank guarantee is intended to provide security or a risk allocation device, or both, the usual rules for construing commercial contracts apply: Kawasaki at [60]-[67]; cf Clough Engineering at [81]-[83]. The Court should construe the terms of an instrument read as a whole. Likewise, the question whether the underlying contract contains a qualification on the right to call upon the bank guarantee should be determined in light of the contract and the form of the bank guarantee: Kawasaki at [78]; CPB Contractors v JKC Australia at [89]; Clough at [85]. While the authorities provide guiding principles, the primary focus must be on the terms of the contract itself: Bateman Project v Resolute Ltd at [30] (per Owen J). Or, as put by the Court, in CPB Contractors v JKC Australia, resolution of the case lies in the proper construction of the provisions of the contract “rather than in attempting to state general principles of broad application or in reconsidering the questions of construction of the different contractual provisions in other decisions”: at [88].

FACTS

  1. Turning then to the facts, Daewoo relied on the evidence of its solicitor, Peter Pether, and Korean law expert, Il Won Kang. INPEX relied on the evidence of its solicitor, David Opperman, and a report from Korean law firm, Kim & Chang. There was no cross-examination.

  2. Daewoo is a Korean shipbuilding company. INPEX is the Australian subsidiary of a Japanese company, which operates the Ichthys Gas Field Development Project, described to me as among “the most significant oil and gas projects in the world”. The project involves the extraction of hydrocarbons from the Ichthys gas field, located some 220 km offshore from north-western Western Australia in the Timor Sea. The hydrocarbons are converted into natural-gas condensate through a semi-submersible platform known as the “central production facility” (CPF) or the Ichthys Explorer.

  3. The condensate is then transferred to a floating production storage and offloading (FPSO) facility, the Ichthys Venturer, by which the condensate is processed, stored and exported, both through offtake tankers and a subsea pipeline to an onshore liquefaction plant in Darwin. It is the FPSO which Daewoo was contracted to build, and built, as can be seen in the following photograph:

  1. The FPSO is permanently moored and is the size of three soccer pitches laid end-to-end and 85 metres high. It is home to 200 people and designed to hold more than one million barrels of condensate. The FPSO processes and stores most of the condensate delivered from the CPF, before periodically offloading it to carriers to export to market.

The contract

  1. On 1 March 2012, Daewoo and INPEX entered into a contract entitled “Ichthys Gas Field Development Project – Engineering, Procurement, Supply, Construction and Commissioning of Floating Production Storage Offloading (FPSO) Facility Contract No 800131”. Daewoo is defined in the contract as “Contractor” and INPEX as “Company”. In short, the contract required Daewoo to construct the FPSO at its shipyard in Korea, deliver the FPSO to the Ichthys gas field and complete certain works in situ to connect it to the CPF.

  2. More specifically, the contract obliged Daewoo to complete the Work (being the work and services required to be performed by Daewoo under the contract) and construct the Plant (being the permanent facilities constructed at the offshore location where the Plant was to be installed) to particular standards and within a specified timeframe: Articles 14 to 16. Daewoo was obliged to pay liquidated damages if it failed to do so: Article 36. INPEX was entitled to issue Change Orders, requiring Daewoo to do further or different work, for which Daewoo was entitled to payment or extensions of time to perform these orders: Article 22.

  3. Daewoo could use Subcontractors to do some of the Work; Daewoo was responsible for their acts and omissions: Article 11.1. Subcontractors was defined to include Vendors, who supplied Contractor Items, being equipment and materials to be incorporated into the Plant or used during Plant commissioning, start up or operations and necessary for the due performance of the Work: Article 2.1. In carrying out the Work, Daewoo was obliged to “procure, manufacture, fabricate, supply and deliver all Contractor Items so as to ensure that the Work are performed in accordance with the Work Time Schedule”: Article 14.5(a)(i). Daewoo was obliged to rectify defects or deficiencies in the Contractor Items: Articles 14.5(a)(iii)-(iv).

  4. On completion of each phase of the work, INPEX was to issue interim certificates, which were many in number and included a Hand Over Certificate: Article 19.1(a)(x). INPEX was also entitled to take-over discrete parts of the Plant or the “Result of Work” which had been completed, by issuing a Transfer of Care and Custody Certificate: Articles 19.3, 53.2(a).

  5. Within six months of issue of the Hand Over Certificate, INPEX was to conduct Performance Tests, with the object of demonstrating that the Plant could be satisfactorily operated: Articles 2.1; 19.2(a). Subject to Daewoo’s warranty obligations, to which I will shortly turn, if the results of the Performance Tests met the specified requirements, Daewoo was entitled to request the issue of a Provisional Acceptance Certificate: Article 19.2(b). (The form of the Provisional Acceptance Certificate in Annexure 8 to the contract makes plain that multiple Provisional Acceptance Certificates may be issued, culminating in “the last Provisional Acceptance Certificate”).

Warranties

  1. Article 20 of the contract concerned guarantees and warranties. Daewoo guaranteed that the Work and the Plant would be constructed, and would perform in accordance with, the requirements of the contract: Article 20.1. Daewoo warranted that the Plant was fit for purpose and free from defects: Article 20.2. Further, Daewoo was obliged to ensure that its Subcontractors also gave warranties and guarantees which were enforceable directly by INPEX: Article 20.3(d).

  2. Article 20.3 is entitled “Warranty Obligations”. Article 20.3(a), entitled “Rework, Repairs, Replacement”, provided that, during the Warranty Period, INPEX was entitled to notify Daewoo of any defects or deficiencies in the Plant or the Work. Daewoo was obliged to “rectify the defect or deficiency and make good all damage to the Plant or the Work resulting from such defects or deficiencies”: Article 20.3(a)(i). Further, Article 20.3(a)(ii) provided: (emphasis added)

Such rectification must include all necessary re-design, repair or replacement, as Approved, at Contractor’s sole cost (except for the cost of the Marine Spread), expense and risk including for investigation, redesign, search, dismantling, removal from Site, transportation, replacement, re-installation and re-testing. The costs associated with the provision of Marine Spread for the purposes of re-work shall be compensated at fifty percent (50%) …

Marine Spread meant the marine portion of Construction Equipment, including captains and crews, used by Daewoo for the performance of the Work: Article 2.1.

  1. Article 20.3(c), “Rework by Other Contractors”, provided that, if Daewoo failed to comply with its obligations under Article 20.3(a), or in the case of emergency or urgency, INPEX “may have rework performed by other contractors” and entitled to recover the cost of doing so from Daewoo. INPEX’s recourse to other contractors “in no way relieves [Daewoo] from its warranty obligations”, save that where the rectification work was carried out by a third party who was not an Approved Subcontractor (that is, approved by INPEX and subcontracted by Daewoo: Article 2.1), Daewoo was not obligated to warrant the specific repair work carried out by that party “however, this does not detract from [Daewoo’s] other warranty obligations under this Contract”.

  2. “Rework” is a word which gained some prominence on this application. Whilst “rework” is not defined in the contract, its import may be gleaned from Article 20.3 as encompassing rectifying defects and repairing damage, including re-design, repair or replacement. In short, “rework” is repeating the tasks required to bring the Work and the Plant into conformity with the Warranty in Article 20.1 and Article 20.2.

  3. Particularly relevant to the dispute before the Court, Article 20.4 specified the Warranty Period, of which there were several: (emphasis added)

20.4   Warranty Period

(a)   Initial Warranty Period

Without prejudice to any other warranties and guarantees set forth in the Contract, Contractor must make good and indemnify Company against any defects or deficiencies in the Plant or the Work for an initial Warranty Period of thirty six (36) months calculated from the effective date of the Provisional Acceptance Certificate. Such initial Warranty Period must be extended for any rework or time of operational stoppages to allow rework on such completed parts of the Plant or the Work as provided for under sub-Articles 20.4(b) and 20.4(c).

(b)   Warranty Period on Rework

Contractor must warrant all rework, including rework on rework, if any, performed under its warranty obligations as of the date of Company's acceptance of such rework and for a period of the same duration as the initial Warranty Period. Such Warranty Period on rework must take effect as of Company's acceptance of replacements, repairs and satisfactory completion, including testing, of all rework.

(c)   Warranty Extensions for Plant Stoppages

Initial Warranty Period and Warranty Period on rework will be adjusted and extended by a duration equivalent to that during which operations are ceased to allow repairs, replacements or rework performed under the foregoing warranty obligations.

…

(e)   Limit on Duration of Warranty Period

The initial Warranty Period together with any time extension for rework or operational stoppages, is limited to a maximum duration of seventy two (72) months from and after the effective date of the Provisional Acceptance Certificate.

…

  1. That is, the contract created the potential for multiple warranty periods, with an initial Warranty Period of three years from the Provisional Acceptance Certificate (of which there may be many) together with a separate three year Warranty Period attaching to “rework, including rework on rework”, with the additional prospect that both the initial Warranty Period and the Warranty Period on rework “must be extended for any rework or time of operational stoppages to allow rework”. All warranties, whenever beginning, expired, at the latest, six years after the Provisional Acceptance Certificate(s).

  2. Article 21 was entitled “Final Acceptance”. Article 21(a) provided that, at the end of “the” Warranty Period, and provided that Daewoo had duly complied with its obligations under the contract, Daewoo was entitled to request the issue of a Final Acceptance Certificate. Subject to a last satisfactory inspection of the Plant and Work, INPEX was obliged to issue a Final Acceptance Certificate within 30 days of Daewoo’s request: Article 21(b). INPEX was not obliged to issue a Final Acceptance Certificate until Daewoo had satisfied all claims and any outstanding obligations in respect of the Plant or Work: Article 21(c). Further, Article 21 provided: (emphasis added)

(e)   This Final Acceptance Certificate must be in a format of Annexure 9 of the Contract.

(f)   The above procedure must be repeated for each major element of the Plant in respect of which a Provisional Acceptance Certificate has been granted pursuant to sub-Article 19.2.

…

(h)   After sixty (60) days of the end of the Warranty Period, any Claim which Contractor could have made against Company in connection with the performance of the Work which has not been made is barred.

