England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand London WC2A 2LL
		7 November 2007

MR JUSTICE RAMSEY:

The Application

1. This is an application by the claimant, Permasteelisa Japan KK, against the first defendant, Bouyguesstroi ("Bouygues") for the continuation of an interim injunction I granted on an application made by the claimant without notice on 28 September 2007. The parties agreed further directions for the service of evidence and submissions and the injunctions have continued in force in the meantime.

Introduction

2. This claim concerns a project in Russia. Exxon Neftgas Ltd engaged Bouygues under an EPC contract for the construction of office facilities and buildings in Sakhalin, Russia. Bouygues essentially subcontracted the curtain wall works to the claimant. The curtain walling works were the subject of an arrangement contained in three documents, which were all executed on 19 February 2004. Those documents were:

(1) the Subcontract, which required the claimant to supply and deliver curtain wall material and equipment to the Sakhalin site;

(2) the Secondment Agreement, which required the claimant to provide supervision staff for the installation of the curtain walls; and

(3) the Side Letter Agreement, which made the claimant responsible for the supply, delivery, installation and commissioning of the curtain wall work

3. Under clause 18.6 of the Subcontract, the claimant was required to procure a performance bond. In due course, a performance bond was issued by the second defendant ("the Bank") on 13 June 2004. The performance bond ("the Bond") was in these terms:

"In consideration of the signature by Bouygues with Permasteelisa Japan KK (hereinafter referred to as the subcontractor) of the subcontract dated 19 February 2004 (hereinafter referred to as the Subcontract) for the curtain wall and associated works (hereinafter referred to as the subcontracted works) within the frame of the Exxon Neftgas Ltd permanent office facilities project in Sakhalin, Russian Federation, we, Banka Intesa SpA, acting through its Tokyo branch, hereby guarantee unconditionally and irrevocably undertake to pay to the contractor on its first demand, despite any objection of the subcontractor, such sum or sums as the contractor may claim to us, provided such sum or sums shall not in aggregate exceed the amount of this guarantee as defined hereunder. This guarantee is issued for an initial amount of US$ 463,666 (herein after referred to as the amount of this guarantee). The amount of this guarantee shall be adjusted at the request of the contractor in the event of any increase of the subcontract price so that the amount of this guarantee shall always be equal to 10 per cent of the subcontract price. The amount of this guarantee shall, however, be reduced to an amount equal to 5 per cent of the subcontract price on receipt by us of a turnover notice of the subcontract works issued and signed by the contractor for the whole subcontracted works. This guarantee shall be construed and governed in accordance with the laws of the United Kingdom."

4. The Bond was subsequently extended on 2 June 2006 so its expiry date was one year after receipt of the turnover notice of the subcontract works issued and signed by the contractor for the whole subcontract works or 31 December 2007.
5. On 3 September 2007 Bouygues wrote to the Bank in the following terms:

"According to the provisions of the performance guarantee, we hereby request you to pay us immediately the full amount guaranteed in such performance guarantee, i.e. US$ 464,666, on the following bank account opened by Bouygues at ZAO Calyon Rusbank, Moscow branch, Bolchoi Zlatooustinsky Per 1/6, Moscow, Russian Federation."

6. The beneficiary was said to be Bouygues at that bank with an intermediary bank in New York.
7. On 28 September 2007, the claimant commenced these proceedings seeking an injunction under sections 44(2), 44(3) and 44(5) of the Arbitration Act 1996 against Bouygues and the Bank. It sought to restrain the Bank from paying. It also sought to restrain Bouygues from making any further call under the Bond and obliging it to pay any sums received under the Bond into a bank account in London. I granted an injunction against Bouygues but not against the Bank until the return date.
8. The Subcontract contains an arbitration clause (clause 26), which provides that all disputes arising in connection with the Subcontract shall be settled before three arbitrators pursuant to the UNCITRAL Arbitration Rules. The London Court of International Arbitration shall administer the arbitration and shall act as the appointing authority. The place of arbitration is London and the language is English. It also provides that the Subcontract shall be governed by the laws of the State of New York, United States of America.
9. On 1 October 2007, the claimant gave notice of arbitration to Bouygues under Article 3 of the UNCITRAL Rules. The relief and remedies claimed include at paragraph 29 of the notice the following:

