P CO AND ANOTHER v. R LLC AND ANOTHER

HCCT 21/2021

[2021] HKCFI 691

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 21 OF 2021

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DECISION

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Introduction

1.  Before me this morning is an urgent application for interlocutory injunctive relief, first, restraining the 2^nd defendant, S Bank, from honouring its undertaking to pay pursuant to an unconditional on-demand bank guarantee issued by it on 24 January 2019, as subsequently amended (“the Bank Guarantee”); and, secondly, ordering the 1^st defendant, the beneficiary of the Bank Guarantee, to withdraw a demand for payment it had issued to S Bank on 4 March 2021 and further restraining the 1^st defendant from seeking payment under the Bank Guarantee pending determination by arbitration of the disputes between the plaintiffs and the 1^st defendant which have led to the issue of the demand.

Brief factual background

2.  The plaintiffs are limited liability companies incorporated under the laws of the PRC.  The 1^st defendant is a company incorporated in Ukraine.

3.  On or about 19 August 2018, the plaintiffs and the 1^st defendant entered into a contract in relation to the development of the 1^st defendant’s wind power project in Ukraine (“the Contract”).  Under the Contract, the plaintiffs were engaged by the 1^st defendant to construct certain wind power facilities for the project.

4.  Pursuant to the terms of the Contract, the plaintiffs arranged for S Bank to issue the Bank Guarantee as security for the performance of their obligations (see clause 4.02).

5.  The Bank Guarantee was expressly stated to be an unconditional one.  The bank irrevocably undertakes to pay to the 1^st defendant a sum or sums not exceeding in total Euro 58,400,000 upon receipt of the 1^st defendant’s demand in writing in the specified form.  (The total amount was subsequently reduced slightly).  The Bank Guarantee expressly provided that the payment by the bank would not require the 1^st defendant to prove or to show grounds for the demand or the amount demanded.  S Bank would pay within five business days of a demand.

6.  The plaintiffs say that the project ran into difficulties causing delay.  Their evidence include letters exchanged in the course of 2020 in relation to the delay and other matters.  The parties appeared to be in disagreement over a number of issues affecting the progress of the project. The plaintiffs’ own evidence also reveals that there were criminal investigations conducted by the Ukrainian authorities against the 1^st plaintiff and another entity, with whom the 1^st plaintiff had had dealings.

7.  On 4 March 2021, that is last Thursday, the 1^st defendant terminated the Contract by written notices.  The grounds for termination were stated to be the plaintiffs’ breaches of provisions relating to anti-bribery and anti-money laundering, the keeping of proper accounts and the compliance with the 1^st defendant’s “Business Principles”. 

8.  On the same day, the 1^st defendant issued the demand to S Bank, seeking to draw the full sum under the Bank Guarantee.

9.  S Bank has five business days to pay.  The deadline therefore falls on 11 March 2021, that is today.

10.  By letter, S Bank has informed the plaintiffs that unless the bank is served with a court order directing otherwise before 4:30 pm today, it will proceed to make payment.

The plaintiffs’ application

11.  The plaintiffs now ask the court to stop S Bank from paying the sum under the Bank Guarantee and restrain the 1^st defendant from seeking payment under it. 

12.  The plaintiffs say that the court should do so as the available evidence supports a sufficiently strong case that the 1^st defendant was not entitled to call on the Bank Guarantee.  This is because the 1^st defendant has to date merely made the allegation that the plaintiffs were in breach of the Contract, without providing sufficient details of the alleged breaches.  Hence, these breaches are not yet established.  The plaintiffs deny these breaches in any event and contend that the 1^st defendant’s termination was wrongful.  In the meantime, the Plaintiffs say therefore that no payment should be made under the Bank Guarantee.  The parties should resolve these disputes by arbitration as provided for in the Contract. 

13.  The plaintiffs seek the interlocutory injunctive relief in aid of foreign arbitration proceedings under section 45 of the Arbitration Ordinance. Alternatively, the plaintiffs rely on the court’s jurisdiction to grant interlocutory relief under section 21L of the High Court Ordinance, Cap 4A. 