  1. Annexure 9 prescribed the form of the Final Acceptance Certificate. After noting that the Plant and Work had been provisionally accepted and the Warranty Period completed, the parties certified and agreed that Daewoo’s obligations had been fulfilled. The form contained an additional component:

<< 3.   The Final Acceptance Certificate is the last Final Acceptance Certificate issued by Company under the Contract. >> (applicable to the last FAC only)

  1. That is, not only were there potentially multiple Warranty Periods ending on multiple dates in respect of parts of the Plant or the Work, but there may also be multiple Final Acceptance Certificates issued at the end of each Warranty Period. Only at the end of all Warranty Periods could Daewoo obtain “the last Final Acceptance Certificate”.

Bank guarantee

  1. Article 35 of the contract obliged Daewoo to provide a bank guarantee as follows: (emphasis added)

35   BANK GUARANTEE

Contractor hereby agrees to provide an irrevocable Bank Guarantee payable on first demand of Company to guarantee the due performance of Contractor's obligations under the Contract, as follows:

35.1   Bank Guarantee

(a)   Form of Bank Guarantee

…

(iii)   The Bank Guarantee must contain an unconditional and irrevocable undertaking by the Approved bank to pay to Company the amount of the security on demand without notice being given to Contractor by the bank or Company. …

…

(b)   Amount of Bank Guarantee

The Bank Guarantee must be provided as one (1) Bank Guarantee equal to:

(i)   ten per cent (10%) of the Contract Price from the date of the Bank Guarantee until the date of the last Provisional Acceptance Certificate; and

(ii)   five per cent (5%) of the Contract Price from the date of the last Provisional Acceptance Certificate until the date of expiry under section 11 of the Form of Deed of Bank Guarantee.

(c)   Duration of Bank Guarantee

(i)   The Bank Guarantee must be valid from the Contract Date until thirty (30) days after the date of the last Final Acceptance Certificate …

(ii)   If the Bank Guarantee has an expiry date that is prior to the period required in sub-Article 35.1(c)(i), then Contractor must at least thirty (30) days prior to the expiry of the Bank Guarantee renew or extend the Bank Guarantee so that it remains in force for the period required by sub-Article 35.1(c)(i).

…

(f)   Release of Bank Guarantee

(i)   Company will release the Bank Guarantee to Contractor within thirty (30) days after the expiry of the last Warranty Period provided that all claims made in accordance with the Bank Guarantee have been fully satisfied by the issuing bank.

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.

  1. The reduction of the amount of the bank guarantee, in Article 35(b), from 10% of the contract price to 5% on the last Provisional Acceptance Certificate, was referred to by the parties as the “Step Down Date”.

  2. Putting the timeframes in Article 21(b), Article 35(c)(i) and Article 35(f)(i) together, on expiry of the last Warranty Period, Daewoo was entitled to request the issue of the last Final Acceptance Certificate. INPEX was obliged to issue that certificate within 30 days, and to release the bank guarantee within the same timeframe. However, the bank guarantee was to remain valid until 30 days after the last Final Acceptance Certificate. That is, all things going well, the bank guarantee would remain valid for 30 days after it was returned to Daewoo.

  3. Annexure 1A contained the form of the bank guarantee including: (emphasis added)

3.   The Bank’s obligation to make payment under this document shall arise on a receipt of a demand made in accordance with the provisions of this document without proof of any breach or any other conditions and notwithstanding any contest or dispute by Contractor. The Bank shall not be required or permitted to make any other investigation or enquiry or notify Contractor prior to the satisfaction of the demand.

…

7.   This document is irrevocable and unconditional and neither the obligations of the Bank under this document nor the rights, powers and remedies conferred upon Company by this document shall be discharged, impaired or otherwise affected by:

…

(vii)   any breach of the Contract by Contractor or Company …

…

11.   This document shall come into force upon its issue. This document shall remain valid and in force for written demand received by the Bank until the earlier of

(i)   the thirty (30) days after the date of the last Final Acceptance Certificate; or

(ii)   [insert calendar date]. …

  1. Article 35.4 is entitled “Proceeds of Security” and provides:

35.4   Proceeds of security

(a)   Company does not hold any security provided by Contractor or the proceeds of any security on trust for Contractor.

(b)   Subject to sub-Article 35.4(3), if Company calls on a security at any time, the balance (after deducting amounts payable to Company by Contractor) of the proceeds (if any) will be deposited by Company into an interest bearing account in the name of Company.

(c)   Subject to sub-Article 5.4(e), any interest accrued on the account balance may be retained by Company and added to the account in which the security is held.

(d)   Company is entitled to withdraw from the account amounts owed to it by Contractor from time to time.

(e)   Company will pay the account balance to Contractor:

(i)   upon request by Contractor at any time during the term, provided that Contractor first provides a replacement Bank Guarantee for the account balance which complies with sub-Article 35.1; or

(ii)   within thirty (30) days after the date of the last Final Acceptance Certificate.

  1. It would thus appear that the goal of the bank guarantee was, at least, to provide security in respect of claims which INPEX may have against Daewoo. The issue is whether the bank guarantee was also a “risk allocation device”.

  2. The contract contains a multi-tiered dispute resolution provision in Article 58, requiring the parties to first attempt to settle disputes by negotiation, failing which disputes are to be resolved by way of final and binding international arbitration, seated in Singapore and using the International Chamber of Commerce Rules of Arbitration. I will return to this provision at [67].

The FPSO is built

  1. On 6 April 2012, the bank guarantee was issued by The Export-Import Bank of Korea. INPEX was entitled to request that the bank guarantee be adjusted in certain circumstances: Article 35.1(e). The bank guarantee was amended from time to time – twelve times in all – until its final form on 27 August 2021: see [48].

  2. Daewoo began work. INPEX issued Change Orders from time to time. Although work in Daewoo’s shipyard was to be completed in January 2017, it was not until July 2017 that the FPSO was ready to sail from Korea. Daewoo attributed this delay to Change Orders issued by INPEX, said to have resulted in a significant increase in the work to be performed before sail away. In July 2017, the parties entered into a Deed of Settlement and Release in respect of accrued claims and entitlements. Once the FPSO was moored in location, Change Orders continued to be issued. Amendments continued to be made to the bank guarantee. In March 2018, the Deed of Settlement and Release was also amended. On 30 July 2018, gas production commenced.

  3. On 6 May 2019, Daewoo requested that a Hand Over Certificate be issued in respect of various subsystems. On 10 May 2019, INPEX performed the first Performance Test. By then, INPEX had exercised its take-over rights under Article 53.2(a) by issuing numerous Transfer of Care and Custody Certificates, the last of which was issued on 13 May 2019. Daewoo requested the issue of a further three Hand Over Certificates in respect of various subsystems, with the last request made on 26 June 2019. No Hand Over Certificates were issued.

  4. In June 2019, the parties entered into a Deed of Amendment to Contract, deleting and replacing Article 20.4(a) and (e) in respect of the initial Warranty Period. Article 20.4(a) became:

Without prejudice to any other warranties and guarantees set out in the Contract, Contractor must make good and indemnify Company against any defects or deficiencies in the Plant or the Work for an initial Warranty Period commencing from the effective date of the Hand Over Certificate(s) until 30th June 2021. The Initial Warranty Period must be extended for any rework or time of operational stoppages to allow rework on such completed parts of the Plant or the Work as provided for under sub-Articles 20.4(b) and 20.4(c).

  1. Article 20.4(e) became:

The initial Warranty Period together with any time extension for rework or operational stoppages, is limited to 30th June 2024.

  1. That is, the initial Warranty Period changed from three years from the Provisional Acceptance Certificate to the period between the Hand Over Certificates and 30 June 2021, subject to (as before) extensions for rework or operational stoppages to allow rework. As such, the starting point for the initial Warranty Period shifted and the length of the initial Warranty Period shortened to, roughly, two years. The Duration of Warranty Period also changed from three years after the Provisional Acceptance Certificate to three years after 30 June 2021.

  2. On 30 June 2019, Daewoo’s personnel, and those of its subcontractor, demobilised from the FPSO. From July 2019 to March 2020, a representative of Daewoo was on the FPSO in an observer capacity but not deployed to perform any work for INPEX. Daewoo’s personnel have not returned to the FPSO to perform rework or other services for INPEX. Nor is Daewoo aware of any operational stoppages. Daewoo’s personnel continued to engage in correspondence and attend a weekly management meeting with INPEX’s personnel, by video link or conference call, in relation to technical issues requiring investigation from Daewoo’s shipyard in South Korea. Daewoo continues to maintain a dedicated team of personnel comprising Daewoo’s Project Manager, Jeon Yeop Song, the general manager of Daewoo’s Warranty Team, Hyeong-Il Kim, together with Cheolwoo Jong and Sang Do Kim at Daewoo’s South Korean shipyard to attend to inquiries made by INPEX. Other Daewoo personnel who had been involved with the project assisted from time to time with correspondence and meetings with INPEX.

Warranty notices and claims

  1. In July 2019, INPEX began issuing warranty notices, with which Daewoo progressively dealt. The warranty claims included paint coating on a ballast tank, gravity dampers, incorrectly sized hoses and the like. From time to time, the parties held “Warranty” meetings, continuing to work through each warranty notice. The suppliers of components and materials became, on occasion, involved in investigating what had gone wrong, how to fix it, and who should fix it. Technical analysis was undertaken and experts utilised. The process of resolving warranty claims remained ongoing by May 2021.

  2. Mr Pether described Daewoo’s position in respect of each of the warranty notices, based on information from Mr Kim and Mr Song. While the evidence in respect of this part of the application was factually dense, in short, Daewoo disputed that many of the items the subject of the warranty notices were, in fact, defects. In some instances, the vendor or supplier has provided replacement items, conducted inspections or undertaken root cause analyses. In other cases, INPEX engaged replacement suppliers and subcontractors to carry out works. Most warranty notices remain in dispute, although Daewoo has continued to work with INPEX in respect of the notices. However, Daewoo and its subcontractors have not performed any works on the FPSO in relation to the warranty notices. Daewoo’s position is that it did not itself perform any “rework”.