"An interim measures award under Article 26 of the UNCITRAL Rules (a) restraining Bouygues from making any further demand to the Bank pursuant to the performance guarantee dated 13 June 2004 and issued by the second respondent in favour of the first respondent …; (b) directing Bouygues to transfer immediately any sums received from the Bank pursuant to the Performance Guarantee into a bank account in London in the joint names of Bouygues and the claimant and held subject to the joint order of Bouygues and the claimant and/or the direction of the arbitral tribunal; (c) directing Bouygues to issue immediately the turnover notice of the subcontract works in accordance with clause 15.2.1 of the Subcontract and to serve it immediately on Banka Intesa, Tokyo branch."

The Issues

10. I now turn to consider the issues. At the hearing to continue the interim injunction, the claimant did not seek any injunction against the Bank. It limited itself to seeking a continuation of the injunction granted on 28 September 2007 until further order or an interim award of the arbitral tribunal.
11. The grounds relied on by the claimant were in summary these: (1) the call was not based upon a default under the Subcontract, which, it submits, is a condition precedent for such a call; (2) the contractual requirements under clause 20.2.1, which apply in a case of a default leading to a call, have not been complied with; (3) the turnover notice of the subcontract works was due and it was withheld by Bouygues and therefore Bouygues cannot make a call on the Bond for the full amount as the sum should be reduced to 5 per cent of the contract sum.
12. The claimant therefore submits it has a seriously arguable case that Bouygues was not entitled to call the Bond on the principles in American Cyanamid v Ethicon [1975] AC 395. It relies on the following: that the balance of convenience is in its favour because Bouygues is a Russian company, albeit a subsidiary of a large French company, Bouygues Bâtiment International (BBI) and that damages would not be an adequate remedy. If there were any doubt, the injunction should be granted to preserve the status quo. Therefore, the claimant submits it is entitled to an injunction under section 44(3) of the Arbitration Act on the grounds that it seeks to preserve assets until an arbitral tribunal has been appointed under the Subcontract and is able to hear an application for interim measures under Article 26 of the UNCITRAL Rules.
13. Bouygues, on the other hand, points out that this is a case where it has a Performance Bond. In such circumstances, it submits the court should not grant an injunction against either the Bank or Bouygues to prevent a call on the Bond unless the court is satisfied that a seriously arguable case of fraud has been established. Bouygues submits there is no such case of fraud.
14. In relation to the proceeds of the call of the Bond, Bouygues submits unless the court is satisfied the grounds exist for the grant of a freezing injunction, the court should not grant an injunction against the proceeds of the Bond. In this case, in particular, Bouygues submits the claimant does not have a good arguable case and has not established by solid evidence that there is a risk of dissipation by Bouygues. Bouygues contends it was entitled to call the Bond and any argument as to the underlying merit should be resolved by arbitration. It also points out the evidence shows Bouygues is a company with substantial trading activities in Russia and is a subsidiary of the French company, BBI, which is one of the largest construction companies in the world.

The Facts

15. I shall first summarise the facts as disclosed in the evidence currently before me. I am conscious in doing so that the merits of the underlying disputes will ultimately be the subject of determination in an arbitration and therefore I do not elaborate on the reasons.
16. There were delays during the course of the project and the claimant and Bouygues entered into supplemental agreements to deal with those delays. The first supplemental agreement was entered into in November 2005 and the second in May 2006. The curtain wall installation commenced in about January 2006 and there were further delays during the course of the installation work. By early 2007, the claimant claimed it was owed substantial sums by Bouygues. In turn, Bouygues claimed the claimant owed it sums for various costs which Bouygues says it had incurred and for which it contended the claimant is liable.
17. After exchanges of correspondence and meetings, matters came to a head when Bouygues wrote to the claimant on 16 August 2007 enclosing a statement of account which dealt separately with sums due under the Subcontract and the Secondment Agreement. The conclusion of that account was that the claimant owed Bouygues US$ 840,040.20 under the Subcontract and Bouygues owed the claimant US$ 148,950.30 under the Secondment Agreement. Bouygues therefore claimed the balance of US$ 694,089.90 from the claimant. Bouygues concluded that letter by saying:

"We ask you to promptly proceed with payment of your debt and no later than within 15 days [about 31 August 2007]."