14.  The plaintiffs have joined S Bank as the 2^nd defendant solely because the latter is affected by the terms of the proposed relief.  It is accepted that the bank is an innocent party which is caught up in the present disputes between the plaintiffs and the 1^st defendant.  By letter, S Bank confirms that it takes a neutral stance on the application.  It does not appear at today’s hearing.

15.  I would put on record that the plaintiffs initially sought the relief on an ex parte basis on 9 March 2021 with notice to the 1^st defendant and the bank.

16.  Before the ex parte hearing, the defendants had simply been notified that an urgent application for injunction would be made, but the supporting affirmation and counsel’s skeleton argument were not sent to the defendants beforehand.  Given that there was then still time for the plaintiffs to serve those documents, at that hearing I did not consider that proper or meaningful notice had been given by the plaintiffs.  I adjourned the application with liberty for them to restore on an urgent basis, but if restored, all court documents should be sent to the defendants in advance.

17.  On 10 March 2021, ie yesterday, the plaintiffs filed an originating summons thus commencing the present action.  A return date of 21 April 2021 is fixed.  At the same time, the plaintiffs took out an inter partes summons to seek the interim relief.  Today’s hearing therefore proceeds on an inter partes basis.  The summons was served on both the 1^st defendant and the bank yesterday.  Due to the urgency, I would allow the time for service to be abridged.

18.  Given that a return date is now fixed for the originating summons which is about six weeks away, Mr Toby Brown, counsel for the plaintiffs, asks the court to grant the injunctive relief on an interim interim basis until the return date.  

19.  The 1^st defendant is represented by Mr Jonathan Wong.  He opposes the application, whether on an interim interim basis or not.  Mr Wong asks for the application to be dismissed straightaway today.

Applicability of section 45 of the Arbitration Ordinance

20.  The first issue that needs to be resolved is whether the interim relief sought comes within the scope of section 45 of the Arbitration Ordinance. 

21.  No arbitration has been commenced yet.  The issue is whether an arbitration is “to be commenced” under sub-section (2).  This issue arises because there is doubt as to whether under clause 20 of the Contract,the plaintiffs can proceed straight to arbitration or whether they are required to go through and complete an elaborate and possibly lengthy resolution process provided for in the clause before proceeding to arbitration.  In the latter case, it may be argued that there are no arbitration proceedings that are “to be commenced” for the purpose of section 45.

22.  In the short space of time that the court has been given to review the papers, it is not quite possible for me to come to any firm view on this issue.  I have to say however that there is at least a good case for saying that the words “to be commenced” should be construed liberally so as to cover the present situation.  It seems illogical to suggest that just because parties have agreed to resolve any dispute amicably before proceeding to arbitration, either or both of them should be deprived of the opportunity to come to the court to seek interim measure during the period of amicable negotiation, even when arbitration is clearly (and ultimately) contemplated.

23.  It is however unnecessary for me to come to any conclusive view on this.  I shall proceed on the basis that section 45 does apply and it operates to confer the power on the court to grant interim relief in this case.  As I shall explain below, I do not think it is a proper case for me to exercise my discretion to grant the relief sought.  And the application would therefore fail for that reason.

24.  It is therefore also unnecessary for me to deal with Mr Wong’s submission that if section 45 does not apply, the plaintiffs cannot rely on section 21L of the High Court Ordinance either.  In this case, the plaintiffs are not seeking any substantive relief against the defendants in Hong Kong.  The reliefs sought are purely in aid of the contemplated foreign arbitration proceedings.  In such a case, it is indeed uncertain whether the court has the power under the general provision of section 21L to grant the relief sought. But there is no need to deal with this point today.

Discussion

25.  I refuse to grant the injunctions sought even on an interim interim basis which effect is to stop S Bank from honouring its payment obligation under the Bank Guarantee.

26.  I arrive at this conclusion by following the well-established principle that the court will not generally interfere with a beneficiary’s right to call on a bank guarantee unless fraud is involved: The Bhoja Trader [1981] 2 Lloyd’s Rep 256.  Here, the plaintiffs are not relying on the fraud exception.  In the circumstances, there is no reason for the court to grant the injunction.