  3. To this, INPEX pointed to documentary evidence which suggested that Daewoo’s actions in respect of the warranty notices amounted to “rework”. Mr Opperman explained that, for at least nine warranty notices, Daewoo had acknowledged that there were defects requiring rectification and progressed rework, either by itself or by its Subcontractors. In some cases, the rework had been completed and the rework Warranty Period had commenced but not expired. In other cases, the rework has not been completed such that INPEX’s position is that the Initial Warranty Period continues to be extended under Article 20.4(a).

  4. In May 2021, INPEX issued a claim for losses said to have been suffered as a result of Daewoo’s suggested delays and alleged defects in its work. INPEX issued a second claim for liquidated damages in respect of a water treatment system and, citing Article 35.3(a), claimed to be entitled to have recourse to the bank guarantee to pay such damages. In June 2021, INPEX issued a third claim in respect of “HOC Punches”, which I understand to be a reference to defects preventing the issue of Hand Over Certificates. In total, the amounts claimed exceed the amount of the bank guarantee.

  5. Daewoo disputed each of the claims, as well as INPEX’s suggested entitlement to have recourse to the bank guarantee in respect of its claim for liquidated damages. In July 2021, INPEX maintained its entitlement to call on the bank guarantee and requested that Daewoo extend the bank guarantee for a further 12 months. In July 2021, the parties’ representatives met and discussed the bank guarantee. Mr Song was informed that, if the bank guarantee was not extended, INPEX would call on the guarantee. INPEX also retained a law firm in South Korea, Kim & Chang, to act on its behalf in relation to the bank guarantee.

  6. On 27 August 2021, The Export-Import Bank of Korea issued its final amendment to the bank guarantee such that, until 5.00 pm on 30 September 2022 – the “Step Down Date” – the guarantee stands at US$328,510,832. Thereafter and until 5.00 pm on 14 February 2023 or the last Final Acceptance Certificate, whichever is earlier, the guarantee is in the sum of US$164,255,416.

  7. “Warranty” meetings continued, as did the parties’ efforts to resolve the warranty claims. In addition, the parties corresponded at length in respect of INPEX’s three substantive claims. Daewoo continued to maintain that INPEX was not entitled to look to the bank guarantee in respect of its claim for liquidated damages, whilst INPEX maintained its entitlement. Mr Opperman is informed by, James Rainey, the Team Leader responsible for outstanding claims associated with the contract, that since June 2022 Daewoo demobilised the last of its remaining engineers who were dealing with outstanding Work and Warranty Notices and relocated them to other projects.

Dispute resolution begins

  1. The parties engaged in without prejudice discussions in Singapore from 30 March 2022 to 1 April 2022, but their disputes were not resolved.

  2. On 1 April 2022, INPEX served a Notice of Dispute pursuant to Article 58(a) of the contract in respect of INPEX’s three substantive claims, together with warranty claims. For the listed warranty notices, Daewoo was said to have refused or failed to rectify the defect or deficiency and make good all damage to the Plant or the Work resulting from defects or deficiencies.

  3. On 20 April 2022, Daewoo issued a Notice of Dispute in respect of INPEX’s failure to issue a Provisional Acceptance Certificate or Final Acceptance Certificate and failure to pay monies owing under the contract and for Change Orders. In addition, Daewoo claimed that it was entitled to have the bank guarantee returned, together with compensation for the cost of maintaining the bank guarantee. Daewoo’s claims exceeded US$200 million.

  4. In accordance with Article 58(c) of the Contract, from 26 to 29 July 2022 the parties participated in a mediation in Singapore, which was unsuccessful. On 29 July 2022, INPEX issued a Request for Arbitration to the Secretariat of the International Court of Arbitration. Again, the compensation sought by INPEX before the tribunal exceeds the amount of the bank guarantee.

These proceedings

  1. On 1 August 2022, Daewoo applied to the Technology and Construction Duty Judge, Ball J, seeking urgent interlocutory relief restraining INPEX from calling on the bank guarantee. That application was made on an ex parte basis as Daewoo was concerned that INPEX would call on the bank guarantee should it be notified that Daewoo intended to seek such relief. Daewoo contended that none of its actions in respect of the warranty notices could be described as “rework” resulting in any extension of the initial Warranty Period. As a result, the Warranty Period expired on 30 June 2021, such that Daewoo was entitled to the return of the bank guarantee. His Honour made an order restraining INPEX until 4pm on 3 August 2022. On 3 August 2022, Stevenson J extended the injunction until 4pm on 18 August 2022 and listed the application for interim relief before me on that date.

  2. 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 bank guarantee, save as permitted by Article 35.3(b) of the contract (which only permits an application for an injunction “drafted and signed by senior counsel … grounded on an allegation of fraudulent attempt” to be paid under the guarantee). INPEX also sought an order that this prayer for relief be determined as a separate question and sought final declaratory relief that INPEX is not obliged to return the bank guarantee to Daewoo.

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

  4. Correspondence ensued between the parties, including in respect of the undertakings proffered by Daewoo to support a continuation of the interlocutory injunction until the determination of the arbitral tribunal. The form of the undertaking proposed at the hearing – in addition to the usual undertaking as to damages – was in the following terms:

b.   an undertaking to maintain and extend the Bank Guarantee until an arbitral tribunal constituted under Article 58 of the Contract has determined the parties’ rights and obligations in connection with the Bank Guarantee or the dispute is otherwise resolved by a settlement between the parties, with each extension to the Bank Guarantee to be provided to the Defendant not later than 14 days prior to the “Step Down Date” identified in the then current form of the Bank Guarantee; and

c.   an undertaking to agree and confirm that the arbitral tribunal may, if it considers appropriate, make a consequential order permitting the Defendant to have recourse to the Bank Guarantee if the Tribunal determines that:

i.   the Defendant was entitled under the Contract to have recourse to the Bank Guarantee as at 1 August 2022;

ii.   the Defendant was prevented from exercising an entitlement to have recourse to the Bank Guarantee by reason of the interlocutory injunction the subject of the Summons; and

iii.   the entitlement to have recourse to the Bank Guarantee expires during the currency of the injunction …

  1. Further, Daewoo proposed that the interlocutory injunction be discharged automatically if an arbitral tribunal so ordered, with the balance of the Summons and Cross-Claim stayed and referred to arbitration pursuant to section 7(2) of the International Arbitration Act.

ARBITRATION AGREEMENTS AND INTERIM MEASURES

  1. The application for interlocutory relief is made in the context of the statutory and contractual regime of international commercial arbitration. That regime is provided by the International Arbitration Act, which is broadly similar to the uniform Commercial Arbitration Acts in each State and Territory. The International Arbitration Act gives effect to the Model Law, which is given the force of law in Australia: section 16.

  2. Section 7(2) of the Act provides that, where an arbitration agreement exists, the Court must stay the proceedings and refer the parties to arbitration unless the Court finds the agreement null, void or incapable of being performed. Section 7(3) provides:

(3)   Where a court makes an order under subsection (2), it may, for the purpose of preserving the rights of the parties, make such interim or supplementary orders as it thinks fit in relation to any property that is the subject of the matter to which the first-mentioned order relates.

  1. Consistently with this, Article 9 of the Model Law states:

Article 9   Arbitration agreement and interim measures by court

It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant such a measure.

  1. More importantly, Article 17J of the Model Law provides:

Article 17J   Court-ordered interim measures

A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration.

  1. As to the relationship between Article 9 and Article 17J, Article 9 does not confer jurisdiction on a court but declares the compatibility between resolving a dispute through arbitration and, at the same time, seeking assistance from the court for interim protection orders: Swift-Fortune Ltd v Magnifica Marine SA [2006] SGCA 42; Ku-ring-gai Council v Ichor Constructions Pty Ltd (2019) 99 NSWLR 260; [2019] NSWCA 2 at [61]-[62] (per Bathurst CJ). As Bathurst CJ observed in Ku-ring-gai Council v Ichor Constructions, “Article 17J was included in the Model Law … to make it clear that the court had that power. However, it did not operate to extend in any way the type of relief which could be granted by the court”: at [64]. See also Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (2015) 246 FCR 479; [2015] FCA 1028 at [103] (per Edelman J).

  2. The general principles that apply to the grant of interim injunctions apply to an application for an interim injunction under Article 17J of the Model Law: Pharmaceutical Processing Technology Inc v Sci-Chem International Pty Ltd [2021] NSWSC 1078 at [44] (per Williams J). Article 17J says as much, “The Court shall exercise such power in accordance with its own procedures”, albeit “in consideration of the special features of international arbitration.”

  3. As to consideration of the special features of international arbitration, the Court should respect the parties’ choice to arbitrate “and not to take out of the hands of the arbitrators a power of decision which the parties have entrusted to them alone”: The Lady Muriel [1995] 2 HKC 320 at 325 (per Godfrey JA). As Lord Mustill held in the seminal case of Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 at 365: (emphasis added)

The purpose of interim measures of protection, by contrast, is not to encroach on the procedural powers of the arbitrators but to reinforce them, and to render more effective the decision at which the arbitrators will ultimately arrive on the substance of the dispute. Provided that this and no more is what such measures aim to do, there is nothing in them contrary to the spirit of international arbitration.

  1. In Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; (2013) 298 ALR 666, Martin CJ, with whom Buss JA agreed, considered that the power to make interim orders should be exercised “very sparingly” and should not be exercised to usurp the powers of the arbitrator: at [93]-[101]. See likewise Leviathan Shipping Co Ltd v Sky Sailing Overseas Co Ltd [1998] 4 HKC 347 at 355 (per Findlay J, “this jurisdiction should be exercised sparingly, and only where there are special reasons to utilise it”); Marnell Corrao Associated Inc v Sensation Yachts Ltd (2000) 15 PRNZ 608 at [74] (per Wild J, who considered interim measures were those which the arbitral tribunal “cannot order in time to give necessary protection”); NCC International AB v Alliance Concrete Singapore Pte Ltd [2008] 2 SLR (R) 565; [2008] SGCA 5 at [53] (per V K Rajah JA, “The same general principle of limited and cautious curial assistance applies.”).

  2. Turning to the arbitration clause in this contract, Article 58 provides: (emphasis added)

58   SETTLEMENT OF DISPUTES

(a)   In the event of a Dispute between Contractor and Company, either Party may give the other Party a written notice adequately identifying the matters the subject of the Dispute.