18. The claimant responded to that letter on 21 August 2007 by making a counterproposal that US$ 826,749.47 was due from Bouygues under the Subcontract and that US$ 309,369.17 was due from Bouygues under the Secondment Agreement, making a total of US$ 1, 136,118.64, due to the claimant from Bouygues.
19. On 24 August 2007, Bouygues wrote to the claimant in response to the claimant's latest letter. Bouygues finished the letter by saying:

"We reiterate our request for you to repay an amount corresponding to the current debt [of the claimant] in order to balance the accounts and to restore such confidence."

20. On 3 September 2007, Bouygues made a demand to the Bank for payment of the full amount of the Performance Guarantee in the sum of US$ 463,666.
21. On 6 September 2007, Bouygues wrote to the claimant and stated:

"Further to our formal request for payment under our letter dated 16 August 2007 which gave you a 15-day period to effect payment of the monies owed by you under your present account, we hereby formally not only record your failure to effect such payment but your rejection of such payment (your fax dated 21 August 2007). With reference to your Subcontract and more particularly to Article 18.4.2 and 18.4.3 of the latter, to the Side Letter Agreement dated 19 February 2004 and to your failure to comply with our demand to make good the current financial situation, please be informed that we have asked for payment of your Performance Guarantee issued by Banka Intesa, Tokyo branch, dated 13 June 2004 to its full amount of US$ 463,666."

Was there a default?

22. I now consider the contentions put forward by the claimant, first, the position that there was not a default. In the letters of 16 August 2007 and 6 September 2007, Bouygues referred to its entitlement under clause 18.4.3 of the Subcontract. That provision provides:

"The contractor shall have the right to set off any loss, damage, liability or claim which the contractor may have against the subcontractor against any payment."

23. The claimant submits that this provision only entitles Bouygues to set off from sums which are due and does not entitle Bouygues to claim payment under clause 18 of the Subcontract until the final accounts stage in clause 18.5 has been reached. That stage has not yet arisen. The claimant therefore submits Bouygues is not entitled to be paid the sums it claims.
24. Bouygues relies upon the witness statement of Mr Doré and Exhibit FD1. It submits the sums claimed are due from the claimant because of delay by the claimant in carrying out the works. Such sums include additional labour hours supplied by Bouygues, penalty for non-completion and provision of cranage and similar items. Bouygues contends such sums are due and payable by the claimant and do not have to be dealt with in accordance with the payment provisions of the Subcontract, although they can be set off against sums due under clause 18.
25. Further arguments were raised by the claimant as to whether, under the contractual arrangements between the parties, the claims made by Bouygues arise under the Secondment Agreement and not under the Subcontract. The effect of that argument is that there would then be no default under the Subcontract which would permit Bouygues to seek to make a claim under the Bond which was issued under the Subcontract.
26. In response, Bouygues submits that on a true construction of the three agreements, they are to be construed as a single agreement and that Bouygues is entitled to deal with its claim as it has done and make a claim under the Bond. Bouygues relies on various matters by way of factual matrix.
27. On this application, my task is to assess the comparative strengths of the arguments. I consider the submissions of both parties as to whether there was a default are arguable and raise a serious issue to be tried. I say no more than that.