27.  The rationale for the court’s approach in this area of law is also well-known.

28.  One of the functions of a bank guarantee, like a letter of credit, is to create an abstract payment obligation in favour of the beneficiary that is independent and detached from the underlying contract between the beneficiary and his contracting party.  It is a cardinal rule that the conditions of the bank’s duty to pay are to be found exclusively in the terms of the guarantee and that the right and duty to make payment do not in any way depend on the performance of the underlying contract: Goode on Commercial Law (5^th ed) at paras 35.52 and 35.153.

29.  This autonomy of bank guarantees provides certainty that payment would be assured to the beneficiary so long as the terms of the bank guarantee are complied with, regardless of any dispute in the underlying contract. For that reason, a bank guarantee is regarded as the equivalent of cash in hand.  It has been said that bank guarantees (and irreversible letters of credit) are the life blood of commerce and thrombosis will occur if, unless fraud is involved, the courts intervene by granting an injunction to stop payment and thereby disturb the mercantile practice of treating them as being the equivalent of cash in hand: The Bhoja Trader.

30.  The integrity and unique importance of these bank instruments in commercial life should be recognised and respected by the court.  It has been argued that the use of a freezing order to restrain the bank from honouring the instruments would be “extremely inadvisable save in the most exceptional circumstances”, for this would interfere with the assurance of payment upon which the whole mechanism depends: Goode at para 35.114.  (This is to be contrasted with an injunction to restrain the beneficiary from dealing with the proceeds after the payment is made under the bank guarantee.  Different considerations would then apply: see The Bhoja Trader and Prime Deal (HK) Enterprises Ltd v The Hongkong and Shanghai Banking Corporation Ltd HCA 2142/2002, 15 July 2002 at para 14(1)).

31.  Where an injunction is granted at all frequently, the value of these instruments will be undermined: Prime Deal at para 14(2), citing Bolivinter Oil SA v Chase Manhattan Bank (C.A.) [1984] 1 WLR 392.

32.  I do not consider that there are any exceptional circumstances in the present case which would justify a departure from the above general principle.

33.  The evidence produced by the plaintiffs point to a dispute between them and the 1^st defendant over a number of issues prior to the 1^st defendant’s issuing the termination notices on 4 March 2021.  In the course of his submissions, Mr Brown in fact referred to these as “genuine disputes”.  The plaintiffs’ present complaint is that the 1^st defendant has so far failed to provide sufficient particulars in support of its allegation that the plaintiffs were in breach of the Contract.  However, earlier correspondence does show that the 1^st defendant did state in writing its comments or remarks on potential breaches relating to, eg, money laundering and corruption, in particular in the context of the criminal investigations against the 1^st plaintiff.  See, eg, the letters from the 1^st defendant dated 29 January 2021 and 4 February 2021. 

34.  The evidence before me is not so one-sided as to enable me to come to any view that the plaintiffs have a good or strong case or not.  The only possible conclusion that I can draw is that there seem to be genuine disputes in which both sides have been putting forward their respective conflicting viewpoints. 

35.  The questions of whether the plaintiffs were in breach as alleged and hence whether the 1^st defendant’s termination of the Contract was wrongful or not are issues that need to be resolved in accordance with the dispute resolution mechanism stated in the Contract.  This may well turn out to be a long drawn out process.  But that hardly amounts to an exceptional circumstance which would justify the court ordering S Bank to withhold payment under the Bank Guarantee.

36.  In fact, it must be recognised as a matter of common and commercial sense that legal disputes may take time to resolve, and it is for that reason a contracting party (if he has the bargaining power to do so) would ask for security in the form of a bank guarantee so that he does not have to wait for the resolution of the disputes but can have immediate access to the funds provided under the bank guarantee.

37.  If in the end it is found that he was not entitled to call on the guarantee, he is liable to return the money.  Just as in the present case, there was an express provision in the Contract (clause 4.02) stipulating that the 1^st defendant should “reimburse” the plaintiffs for any losses resulting from a claim under the Bank Guarantee to the extent that the 1^st defendant has no contractual basis to make such a claim as evidenced by an arbitration award.