(b)   The Parties must endeavour to settle by negotiation any Dispute and all the consequences thereof. The Parties must confer at least once within twenty one (21) days of the notice of Dispute to attempt to resolve the dispute and failing resolution of the Dispute to explore alternative methods of resolving the Dispute. At any such conference each Party must be represented by a person having authority to agree to a resolution of the Dispute.

(c)   The Parties will endeavour to settle such Dispute by negotiation within forty-five (45) days from receipt of the notice of Dispute.

(d)   All Disputes are to be settled by final and binding arbitration. If the Parties fail to settle the Dispute by negotiation within the period of time set out in sub-Article 58(c), either Party may refer the Dispute to international arbitration in accordance with this Article 58.

…

(n)   Neither Party is prevented or restrained by operation of this Article 58 from applying to a court of competent jurisdiction to seek urgent relief (including injunction or conservatory measures). The Parties must as soon as is practicable commence and if practicable, in conjunction with the urgent court application, comply with the procedures in sub-Articles 58(a) to 58(d). The application by a Party for such urgent relief must not be deemed to be an infringement or waiver of the arbitration agreement and does not affect the relevant powers of the arbitral tribunal.

Noteworthy, Article 58(n) permits applications to a court for “urgent relief” but does not refer to interim or interlocutory relief. This is a feature on which INPEX placed some emphasis, and to which I will return at [83].

  1. A relevantly identical arbitration clause was considered in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112, where Le Miere J at first instance described Article 58(n) as a “carve out” to the arbitration agreement: at [34], [36]. His Honour was there satisfied that the interlocutory relief sought was urgent, where circumstances gave rise to a real risk that JKC might call on the bank guarantee: at [41]. As such, the application fell within the carve out and the Court’s obligation to stay the proceedings under section 7(2) of the International Arbitration Act was “not enlivened”: at [42].

  2. Here, the parties agreed that Daewoo’s interlocutory application sought “urgent” relief. As such, the Court has power to grant interim measures and is not obliged to stay the proceedings before doing so. The Court’s power should be exercised sparingly, to support the effectiveness of the arbitral tribunal rather than to usurp its powers.

INTERLOCUTORY INJUNCTIONS AND BANK GUARANTEES

  1. As noted, Article 17J of the Model Law requires the Court to exercise its power to order interim measures “in accordance with its own procedures”. The principles which govern the grant of interlocutory injunctions are notorious. It bears emphasis, however, that when considering whether the plaintiff has a prima facie case, how strong the probability needs to be that the plaintiff will succeed at trial depends upon the nature of the rights the plaintiff asserts and the practical consequences likely to flow from the orders the plaintiff seeks: Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105 at [87] (per Newnes JA, McLure P and Corboy J agreeing).

  2. This consideration finds particular resonance on an application to injunct a party from calling on a bank guarantee, where the Courts ordinarily need to be satisfied that there is a strong prima facie case justifying the Court’s interference. As Andrew Phang Boon Leong JA put it in BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352; [2012] SGCA 28, albeit it in the context of an application for an interlocutory injunction based on unconscionable conduct, at [21]-[22]:

21   When determining if a strong prima facie case has been made out, the entire context of the case must be thoroughly considered, and it is only if the entire context of the case is particularly malodorous that such an injunction should be granted. We must emphasise that the courts’ discretion to grant such injunctions must be sparingly exercised and it should not be an easy thing for an applicant to establish a strong prima facie case.

22   The reason for setting the barrier at such a high level is that the equitable remedy of the interim prohibitive injunction is a very harsh one. It restricts the person in whose favour the performance bond was issued (“the beneficiary”) from doing that which he was entitled by agreement of the parties to do, and which he in all probability had bargained for during the negotiations leading up to the contract concerned. In essence, he would be prevented from enforcing a substantive right which he had contracted for.

  1. Nor do the Courts approach this task any differently where the parties have agreed to arbitrate. This may be seen in the following three examples, where the Court considered whether it was appropriate to injunct a call on the bank guarantee without taking any different approach by reason of the arbitration agreement which existed in each case. In Permasteelisa Japan UK v Bouyguesstroi [2007] EWHC 3508 (TCC), Ramsey J, in the Technology and Construction Court of the Queen’s Bench Division, observed that, when ordering interim measures, the Court will act in accordance with the general principles applied by the courts in relation to the remedy sought: at [45]. At [46]-[48]:

46   Should the court therefore apply the principles developed in respect of calls on performance guarantees or should it apply a different test seeking to preserve the position pending the determination by the arbitral tribunal? In my judgment, the court should be wary of adopting a different test to that customarily applied to cases which come before the court. To do otherwise would add uncertainty to the approach to be adopted. In particular, in this case it would add uncertainty where there are common forms of security given by way of bonds in relation to obligations which, particularly in the context of construction contracts, are often the subject of arbitration.

…

48   In such circumstances, the court should generally act as it would if the same dispute were before it in court, rather than attempting to adopt a different test so as to hold the position pending a future application to the arbitral tribunal.

  1. Ramsey J considered that, whilst the Court may grant an injunction where there was an express term restricting the circumstances in which a party may call on a bank guarantee, and where it was positively established that the party was not entitled to draw down, “The same will not apply where there is only a serious, arguable case to that effect. Otherwise, the commercial effectiveness of letters of credit would be eroded”: at [51]. Thus, “on the general approach of the courts for the grant of injunctions in relation to performance guarantees”, his Honour refused an interim injunction: at [56].

  2. In Tech-System Design & Contract (S) Pte Ltd v WYWY Investments Pte Ltd [2014] 2 SCR 1309; [2014] SGHC 57, Edmund Leow JC refused to grant an interlocutory injunction, where the application was made on the basis of unconscionable conduct. His Honour considered that the plaintiff had to make out a strong prima facie case of unconscionable conduct and, in order to determine whether this had been made out, “I was bound to consider thoroughly the entire context of the case”: at [18]. The evidence did not meet the standard and the application for injunction was refused.

  3. More recently in P Co v R LLC [2021] HKCU 1199, Deputy High Court Judge Winnie Tsui refused to grant an interlocutory injunction in respect of a bank guarantee on the basis of the principle in The Bhoja Trader [1981] 2 Lloyd’s Rep 256, that is, bank guarantees are “the life blood of commerce. Thrombosis will occur if, unless fraud is involved, the Courts intervene …”: at [29]. Her Honour did not consider that there were exceptional circumstances to justify departure from the general principle where bank guarantees “fall to be considered in a special category of their own in the context of interlocutory injunctive relief”: at [32], [42]. Even assuming that it was sufficient for the plaintiff to show that there was a serious issue to be tried being, her Honour was not satisfied that that case was sufficiently strong, nor did the balance of convenience favour the grant of an injunction: at [44]-[48].

  4. The need to establish a strong prima facie case when seeking to injunct a call on a bank guarantee has led the Courts, on occasion, to construe the disputed contractual provisions on the interlocutory application. In Sugar Australia Pty Ltd v Lendlease Services Pty Ltd [2015] VSCA 98 – where there was no arbitration agreement – Osborn and Ferguson JJA observed that, although it was not always the duty of the court on an interlocutory application to decide a question of law, “more often than not performance bonds stand in a separate category”: at [18]. Further, at [21]:

If a provision in a building contract requiring a performance bond is intended to operate as a risk allocation device pending the final determination of the dispute between the parties then that intention must be fundamental to a consideration of the justice of an application made to restrain recourse to such a bond pending final determination of the dispute.

  1. Whilst the ability to call on a bank guarantee intended to operate as a risk allocation device may be subject to a contractual limitation, “Nevertheless, the fundamental characteristic of a risk allocation device informs the task which the court must undertake in resolving whether or not to grant an injunction”: at [25]. Thus, the first task for the Court was to ask whether the performance bond was intended to allocate risk pending the final determination of the parties’ rights as, if this was the case, “the failure to resolve its construction until trial renders it effectively nugatory … and defeats its evident commercial purpose. In substance, it deprives the parties of the commercial bargain that they made. The consequence of the grant of an injunction restraining recourse to a performance bond pending trial in these circumstances is that it will in effect amount to final relief in respect of a principal benefit intended to be conveyed by the performance bond. It is well recognised that where an injunction in effect grants final relief that consequence must bear upon the fundamental question of whether the grant or refusal of the injunction carries with it the lower risk of injustice.”: at [29]. Further, at [31]:

Whilst it may be accepted that the usual principles governing interlocutory injunctions fell to be applied in the present case, it must also be accepted that they fell to be applied in respect of an unusual form of contract, if it be the case that the commercial purpose of the performance bond was to allocate risk pending final determination of the dispute. Such a contractual provision fundamentally alters the context in which the court must exercise its discretion by changing the complexion of the status quo and raising the prospect of substantial injustice if the purpose of the provision is defeated. That is, the status quo in such circumstances becomes what the parties have agreed as to which of them should bear the financial risk pending final determination, not the continuation of where that risk would naturally fall in the absence of a performance bond to call upon.

  1. Osborn and Ferguson JJA considered that, if the commercial purpose of a contractual provision is defeated, this must bear squarely on the ultimate risk of injustice inherent in the grant of an injunction, where the Court should take the course which appears to carry the lower risk of injustice if it should turn out to have been wrong to grant the injunction: at [34]. As such, whether the clause was intended to effect risk allocation pending resolution of a dispute necessarily bears on whether it is just to grant an adjournment; “The interlocutory relief sought had the capacity to amount to final relief in the sense of completely defeating the commercial purpose of risk allocation prior to the final determination of the matter”: at [35]. Further, “If the evident commercial purpose of the provision was to be given effect, the judge was bound to construe it at least on a provisional basis. If he [or she] did not, then the risk allocation purpose of the clause was potentially defeated”: at [38]. Without construing the contract, the question of whether there was a serious question to be tried on the facts as to whether the beneficiary was entitled to seek recourse to the bank guarantee could not be determined: at [42]. Their Honours concluded, at [43]:

it is ordinarily appropriate to resolve construction issues which are capable of resolution at the interlocutory stage and which bear squarely on the justice of preventing reliance upon a performance bond pending trial.