Clause 20.2.1

28. The claimant contends that, in any event, Bouygues has not complied with the provisions of clause 20.2.1, which provides as follows:

"In case the subcontractor fails to comply with one of its contractual duties and/or obligations and if such default exceeds a period of ten (10) days after the contractor gives the subcontractor formal written notice of remedying such a default, or in case the subcontractor would go bankrupt or go into liquidation the subcontractor shall be entitled to the following measures … (iv) call all or part of bank guarantees."

29. The claimant submits this requires three preconditions to be met: (1) the claimant must fail to comply with one of its contractual duties; (2) formal written notice of remedying such a default must be given; and (3) such default must exceed a period of ten days after that formal written notice. The claimant submits Bouygues' claim for payment and the claimant's failure to pay do not amount to a failure to comply with one of its contractual duties or obligations.
30. Further, it submits the first demand made by Bouygues was contained in Bouygues' letter of 16 August 2007 requiring payment by 31 August 2007. It therefore contends that, even if it gave rise to a contractual obligation, there would be no default before 31 August 2007. In such circumstances, the default would then have to continue for ten days before a call on the Bond could be made, which it did not.
31. The claimant also submits that even if the letter of 24 August 2007 could be construed as the formal written notice, the ten days would not have expired before the call. The claimant therefore submits the call was not made in compliance with clause 20.2.1.
32. Bouygues responds by contending that the notice of default was given by letter of 16 August and 24 August 2007 and that both letters gave the claimant ten days or more to remedy the default. Bouygues contends the sums were already due prior to the letter of 16 August 2007.
33. On the evidence and arguments put before me, I consider it is seriously arguable that clause 20.2.1 of the Subcontract was not complied with in that there was no failure to comply with one of the contractual duties or obligations and that any default by the claimant did not exceed ten days after formal written notice to remedy the default.
34. The claimant contends Bouygues has failed to issue a turnover notice of the subcontract works, which Bouygues is obliged to deliver to the claimant under clause 15.2.1: "As soon as possible after delivery by [Exxon] of the final turnover notice of the facility under the main contract."
35. The claimant relies on a letter dated 28 August 2007 from Bouygues to Exxon in which Bouygues requested the issue of the final turnover notice of the facility, referring to the fact that turnover notices for all parts of the facility had already been issued. The claimant submits there is no requirement under the terms of the main contract (as it sees them) for Exxon to issue a final turnover notice of the facility because, once there have been turnover notices for all parts of the facility, the last of these notices is the final turnover notice. The claimant therefore submits that as the facility was completed and officially opened by Exxon on 28 August 2007, it is entitled to a turnover notice of the subcontract works.
36. Bouygues disputes that contention and refers to the fact that it sought but did not receive a final turnover notice and that by a letter dated 7 September 2007 Exxon says it will respond with the turnover notice as soon as the resolution of existing deficiencies allows.
37. On the evidence and submissions put before me, I consider the contention of both parties are arguable and that there is a serious issue to be tried in this respect.

The Overall Position

38. Having considered the contentions put forward by the parties, I consider that on the second ground, compliance with clause 20.2.1, the claimant has a seriously arguable case that Bouygues has failed to comply with the contractual procedure under clause 20 in calling the Bond. Otherwise, the contentions raise a serious issue to be tried in the arbitration.
39. However, on the evidence before me, I do not consider there is any arguable case that Bouygues' conduct in calling the Bond amounts to conduct sufficient to draw the inference of fraud as defined in English law so as to justify the intervention of the court on that ground.
40. On that basis, I now consider whether those findings justify the court intervening by granting an interim injunction. The application is for an injunction under Section 44(3) of the Arbitration Act 1996. That section provides by sections 44(1) and 44(2)(e) that the court has the same powers to grant interim injunctions for the purpose of and in relation to arbitral proceedings as it has for the purpose of and in relation to legal proceedings. However, the exercise of those powers is then limited by the provisions of section 44(3), as follows:

"If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets."

41. Section 44(5) and 44(6) show the interrelationship between the powers of the arbitral tribunal and the powers of the court, as follows:

"(5) In any case the court shall act only if or to the extent that the arbitral tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively. (6) If the court so orders, an order made by it under this section shall cease to have effect in whole or in part on the order of the tribunal or of any such arbitral or other institution or person having power to act in relation to the subject-matter of the order."