38.  Mr Brown argued that if the court grants the injunction today, it would merely delay the 1^st defendant’s receipt of funds under the Bank Guarantee if it turns out after arbitration that the 1^st defendant was indeed entitled to call in the first place.  On the other hand, if money is paid out now to the 1^st defendant, the plaintiffs will run the risk of not being able to recover the money from the 1^st defendant in the future if the arbitration ruling turns out to be that the 1^st defendant was not entitled to call.

39.  This contention clearly goes directly contrary to the commercial rationale underlying the use of bank guarantees as discussed above.

40.  A potential delay in receiving the funds pending the resolution of disputes is the very reason why a party wants to have a bank guarantee as security in the first place.  Hence it is not quite open to the plaintiffs now to say that the 1^st defendant would suffer a mere delay.

41.  Equally, I do not think that the plaintiffs are entitled to put too much emphasis on the risk of not being able to recover money from the 1^st defendant in the event that the 1^st defendant should reimburse the plaintiffs for the money drawn under the Bank Guarantee.  This is for the simple reason that this is a risk that the plaintiffs implicitly accepted to bear when they agreed to provide a bank guarantee under the Contract.

42.  On the whole, one must recognise the unique characteristics of bank guarantees issued in the commercial context.  They really fall to be considered in a special category of their own in the context of interlocutory injunctive relief.  No fraud is being alleged here.  The plaintiffs have not made out any exceptional circumstances that would justify the court’s intervention in the payment out under the Bank Guarantee.  The injunctive relief should not be granted.

43.  To complete the analysis, I will also deal with Mr Brown’s submission that fraud is not the only exception to the general rule and that there is a further exception, which is said to arise when the beneficiary is not entitled to draw pursuant to the terms of the underlying contract. 

44.  In this regard, Mr Brown further submits that I should follow the American Cyanamid approach.  He submits that the general principle applies save that given the unique nature of the Bank Guarantee, it is not enough for the plaintiffs to show that there is a serious issue to be tried.  A higher threshold is to be met.  There are different formulations of this threshold.  It is suggested that the plaintiffs should show “a strong case” of, or should “positively” or “clearly” establish, the wrongful termination on the part of the 1^st defendant.  See Grande Cache Coal LP v Marubeni Corporation HCA 2136/2015, 23 September 2015 at paras 29 to 32.

45.  Even assuming that this is the correct approach, I am of the view that on the evidence before me, the plaintiffs have failed to surmount that threshold.  As commented above, the evidence is not one-sided or strong in the plaintiffs’ favour.  It simply shows that comments or remarks were exchanged on some of the alleged breaches.  It is simply not possible for the court to tell from the evidence who is right and who is wrong.  The plaintiffs are saying that the 1^st defendant has failed to show sufficient particulars of breach.  However, it does not appear to me that the 1^st defendant was under any duty to provide a full explanation before the Bank Guarantee was called.  Even if the plaintiffs are correct in their observation about the lack of particulars, that does not by itself point to a positive case that the termination of the Contract was wrongful.

46.  For that reason, even applying the American Cyanamid approach and assuming that fraud is not the only exception in this context, the plaintiffs have failed to pass the first hurdle on merits.  The application must fail.

47.  In any event, even if I am wrong on this and if I am required to proceed to the stage of weighing the balance of convenience, in my view, the balance lies clearly against the grant of the injunction. 

48.  The Bank Guarantee, like other guarantees commonly issued in the commercial world, was meant to give protection to the 1^st defendant in the form of quick and certain remedy in the event of a breach by the plaintiffs under the Contract. In this application, the plaintiffs are effectively asking the court to take away that certainty from the 1^st defendant just because there appears to be genuine disputes between the parties (even where there is a good evidential basis in support).  Commercially speaking, that was not what the parties had agreed to when the Contract was signed, when well-established commercial practices and understanding are taken into account.

Conclusion

49.  For the above reasons, I dismiss the plaintiffs’ inter partes summons.

[Submissions on costs]

50.  I order that the 1^st defendant do have costs of the summons, to be taxed if not agreed.  There be no order as to costs between the plaintiffs and the 2^nd defendant.