  1. Similar views were expressed by Kaye JA: at [111], [122]-[128]. Importantly, his Honour observed that it may not be appropriate for a judge to construe the contract if, in the particular circumstances of the case, it was not practicable or appropriate to do so: at [111]. In that case, it was not suggested that the construction of the clause required evidence as to the factual matrix in which the contract was concluded, where construction of the clause was a discreet question which did not involve consideration of detailed or complex material and where resolution of a question was not urgent as the parties’ rights were protected by an interim injunction and thus the judge did have some time to consider the issues raised by the parties: at [120]. (More recently, in Siemens Gamesa, the Victorian Court of Appeal observed that Sugar pointed towards the desirability of finally determining the question of construction, but noted that there was no absolute rule and the Court may proceed otherwise if it does not have the benefit of the evidence necessary for that purpose: at [94]. In that case, it was necessary for the primary judge to have regard to the content of two disputed conversations; it was plain that the matter could not proceed to a final determination without testing that evidence, which would occur at trial: at [103].)

  2. The same approach was taken in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112. Le Miere J at first instance rejected a submission that he should only construe the contract on a prima facie basis as the proper construction was the subject of a dispute determined by the arbitrator. Rather, “The proceeding commenced by CPB requires the Court to determine on a final basis the very question which CPB says the Court should not resolve on a final basis.” at [65]. Further, at [65]:

The parties have agreed by Article [58(n)] that the dispute resolution process in Article [58] does not constrain a party from seeking urgent relief from a court. That invokes the ordinary procedures and practices of the court. Those practices include that ordinarily on an application for an interlocutory injunction to restrain recourse to security provided under a contract, the court should determine a controversial issue of law, if the determination of that issue is a necessary step to a conclusion whether an applicant is entitled to the injunction, unless, in the particular circumstances of the case, it is not practicable or appropriate to do so. The circumstances of this case do not render it inappropriate to determine the construction of Article 35.3(a) on the final basis. CPB has invoked the jurisdiction of the court to restrain JKC calling on the Bonds. JKC is entitled to call on the Bonds unless, amongst other things, CPB’s construction of Article 35.3(a) is correct. It is inappropriate for the court to restrain JKC from calling on the Bonds without determining the proper construction of Article 35.3(a) when it is practicable to do so.

It was not suggested on appeal that Le Miere J should not have taken this approach. Rather, the appeal concerned whether his Honour’s construction of the clause was wrong.

  1. Kawasaki was handed down three months after the judgment of the Western Australian Court of Appeal in CPB. The case also concerned whether a party should be injuncted from calling on a performance bond. The contract contained an arbitration clause, as follows:

A Party must not start court proceedings (except proceedings seeking interlocutory relief) in respect of a dispute arising under or in connection with this agreement unless it has complied with this clause …

  1. At the request of the parties, Stevenson J had considered the question at first instance on a “serious question to be tried” basis rather than a final or “as if final” basis: at [30] (see Laing O’Rourke Australia Construction Pty Ltd v Kawasaki Heavy Industries Ltd [2017] NSWSC 541). On appeal, the Court (Meagher, Payne and White JJA) distinguished Sugar on the basis that the parties in Kawasaki had agreed to submit their dispute to international arbitration and, as such, “This plainly is not a case where a declaration can be made. Such a declaration of rights would be inconsistent with [the arbitration] clause … which entrusts an arbitral tribunal with the determination of all disputes”: at [96].

  2. Here, Daewoo submitted that, following Kawasaki, the Court should refrain from intervening in the dispute by construing the contract. INPEX submitted that Kawasaki ought to be distinguished as the arbitration clause in that case prevented the parties from starting court proceedings “except proceedings seeking interlocutory relief”. Here, Article 58(n) permitted the parties to seek “urgent relief (including injunction or conservatory measures)” that is, not confined to interlocutory relief. As such, the parties could seek final relief of an urgent nature and the Court is not deprived of jurisdiction to determine the construction of the Contract on a final basis: CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112 at [65] (per Le Miere J).

  3. I consider that the suggested difference between CPB Contractors v JKC Australia and Kawasaki is more apparent than real. On any application for interlocutory relief, it may be necessary for the Court to give careful consideration to the legal basis on which an applicant claims to be entitled to permanent relief. As Gleeson CJ observed in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; [2001] HCA 63 at [18]:

The extent to which it is necessary, or appropriate, to examine the legal merits of a plaintiff's claim for final relief, in determining whether to grant an interlocutory injunction, will depend upon the circumstances of the case. There is no inflexible rule. It may depend upon the nature of the dispute.

  1. As Lord Mustill observed in Channel Tunnel at 367-368:

There is always a tension when the court is asked to order, by way of interim relief in support of an arbitration, a remedy of the same kind as will ultimately be sought from the arbitrators: between, on the one hand, the need for the court to make a tentative assessment of the merits in order to decide whether the plaintiff's claim is strong enough to merit protection, and on the other the duty of the court to respect the choice of tribunal which both parties have made, and not to take out of the hands of the arbitrators (or other decision-makers) a power of decision which the parties have entrusted to them alone.

  1. A prima facie case is not ‘one size fits all’. On an application to injunct a call on a bank guarantee, the plaintiff must demonstrate a strong or serious prima facie case. In order for the Court to be satisfied that an interlocutory injunction should be granted, it may be necessary for the Court to construe the contractual provisions. To do so is consistent with Article 17J of the Model Law, as it may be necessary so that the Court can exercise its power to order interim measures “in accordance with its own procedures”. This should not be taken as binding on the arbitral tribunal but simply what the Court needs to do in order to satisfy itself that it should preserve the status quo until the arbitral tribunal can finally determine the matter.

PRIMA FACIE CASE

  1. What then is Daewoo’s prima facie case that INPEX is not entitled to call on the bank guarantee but, rather, to deliver it up? Daewoo advanced three contentions.

  2. First, Daewoo contends that the initial Warranty Period has not been extended by reason of any “rework” – or at least there is a serious question to be tried in this regard – such that the initial Warranty Period ended on 30 June 2021 and, as this period was not extended, so too did the Warranty Period. As to the meaning of “rework”, Daewoo pointed to the use of the word in Article 20 and also in Article 33.2(a)(iv), which provides that the Contract Price includes customs duties and the like relating to the importation and exportation or re-exportation of:

material, equipment, consumables, spare parts, Construction Equipment, and in general anything necessary to effect rework, repairs or replacements under warranties and guarantees or due to any act, omission or default of Contractor and any Subcontractors, during the Warranty Period.

  1. Daewoo submitted that the use of the disjunctive “or” indicated that “rework” was different to “repairs or replacements under warranties”, although it was clear from Article 20.3(a)(ii) that “rework” may include any necessary “repair or replacement”. As such, “rework” meant “rectification” of defects or deficiencies, or “make good of damage” but not the mere supply of replacement materials absent accompanying “rectification” or “make good” works. Daewoo had an arguable case that no “rework” had occurred. Further, the initial Warranty Period was not extended unless and until INPEX accepted any rework: Article 20.4(b). Daewoo submitted that it had a prima facie case that any rework had not been accepted by INPEX. Absent any extensions to the initial Warranty Period under Article 20.4(b) or Article 20.4(c), the initial Warranty Period was also “the last Warranty Period” and expired on 30 June 2021.

  2. Second, INPEX was said to be in breach of an implied negative covenant preventing it from calling upon the Bank Guarantee during any period in which it is obliged to “release” the Bank Guarantee under sub-Article 35.1(f). Daewoo submitted that the implication of such a term satisfied the requirements in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283. It was reasonable and equitable to require that, once the time to hold the bank guarantee has expired, it cannot be drawn down. The covenant was necessary to give business efficacy to the contract where the required duration of the bank guarantee exceeded the period for which INPEX was permitted to retain it. This interpretation was said to be consistent with the general principle that the “law implies a negative covenant not to hinder or prevent the fulfillment of the purpose of the express promises in the contract”: Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318; [2010] WASCA 222 at [78] (per Pullin, Newness and Murphy JJA), citing Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45 (per Gleeson CJ, Gummow, Kirby and Hayne JJ) at [36]; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607–608 (per Mason J). Further, such a covenant “goes without saying” and can be clearly expressed. Nor did such a covenant contradict the express terms of the contract (albeit I note that this submission did not refer to Article 35.3(b)). As such, Daewoo contended that it had a prima facie entitlement to an order for specific performance: Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd (No 3) [2018] QSC 60 at [128].

  3. Third, Daewoo contended that Article 35.3(b) was void to the extent that it purported to prevent Daewoo seeking an interlocutory injunction restraining a breach of contract, or in aide of a claim for specific performance. Article 35.3(b) was said to be against public policy, being an attempt to oust the jurisdiction of the Court to enforce the parties’ rights which may arise under the contract: Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540 at 548-549 (per Drummond J); Scott v Avery (1956) 5 HLC 810 at 830 (per Baron Martin); Dobbs v National Bank of Australia Ltd (1935) 53 CLR 643 at 652-653 (per Rich, Dixon, Evatt and McTiernan JJ). Apart from statute, even arbitration agreements cannot deprive parties of the power to invoke the jurisdiction of the courts: TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533; [2013] HCA 5 at [76] (per Hayne, Crennan, Kiefel and Bell JJ). This principle applied equally whether a contract effected a partial ouster of jurisdiction being, here, except in relation to fraud: Brooks v Burns Philp Trustee Co Ltd (1968) 121 CLR 432 at 438 (per Kitto J), 441 (per Taylor J), 482 (per Owen J). The principle also extended to ousting the jurisdiction of the Court in respect of non-contractual rights, such as equitable rights: Bond v Larobi Pty Ltd (1992) 6 WAR 489 at 497 (per Owen J).