42. In this case, the process of appointment of an arbitral tribunal has commenced with the claimant nominating an arbitrator. But the arbitral tribunal is not yet fully appointed, as required by Article 7 of the UNCITRAL Rules. In such circumstances, I consider section 44(5) applies. The reference to the arbitral tribunal having no power or being unable to act effectively must apply to a case where as yet there is no arbitral tribunal. Indeed, section 44(3) contemplates an application by a proposed party to arbitral proceedings. The power was so construed in Cetelem SA v Roust Holdings Ltd [2005] EWCA Civ 618 at paragraph 71. The reference to a court order ceasing on the order of the tribunal indicates that an arbitral tribunal may at some stage have power. In the present case, as I have said, the injunction is sought pending an application to the arbitral tribunal under Article 26 of the UNCITRAL Rules.
43. Cases where there is an application for an injunction in relation to a call on a Performance Guarantee or Bond do, I consider, come within clause 44(3). First, the case is one of urgency. Such matters have to be dealt with quickly if any order is to be effective. Second, orders in relation to Performance Guarantees generally relate to the preservation of assets in the form of the sum due under the guarantee. The phrase "asset" was given a wide meaning by Clarke LJ in Cetelem, where he held it included a right, conditional or not, to purchase shares. In this case whether the asset is limited to the sum due under the Performance Guarantee or includes a contractual right arising from the Performance Guarantees or a contractual right to apply to the arbitral tribunal for interim measures, I consider in all those cases the order would relate to the preservation of assets.
44. What approach should the court take to the granting of injunctions under section 44(3)? It must be remembered that the court is granting an injunction for the purposes of and in relation to arbitration proceedings. There a number of different situations in which the court's powers under section 44(3) may apply. First, it may be asked to grant an injunction against a third party where the arbitral tribunal would have no power. Second, it might be called upon to grant an injunction against a party where the arbitral tribunal cannot act effectively, such as the grant of a search and seizure order. Third, as in this case, it may be asked to intervene at a stage before the arbitral tribunal can act to use the powers it would later have.
45. In all such cases, as section 44(1) makes clear, the court is exercising the powers it would have in relation to legal proceedings. Where the court is being asked to act to grant a freezing injunction or a search and seizure order, evidently it will act in accordance with the general principles applied by the courts in relation to such remedies. In the present case, the court is being asked to grant an injunction in relation to a call on a Bond but in doing so is being asked to preserve the asset so that, when the arbitral tribunal is constituted, an application could be made to that tribunal for an interim measure in relation to the call on the Bond.
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.
47. In addition, if the court were to approach the question of whether to grant an injunction by taking into account the prospects of success in obtaining relief from the arbitral tribunal, the court would face difficult questions on the jurisdiction of the arbitral tribunal to grant relief and on foreign law which I consider should be avoided at an interim stage. I also consider that there would be difficulties if the court were to take account of the approach of the arbitral tribunal.
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.
49. With those observations in mind, I now turn to consider the appropriate approach in this case. The general principles which apply to the grant of injunctions in relation to performance guarantees may be summarised as follows: (1) A court will only grant an injunction against the Bank to prevent the Bank from paying on a performance guarantee if it is seriously arguable that the beneficiary could not honestly have believed in the validity of the call on the performance guarantee. See, for example, United Trading Corporation v Allied Arab Bank [1985] 2 Lloyd's 554. (2) A court will apply the same principles when considering whether to grant an injunction against a beneficiary seeking to make a call on a performance guarantee. See, for example, Intraco Ltd v Notis Shipping Corporation ("The "Bhoja Trader") [1981] 2 Lloyd's 256 at paragraph 257. (3) The court will, in an appropriate case, impose a freezing injunction upon the fruits of a performance guarantee. See The Bhoja Trader at paragraph 258.