  4. INPEX submitted that the issue was whether there was a serious question to be tried as to whether INPEX is breaching the “risk allocation agreement” to which the parties had objectively agreed by, for example, making a fraudulent claim to call on the bank guarantee. Whether construed on a final basis or at the “serious question to be tried” level, INPEX submitted that the bank guarantee was clearly a risk allocation device and there was no arguable case to the contrary, given the construction of the same clause by the Western Australian Court of Appeal in CPB Contractors v JKC Australia at [74], [82]-[136]. When Article 35 was read together with the terms of the bank guarantee, it was not reasonably arguable that the contract included an implied negative covenant. The purpose of the bank guarantee was that INPEX could have recourse to it at any time and without notice to Daewoo; the suggested negative covenant would be contrary to the entire scheme of Article 35. The clear contractual intent was that INPEX could have recourse to the bank guarantee during any period of disputation (other than fraud) and Daewoo’s entitlement to relief in such a situation was damages; Article 35.3(b) was a clear manifestation of this contractual intent. The fact that the duration of the bank guarantee was longer than the warranty period was consistent with an objective intention that disputes about the return of the bank guarantee were at the risk of Daewoo and not at the risk of INPEX. The fact that the Duration of the bank guarantee was longer covered the very possibility of the parties disputing the return of the bank guarantee, without inhibiting INPEX’s rights. Objectively, the parties intended that INPEX would have a right to call on the bank guarantee as long as there was a legitimate dispute.

  5. In the alternative, INPEX submitted that the suggestion that “the last Warranty Period” expired on 30 June 2021 was not reasonably arguable. Article 20.4(b) did not extend the initial Warranty Period. Rather, the initial Warranty Period was extended under Article 20.4(a) “to allow rework”. Once rework was completed and accepted by INPEX, there was a new Warranty Period in respect of that rework. Where rework was required, the extensions for rework provided for in Articles 20.4(a) and (d) subsisted until such acceptance occurred. The contrary construction contended for by Daewoo was said to be nonsensical, which entitled Daewoo to compel the release of the bank guarantee under Article 35.1(f) before any rework had begun by simply refusing to do the rework. This construction would also mean that Daewoo was required to ensure that the bank guarantee was valid under clause 35.1(c) even though it had to be returned under Article 35.1(f). That could not have been the parties’ intention. Rather, where rework is required but has not been completed, then the initial Warranty Period has been extended and the Warranty Period for the rework has yet to commence. It was not reasonably arguable that all rework had been completed and accepted so long ago that the Warranty Period in respect of the rework had expired.

  6. INPEX submitted that the replacement of defective parts or equipment by Daewoo’s subcontractors was plainly “rework” and, where INPEX conducted rework because Daewoo was unable or unwilling to do so, Article 20.3(c) provided that this did not affect the requirement that such work be warranted by Daewoo under Article 20.4(b).

  7. Given Daewoo’s responsibility for Subcontractors and Vendors in respect of Contractor Items, INPEX submitted that any equipment or materials supplied by Daewoo in the course of its performance of the Contract constituted Contractor Items incorporated into the Plant, which must be procured, manufactured, fabricated, supplied and delivered by Daewoo pursuant to Article 14.5(a)(i). The warranty granted by Daewoo in Article 20.2(b) includes that the Plant will be “free from defects in materials”. Article 20.3(a)(i) required Daewoo to rectify defects or deficiencies in the Plant. Read with Article 20.2(b), this must include defects or deficiencies in materials incorporated into the Plant. It followed that the materials provided by Daewoo were subject to Daewoo’s warranties and are required to be replaced where defective in accordance with those warranties. The word “rework” was intended to pick up any rectification of warrantable items pursuant to Daewoo’s warranty obligations in Article 20.3. That this included replacement of materials was said to be expressly recognised in Article 20.4(b), which referred to INPEX’s “acceptance of replacements”.

  8. INPEX submitted that the objective evidence indicated that rework had been, and was still being, carried out. INPEX issued 39 warranty notices, most of which were disputed by Daewoo and will be the subject of the arbitration. Mr Opperman’s evidence made plain that there was no arguable basis on which Daewoo could assert that the last Warranty Period under Article 20.4 of the Contract has expired.

  9. Alternatively, if the Court found that there was a serious question to be tried, INPEX submitted that the injunction should be refused as a matter of discretion. Even if Daewoo’s case was reasonably arguable it is nevertheless very weak. Second, it would defeat the purpose of the commercial bargain underpinning the bank guarantee where INPEX had bargained for a security that it could draw on without condition and could not be restrained save where senior counsel signed an application alleging fraud. Whilst INPEX accepted that it was at least reasonably arguable whether Article 35.3(b) is an impermissible ouster of the Court’s jurisdiction and thus unenforceable, that does not mean it should be ignored: CPB Contractors v JKC Australia at [90]-[98]. The bank guarantee represented an allocation of commercial risk such that, in the event of a dispute, Daewoo would be out of pocket until the resolution of the dispute. “Courts considering applications to restrain reliance on performance bonds need to be vigilant”: Siemens Gamesa at [121].

Conclusion

  1. Each of the three contentions advanced by Daewoo are certainly arguable; the question is whether these arguments are sufficiently strong or serious such that the Court “in accordance with its own procedures” will continue the interlocutory injunction restraining INPEX from calling on a bank guarantee.

  2. Helpful in assessing the parties’ submissions, this contract has already been construed in CPB Contractors v JKC Australia, where the Court of Appeal considered another contract associated with the Ichthys project, being the contract between the head contractor and a subcontractor in respect of on-shore buildings. The Court considered that Article 35.3(a) – in identical terms to this case – on a proper construction, entitled the party (here, INPEX) to have recourse to the bank guarantee if at any time that party had a bona fide claim to immediate payment under the contract: at [82]. That is, the bank guarantee is a “risk allocation device”.

  3. INPEX accepted that there was a prima facie case that Article 35.3(b) was void and was right to do so. In CPB Contractors v JKC Australia, Article 35.3(b) did not have the opening phrase, “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”. Otherwise, the clause was the same. At first instance, Le Miere J concluded that the clause was void: at [56]. The Court of Appeal did not consider it necessary to consider the question on appeal: at [75].

  4. But nor did this conclusion remove Article 35.3(b) from the Court of Appeal’s consideration when considering the terms of the contract. In CPB Contractors v JKC Australia, the Court considered that contractual limits on seeking an injunction restraining a party’s recourse to the bank guarantee may shed light on the purpose of the right to recourse and confirmed that the object of Article 35 was to provide a risk allocation device as to who was to be out of pocket pending the resolution of any dispute: at [93]. Such a construction of Article 35.3 was supported by the terms of the contract and the form of the bank guarantee as a whole, even if Article 35.3(b) was unenforceable as an ouster of the jurisdiction of the Court. Article 35.3(b) ought not be ignored in the process of construction as it may demonstrate the intention of the parties: at [94]-[97].

  5. Further, even putting Article 35.3(b) to one side altogether, the Court was nonetheless satisfied, having regard to the text, context and object, to construe Article 35.3(a) in the same manner: at [98]. The word ‘recourse’ in Article 35.3(a) involved the notion of appropriating the proceeds of conversion of the guarantee into cash, reinforced by the use of the word ‘recover’: at [99]. The right to have recourse to the bank guarantee was exercisable ‘at any time’ and was not expressed to be conditional upon an admission of liability or an arbitral determination, nor was there a requirement for notice to be given to (in this case) Daewoo before exercising this right: at [100]. As to the requirement for the amounts to be ‘payable … on demand’ the Court concluded at [104]:

In our view, the words 'on demand' do not qualify or describe the 'amounts that are payable' in [Article] 35.3(a). Rather, the words 'on demand' in [Article] 35.3(a) are to be read with the words 'in order to recover'. They identify the object or purpose of [Article] 35.3(a). The purpose of having recourse to the bank guarantee is to recover 'on demand' amounts that are 'payable'. The 'demand' is made to the bank, without notice to the subcontractor ([Article] 35.1(a)(iii)). The evident purpose is to enable the contractor to recover amounts 'payable' by the subcontractor, by merely making demand (emphasised by the words 'first demand') on the bank, without notice to the subcontractor. The provision appears, prima facie, designed not merely to protect against the risk of insolvency of the subcontractor, but to provide immediate recovery by the contractor without any delay, including, it may be inferred, delays associated with the resolution of disputes.

  1. Further, the Court considered that the terms of the bank guarantee, in particular, the Duration, supported a construction of the bank guarantee as a risk allocation device. At [106]:

… If the contractor is not permitted to have recourse under [Article] 35.3 to the Bank Guarantees unless an amount is, if disputed, determined by an arbitrator to be payable, the contractual stipulation concerning the duration of the Bank Guarantees means there would be a real risk that the relevant Bank Guarantee would expire before the question of whether an amount was payable had been determined by the completion of the arbitration process. …

  1. As here, the bank guarantee was required to remain valid until 30 days after the expiry of the last Warranty Period. Article 20.4(e) specified the maximum duration of the Warranty Period, which was unaffected by the existence of an unresolved dispute. As such, disputes arising in relation to warranties or other disputes arising during the Warranty Period may not be resolved by the maximum Duration of the Warranty Period: at [110]. The fact that the bank guarantee was liable to expire prior to the determination of disputes was consistent with the purpose of Article 35.3 being for (in this case) INPEX to be in the money, to the extent of the bank guarantee, pending resolution of any dispute: at [111]-[112]. The difficulty with the alternate construction was said to be illustrated by the circumstances of the case where the bank guarantee had been twice extended until the conclusion of the appeal and (as here) was due to expire while the disputes had not been the subject of any completed arbitration. While these events “do not influence construction, they are illustrative of the points of construction to which we have just drawn attention”: at [113].

  2. I note in passing that “a strong pointer” that the parties intend that the ability to call on a bank guarantee is a risk allocation device is where the bank guarantee has a fixed temporal limit: Bateman Project v Resolute Ltd at [64] per Owen J. As his Honour there explained, “It is unlikely that the parties would have contemplated that the parties could, by raising disputes, cause the benefit of the Guarantee to be lost to one of them simply by effluxion of time”: at [63]. Likewise, in Bachmann v BHP Power, where a letter of credit had been twice extended as a result of the pendency of litigation and would soon expire, Brooking JA observed at [55]:

It is manifest that there is no prospect that an arbitrator will make an award resolving the disputes until much more time has elapsed. Letters of credit invariably stipulate an expiry date … no bank would have issued one without an expiry date. On the view of cl 5.5 put forward by the supplier, the purchaser must accept from the outset that its security will almost certainly implode long before recourse becomes permissible, so that it loses not only the benefit of cash in hand while the dispute drags on but also the entire benefit of the letter of credit as a security. Counsel for the supplier accepts that if his argument is accepted the security has now become worthless.

  1. The Court of Appeal’s construction of Article 35.3 in CPB Contractors v JKC Australia was supported by the pro forma bank guarantee, confirming that the word ‘payable’ in Article 35.3(a) did not signify only an admitted sum or a sum objectively or authoritatively established by arbitral or curial determination; the form of bank guarantee provided that the bank’s obligation to make payment arose on receipt of demand without proof of any breach and notwithstanding any contest or dispute and nor was the bank permitted to notify, in this case, Daewoo prior to satisfaction of the demand: at [114]-[115]. Whilst the form of the bank guarantee did not control the question of construction of Article 35.3(b), its terms nonetheless tended to confirm that the parties to the contract contemplated that recourse should be effectuated in favour of (in this case) INPEX irrespective of the existence of prospects of an underlying dispute: at [116].

  2. If an arbitrator ultimately determined that (in this case) Daewoo was not liable in respect of an amount for which INPEX had recourse under the bank guarantee, then the arbitrator would have power to order repayment of that amount, or its crediting against any other liability of Daewoo: at [132]. The alternate construction – that an amount was only payable under the bank guarantee if an arbitrator or court had determined that Daewoo was obliged to pay the amount – was said to produce “an unacceptably high degree of uncertainty” which “does not sit easily with the self-help character and evident purpose of a provision enabling recourse to performance bonds”: at [134].

  3. I have no reason to depart from the Court of Appeal’s extensive consideration of the terms of the contract and the pro forma bank guarantee in CPB Contractors v JKC Australia. The bank guarantee is a “risk allocation device”, providing a ‘pay now, argue later’ regime. As such, even assuming that Daewoo’s contention regarding “rework” and the expiry of the Warranty Period, and with it, INPEX’s right to hold the bank guarantee and call upon it, is arguable or even strongly arguable, it is certainly hotly contested. The contractual bargain of the parties is that, while this contest is resolved before an arbitral tribunal, INPEX gets to hold the money.

  4. Daewoo’s contention that the contract has an implied term that INPEX will not call on the bank guarantee at this time encounters the difficulties articulated by the Court of Appeal in CPB Contractors v JKC Australia. More broadly, the Courts are reluctant to imply a term in the underlying contract which has the consequence of detracting from the nature of a bank guarantee. As Stephen J observed in Wood Hall at 457:

… none of the four guarantees is, by any process of implication or construction, to be deprived of the unqualified operation which its express words dictate. Not only does the clear, indeed emphatic, language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is “as good as cash” can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being “as good as cash” in the eyes of those to whom it is issued is essential to its function. …  

  1. As to the implication of a term in respect of risk allocation device, Callaway JA observed in Fletcher Construction at 827:

No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect.

  1. Daewoo may, of course, persuade the arbitral tribunal otherwise, and nothing I have said should be taken a final determination of the issue. But it is to say that I am not satisfied that Daewoo has a prima facie case of sufficient strength to justify continuing to injunct INPEX from calling on the bank guarantee. I would refuse Daewoo’s application on this basis alone.

BALANCE OF CONVENIENCE

  1. If I am wrong about this, then the second question is whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs, or is outweighed by, the injury which the defendant would suffer if an injunction was granted: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1; Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; [2006] HCA 46; Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238; [2011] FCAFC 156 at [65]-[66].

Daewoo’s financial troubles

  1. Daewoo is a very substantial company. However, it was common ground that Daewoo has experienced financial troubles in recent times, in particular, as a consequence of international sanctions imposed on Russia following its invasion of Ukraine.

  2. Daewoo’s audited accounts for the financial year ended 31 December 2021 report net assets of $11.5 billion comprising current assets of $7 billion (including cash and cash equivalents of $1.93 billion). Current assets were exceeded by current liabilities of $8.1 billion. Further, Daewoo’s profitability worsened, from a $94 million profit in 2020 to a loss of $1.85 billion in 2021. Further, the auditor’s report drew attention to the uncertainty relating to the impact of COVID-19 on productivity and the ability to satisfy customer’s orders, together with uncertainty relating to increased credit risk and the timing of payments due to international sanctions against Russia. As at 31 December 2021, Daewoo had 12 ship building contracts with Russian companies or banks; the impact of sanctions on Daewoo’s financial position was then considered by the auditor to be “highly uncertain”. Against this, Daewoo reported a substantial increase in new construction contracts, from $5.8 billion in 2020 to $15.5 billion in 2021.

  3. On 1 March 2022, the Korean government joined in international sanctions imposed on Russia. The sanctions prevented Russian entities from making the required payments under the shipbuilding contracts. The head of Daewoo’s international finance department, Mr Park, has informed Mr Pether that this has affected the strength of Daewoo’s financial position and cashflow in the short to medium term. Before sanctions were introduced, Daewoo had entered into contracts involving Russian domiciled entities for over US$1 billion. Daewoo is taking all steps to comply with the sanctions, including rescinding certain partially performed contracts in place with Russian shipping company Sovcomflot. In addition, according to Mr Park, the Ukraine-Russian conflict has caused supply chain issues which have had an adverse financial impact on Daewoo, seriously restricting the availability of materials and equipment, impacting Daewoo’s ability to meet key delivery dates under existing contracts and causing significant increases in costs to Daewoo on its current projects.

  4. For the first quarter of this calendar year, Daewoo made a net loss of $534 million. Daewoo’s current assets of $7 billion were exceeded by current liabilities of $8.4 billion. Cash and cash equivalents reduced from $1.93 billion to $1.275 billion.

  5. On 23 May 2022, Daewoo announced that it had cancelled a shipbuilding contract with a Russian ship owner – the price of the ship was some $358 million – with two other contracts likely to be cancelled as well. Daewoo was then estimated to have some US$2.5 billion in shipbuilding contracts with Russia. On 1 July 2022, Daewoo cancelled the second order.

  6. Daewoo has also been the subject of sustained industrial action. In June 2022, subcontractors went on strike demanding a 30% increase in pay and improved working conditions. Workers disrupted production by occupying a tanker under construction at the shipyard.

  7. Sang Gun Park has informed Mr Pether that, as at 30 June 2022, Daewoo’s net assets are $1.58 billion, with current assets of $8.18 billion (including cash and cash equivalents of $1.18 billion, down from the previous quarter) and current liabilities of $9.98 billion. In the six months to 30 June 2022, Daewoo sustained a net loss of $627 million.

  8. When announcing these results to the market, Daewoo’s chief executive officer, Park Doo-sun is reported as saying that Daewoo was entering an emergency period. Against this, Daewoo reported having received an increase in orders for liquified natural gas carriers. Daewoo’s chief executive officer is reported to have said, “The recent recovery in orders has helped to solve the problem of low production volume and to normalise business”. Daewoo booked orders worth US$5.47 billion in 2022, being nearly two thirds of its annual target. By August 2022, Daewoo had received orders worth US$6.43 billion.

Effect of a call on the bank guarantee

  1. The bank guarantee with which this application is concerned is the largest bank guarantee ever procured by Daewoo. Mr Pether is informed by the head of Daewoo’s international legal department, Young Suk Lim, that the financial and reputational consequences of a call on the bank guarantee are assessed to have very serious consequences for Daewoo. Whilst Daewoo holds cash, that cash is fully committed to meet Daewoo’s day-to-day expenditure. If a call is made on the bank guarantee, Daewoo will have to choose whether to use its cash reserves to pay The Export-Import Bank of Korea and INPEX or pay day-to-day expenditure.

  2. Mr Pether also understands from the head of Daewoo’s international finance team, Mr Park, that, in the event of a call, The Export-Import Bank of Korea will immediately require Daewoo to pay the amount of the guarantee to the bank or to INPEX. If Daewoo does not do so, the bank will pay the guaranteed amount to INPEX and charge Daewoo default interest, require the immediate payment of all its loans to Daewoo and exercise its security rights in respect of Daewoo’s assets. If Daewoo fails to effect payment of the bank guarantee amount to the bank within three months of payment by the bank to INPEX, then Mr Park understands that the bank will be required to register the call on a publicly available register maintained by Korea Credit Information Services. Mr Park understands that this register is monitored by Korean banks and financial institutions; the inclusion of Daewoo on the register could affect its ability to obtain further loans, performance bonds or securities for future projects and will also result in a downgrade of Daewoo’s credit rating. Mr Park believes that this will cause irreparable harm to Daewoo’s reputation and business.

  3. According to Mr Park, Daewoo’s failure to pay the amount guaranteed under the bank guarantee may also affect its contractual rights under other contracts, as ship building contracts generally contain provisions which give a right to terminate on events of default. Likewise, if Daewoo pays the bank in the event of a call by INPEX, Daewoo may not be able to meet its obligations for payment under other contracts, which may trigger default events under those contracts and lead to calls on other bank guarantees. Daewoo has yet to approach capital markets or financiers to raise additional capital to normalise operations if it has to pay the bank guarantee amount to INPEX or the bank.

  4. Joe Yong Seok, who was until recently the general manager of Daewoo’s energy plant business, has informed Mr Pether that he believes a call on the bank guarantee will quickly become known to Daewoo’s clients, potential clients and competitors in the ship building industry, damage Daewoo’s reputation and affect its ability to tender for new jobs and contracts. He believes that the damage to Daewoo’s reputation could last for multiple years, with the impact on Daewoo believed to be greater than the monetary value of the bank guarantee.

  5. In turn, Mr Opperman is informed by Gavin Kleinhnas, INPEX’s manager responsible for the contract, that INPEX is gravely concerned not to be prevented from calling on the bank guarantee as the value of the guarantee will soon ‘step down’. In addition, Daewoo appears to be experiencing solvency issues such that INPEX is concerned that Daewoo may be unable to obtain an extension of the guarantee or honour its proffered undertakings, including as to damages. Given Daewoo’s demobilisation of personnel, it may now be necessary for INPEX to incur the costs to complete the outstanding Work and address the outstanding warranty notices, where the parties have attempted to resolve these issues over an extended period.