50. The power of the court to grant an injunction where there is an express contractual limitation in the underlying contract which affects the ability to call the performance guarantee was considered by the Court of Appeal in Sirius International Insurance Co v FAI General Insurance Ltd and Ors [2003] 1 WLR 2214, which was subsequently reversed on appeal: see Sirius International Insurance Co v FAI General Insurance Ltd [2004] 1 WLR 3251. The Court of Appeal held that where the conditions of the underlying agreement had not been fulfilled, the claimant was not entitled to draw down and in appropriate cases the court would have granted an injunction restraining the drawdown on the letter of credit: see paragraphs 26 to 30). The House of Lords decided the appeal on the meaning of the contractual provisions and said it had not been necessary to examine issues regarding the so-called autonomy principle applicable to letters of credit issued by banks.
51. In my judgment, whilst, as the Court of Appeal indicated in Sirius, a court might grant an injunction where there is an express term restricting the circumstances in which a party can draw on a letter of credit and where it is 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: see paragraph 31.
52. If those principles are applied here, then I consider that the court should not intervene in the manner the claimant seeks. First, in relation to an order preventing Bouygues calling the Bond, no case of fraud has been made out and there is only a seriously arguable case that there has been a breach of the contractual requirements under clause 20.2.1, which form preconditions to the call of the Bond.
53. Second, this is not a case where a freezing injunction should be granted against the funds. Whilst the claimant has established it has a seriously arguable claim, I am not satisfied that on the evidence the claimant has established there is a serious risk of dissipation. Whilst Mr Draper, who gives evidence on behalf of the claimant, seeks to draw inferences from the manner in which the Bond was called, to the effect that Bouygues will dissipate the asset to its French parent company, I do not consider the evidence goes far enough. Indeed, Mr Doré, who provides evidence on behalf of Bouygues, says Bouygues is financially stable. He also states that Bouygues is a subsidiary of BBI, a large French construction group, and forms a part of the permanent structure for operating in Russia. He says BBI is proud of its position as one of the world's leading contractors and intends to continue to build on its project portfolio in this region. He says the combined BBI/Bouygues turnover since their inception in 1989 represents over US$ 900 million. He says the interference Mr Draper seeks to draw, to the effect that the court should be concerned about Bouygues' financial and operating viability because he is unable to learn about Bouygues' financial history, is not proof that there is such an inability. He says such is simply not the case.
54. In this case, it is evident the parties have been in a contractual relationship for a number of years and there has been no allegation that Bouygues has failed to pay certificates as they have become due in the past. I am satisfied that Bouygues is a substantial trading company in the international construction industry and is not likely to put that and its parent company's reputation at risk for the comparatively modest sums at issue on the Bond.
55. In addition, this is a case where the sums payable under the Bond would be payable from a Japanese bank to a Russian bank via a New York intermediary. I consider that whilst the court could make a freezing order in such circumstances, it is more unlikely to do so when the assets are overseas.
56. Therefore on the general approach of the courts for the grant of injunctions in relation to performance guarantees, I do not consider that the claimant is entitled to the injunctions it seeks. If, however, contrary to the view I have expressed, the approach of the court were to be to apply a less rigorous test, whilst there is a seriously arguable case, I do not consider that this is a case where there should be an injunction.
57. In relation to the balance of convenience, I consider the effectiveness of performance guarantees should take priority. In this case, the Bond expires on 21 December 2007. If a call on the Bond is delayed until an arbitral tribunal is effective, the Bond may well expire. If the claimant wishes to apply for interim measures, it can still apply for an order that Bouygues should deposit a sum equivalent to the Bond in an account. Of course it will be for the arbitral tribunal whether such an order is appropriate under Article 26, taking into account that the tribunal sits in London but New York law applies to the contract.
58. In those circumstances, on the basis of evidence and arguments before me, I do not consider the claimant is entitled to either of the injunctions against Bouygues. Therefore, these injunctions should be discharged. The process commenced by Bouygues' call on the Bond on 3 September 2007 must therefore take its course unaffected by any order of this court.