Enforceability of judgment

  1. INPEX also queried the ease with which it could enforce the undertaking as to damages in Korea, where it is common ground that Daewoo has no assets in the jurisdiction. Daewoo instructed a Korean attorney and former judge of the Constitutional Court of Korea, Il Won Kang, to provide an expert report on the enforceability of judgments of this Court in Korea. The expert opined that a monetary judgment of this Court will be enforced to the extent that the judgment satisfies the requirements in Article 26(1) of the Civil Execution Act of Korea and Article 217(1) of the Civil Procedure Act of Korea. Primarily, to satisfy these requirements, a judgment must be final and conclusive.

  2. Given the shortness of time to address this matter, INPEX’s solicitor asked John S Park of Kim & Chang, (which, it will be recalled, is a firm retained by INPEX to act on its behalf in relation to the bank guarantee) for his views on the subject. Whilst the letter of instruction did not annex the expert’s code of conduct, the import of the code was extracted in the letter of instruction. Obviously, Mr Park cannot be considered impartial given his firm’s retainer by INPEX. Given the urgency of this application and the late service of expert evidence by Daewoo, I admitted Mr Park’s opinion into evidence (or, more precisely, a letter from Kim & Chang). In any event, Kim & Chang broadly agreed with Daewoo’s expert, observing that the enforceability of a judgment of this Court depends on the specific terms of the monetary judgment and the manner in which the judgment has been obtained. In particular, if Daewoo is ordered to pay damages or compensation, but the amount had not been quantified by the Court, then the judgment may not be enforceable.

Submissions

  1. Daewoo submitted that the balance of convenience favoured the grant of the injunction, where it undertook to extend and maintain the bank guarantee, together with the usual undertaking as to damages. INPEX’s position was said to be appropriately protected. If the injunction was not granted, it should be inferred that INPEX would call on the guarantee, with profound financial and reputational consequences to Daewoo: Austrak Pty Ltd v John Holland Pty Ltd [2006] QSC 103 at [31]-[34] (per Chesterman J). Damages would not be an adequate remedy if it is later found that INPEX was obliged to return the guarantee, as the subject matter of Daewoo’s claim for final relief, being “release” of the bank guarantee, would have been destroyed. The financial consequences of a call on the guarantee were not readily quantifiable. Further, the adequacy of the plaintiff’s undertaking as to damages is but one factor to be taken into account where other considerations include whether the applicant has done the best they can to provide appropriate undertakings even if the undertaking may ultimately prove inadequate: Guo v Xu [2021] NSWSC 460 at [212] (per Rees J). Daewoo has substantial net assets in South Korea against which an Australian money judgment could be enforced: the Superior Courts of the Republic of Korea are included in the Schedule to the Foreign Judgments Regulation 1992 (Cth) to the Foreign Judgments Act 1991 (Cth); see, for example, KR & C Co Ltd v Soon Ok Hwang [2021] NSWSC 551 at [77], Harrison ASJ.

  2. INPEX submitted that there were real doubts as to Daewoo’s ability to continue to extend the bank guarantee, or its undertaking as to damages, given its financial difficulties. It was unlikely that The Korea Export-Import Bank would have much appetite to extend the bank guarantee in the circumstances. If the bank guarantee cannot be extended until determination of the dispute by the arbitral tribunal, then INPEX will lose the security in a sum exceeding US$328 million and be left with the unsavoury prospect of enforcing a judgment against a foreign company with no assets in the jurisdiction and a questionable ability to pay the sum, which was clearly unsatisfactory.

  3. INPEX submitted that the suggestion of reputational damage should be put to one side where it was open to Daewoo to pay the amount of the bank guarantee now and recover it later by way of damages plus interest: Siemens Gamesa at [117]. The alleged reputational damage would only have significance if Daewoo was not able to meet its obligations to the bank under the bank guarantee, in which case it was said to be unlikely that the bank would agree to extend the bank guarantee and unlikely that Daewoo could meet a damages award against it. Damages are an adequate remedy and the need for an interim injunction is not made out: Siemens Gamesa at [121]; Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd [2020] NSWSC 178 at [79]-[86] (per Stevenson J).

Conclusion

  1. Whilst INPEX criticised the quality of Daewoo’s evidence as to the balance of convenience, it may be unsurprising on an urgent application that evidence may be in general terms and contain some assertion and speculation, sometimes without supporting documents: Siemens Gamesa at [108]. Daewoo’s evidence did permit me to form an overall view of the consequences to both parties in the event that the injunction was extended or not, and whether any resulting financial loss could be compensated by damages, with the possible exception of reputational damages.

  2. Given the international flavour of the underlying transaction, the absence of assets in the jurisdiction is a neutral factor. However, whilst INPEX would likely be able to enforce a judgment of this Court in respect of any compensation payable by Daewoo under its usual undertaking as to damages, the need to enforce that judgment in Korea will, likely, involve some delay which, on the evidence of the experts, was between six month and twelve months. The prospect that Daewoo’s financial troubles may have adverse consequences for INPEX’s ability to then enforce a judgment in Korea cannot be ignored.

  3. Should Daewoo succeed before the arbitral tribunal, then I consider that damages are an adequate remedy save for any reputational damages.  Whilst it is true that the bank guarantee may well have been called upon by then such that it cannot be returned, money can readily place Daewoo in the position it would have been if the bank guarantee had been returned.  There was limited evidence of INPEX’s financial wherewithal, save that it appears to have substance such that it could satisfy an arbitral award; Daewoo did not suggest otherwise.  It follows that damages are an adequate remedy. As to damages to Daewoo’s reputation if a call is made on the guarantee, Macfarlan JA observed in Lucas Stuart v Hemmes Hermitage, “Courts have recognised on a number of occasions that calls upon performance bonds may cause significant damage to a contractor’s reputation and financial standing that is not readily curable by an award of damages”: at [45]. Of course, it lies within the ability of Daewoo to pay the amount of the guarantee and thus avoid the bank guarantee being called upon: Siemens Gamesa at [117]. Presumably, Daewoo is not in a position to do so.

  4. Daewoo’s senior counsel submitted that the deterioration in the accounts for the first quarter of 2022 could be seen to be stabilising, given a slowdown in the loss of profit and a slowdown in the deterioration of the current cash and cash equivalents. One can only hope that Daewoo’s senior counsel is correct but the financial results for the second quarter of 2022 show that, at present, Daewoo is continuing to incur losses and reduce its cash reserves. The Court may feel more comfortable in considering that Daewoo’s position has stabilised if more than one quarter’s accounts showing a “less bad” position were available. It might also be more comforting if the quarterly reports for June 2022 showed a profit. As INPEX’s senior counsel submitted, an increase in orders does not necessarily mean an increase in profits.

  5. Whilst Daewoo’s senior counsel submitted that there were appropriate prospects to see that Daewoo could trade out of its current crisis, it follows that there are prospects that it will not. There is no evidence as to how long it is expected to take until the arbitral tribunal concludes its determination, the tribunal having only just been convened. The potential for problems to emerge with Daewoo obtaining further extensions of the bank guarantee are obvious. True it is that, as Daewoo’s senior counsel submitted, INPEX’s claims against Daewoo already exceed the amount of the bank guarantee and, if INPEX called on the bank guarantee then Daewoo’s prospects of trading through this crisis and being in a position to meet any arbitral award in excess of the bank guarantee are diminished. If the interlocutory injunction is extended, at least until the arbitral tribunal has an opportunity to consider the matter, then Daewoo’s chances of trading on and providing deeper pockets are enhanced. But either scenario is highly speculative and the evidence before the Court does not permit me to make an educated guess as to which scenario is realistic.

  6. When 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. But that does not detract from INPEX’s entitlement to be protected by the bank guarantee from Daewoo’s troubles in the event of a dispute between them as to Daewoo’s performance of the contract, including as to liquidated damages or warranty notices and “rework”. 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.

  7. The position is not unlike that in Tech-System Design & Contract, where the plaintiff “protested long and hard” that a call on a bank guarantee would place it in a very difficult financial position. Edmund Leow JC observed at [39]:

In my judgment the financial hardship alleged by the plaintiff could not be relevant. No doubt an obligor might be put to liquidity issues by a call on a bond, as the plaintiff in this case was claiming. That was why a court would enjoin calls made in bad faith or which were in any case unconscionable. But, as the Court of Appeal noted in BS Mount Sophia at [39], “it is a fact of commercial life that the tide of liquidity needs to wash both ways, and financial droughts can be equally detrimental to both the beneficiary and the obligor”. A beneficiary should not be prevented from calling on a bond simply because this resulted in hardship to the obligor.

  1. As Allanson J observed in Best Tech & Engineering Ltd v Samsung C&T Corp (No 3) [2015] WASC 459, “I accept that the plaintiff will be prejudiced by any call on the guarantees. But that is the effect of the agreement it entered”: at [37]. For the same reasons, I am not satisfied that the balance of convenience favours the extension of the interlocutory injunction.

  2. It has not been necessary on this application to determine INPEX’s contention that, by reason of the terms of Article 58(n), it is entitled to seek final relief in respect of the matters in its Cross-Summons. It may be that, in light of this judgment, INPEX does not wish to proceed further with the Cross Summons and the parties are content for both the Summons and Cross-Summons to be stayed pursuant to section 7(2) of the International Arbitration Act. Consequently, I will stand over whatever remains of the proceedings for directions.

ORDERS

  1. For these reasons, I make the following orders, directions and notations:

  1. Dismiss prayers 4 and 5 of the Summons, with costs.

  2. Discharge the interlocutory injunction ordered on 1 August 2022 and extended on 3 August 2022 and 18 August 2022, restraining the defendant from making a demand for payment on the Letter of Guarantee No. MO902-204-LG-0032 issued by The Korea Export-Import Bank dated 6 April 2012 and amended from time to time thereafter.

  3. List the matter for directions before the Technology & Construction List Judge on 16 September 2022.

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Amendments

30 August 2022 - Grammatical amendments to [4] and [132].

Decision last updated: 30 August 2022

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