Leighton Llc v. Mongolia Energy Corporation Ltd
Read the full judgment text of HCCL 15/2013 on BabelCite. This HCCL judgment was delivered on 10 July 2013.
1. In this action the plaintiff (“Leighton”) claims payment from the defendant (“MECL”) under a written guarantee dated 2 June 2010. It is not disputed that a demand for payment of 12,162,710,117 MNT (Mongolian Tugrik) was sent by Leighton to MECL. This was the plaintiff’s application under Order 14A for my determination by way of construction of the guarantee: the plaintiff contending that it was an on demand bond or guarantee and the defendant contending that it was a true guarantee where the
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HCCL 15/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMMERCIAL ACTION NO 15 OF 2013 ---------------------------
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---------------------------------------- REASONS FOR DECISION ---------------------------------------- 1.In this action the plaintiff (“Leighton”) claims payment from the defendant (“MECL”) under a written guarantee dated 2 June 2010. It is not disputed that a demand for payment of 12,162,710,117 MNT (Mongolian Tugrik) was sent by Leighton to MECL. This was the plaintiff’s application under Order 14A for my determination by way of construction of the guarantee: the plaintiff contending that it was an on demand bond or guarantee and the defendant contending that it was a true guarantee where the guarantor’s liability was dependent upon the liability of the principal, MoEnCo LLC (“MoEnCo”), a subsidiary of MECL, such that MECL could rely upon all the defences that would be available to MoEnCo under the principal agreement. The parties were agreed that proceeding by way of an application under Order 14A was correct. If I found in favour of the plaintiff, they would be entitled to Order 14 judgment for the amount in question; and if I found in favour of the defendant then, although the action would have to proceed to a full trial, I would have made a final determination of this issue under the Order 14A application. 2.After hearing the parties, I concluded that the guarantee in question was a traditional type of guarantee under which the liability of the guarantor was dependent on the liability of the principal. I stated that I would give my reasons in due course. I also granted the plaintiff leave to withdraw its Order 14 application. 3.These are my reasons for my decision. I have not handed down my reasons earlier because on 10 October 2013 and again on 20 December 2013, I made orders by consent staying the proceedings to enable the parties to resolve the matter by mediation. Thereafter, I heard nothing further from the parties until 12 June 2015 when I received a letter from the solicitors for MECL requesting me to hand down reasons for my decision, which I now do. 4.The guarantee in question, entitled “Company Guarantee” (“company guarantee”) is set out in full in Appendix I to this judgment. 5.The authorities relevant to the proper construction of this guarantee are summarised in Appendix II to this judgment. Leighton’s Submissions 6.Mr Denis Brock, who appeared for the plaintiff, submitted that on its true and proper construction the company guarantee was a performance bond. He referred me to the relevant authorities on “on demand” guarantees and on the construction of contractual documents, before identifying the factual background giving rise to the company guarantee. 7.He submitted that there was considerable commercial risk to Leighton under its agreement with MoEnCo (“the mining agreement”) and he highlighted the following factors, all known to the parties at the time of the company guarantee, which were relevant to my consideration:
8.At §§8 to 11 of his first affidavit, Mr Paul Kimberly, the General Regional Manager of Leighton, explained how the agreement worked:
9.MoEnCo was a special purpose vehicle created to comply with the requirement in Mongolian law that natural resources are exploited by Mongolians. 10.Mr Brock also referred to §14 of the second affidavit of Mr Kimberly, where he stated:
11.Leighton was seeking advance payments from MoEnCo and that mechanism broke down when MoEnCo failed to keep up with that programme and, ultimately, the contract came to an end. As relatively recently as February 2012, Leighton was indicating to MECL the financial difficulties that Leighton was being put under by MoEnCo’s default. 12.Mr Brock referred me specifically to §§31-32 of Kimberly’s second affidavit:
13.Mr Brock submitted that it was self‑evident that the word “bond” has been omitted. To give the sentence any sense and against the factual background, it should read:
But even if, as was contended by MECL, the word omitted was not “bond”, but “guarantee” that did not take it any further because a performance bond or a performance guarantee were of the same nature. 14.The mining agreement provision which spoke of the provision of the company guarantee stated:
Appendix 4 was the draft of the company guarantee. 15.Under the company guarantee, MECL:
This was the important express statement that the obligation of MECL was a primary obligation and a contractual obligation to make payment on demand. 16.The maximum aggregate liability clause stated that:
This clause indicated that this was a performance bond because it asserted the presumption that MoEnCo’s obligations exist as if each and every provision of the mining agreement were valid and binding, whether or not this is the case. This was a powerful indication that this was designed to be an independent instrument, independent of the underlying contractual arrangements. 17.Mr Brock referred to Law of Guarantees, (6th ed), by Andrews and Millett it was stated at §6-002:
If this instrument were a mere guarantee, the co-extensiveness principle would be implicit within it. The fact that there was an insertion of the clause that specifically told one to ignore the underlying obligations suggests that it was not a guarantee. 18.Another provision of the guarantee stated:
In short, there is no contractual requirement for Leighton to first sue MoEnCo, before it could proceed directly against MECL because the latter’s liability was primary and not a secondary liability. MECL’s Submissions 19.Mr Ian Pennicott appeared together with Ms Catrina Lam on behalf of MECL. He emphasized that the court must look at the whole of the document and not just isolated parts of it and that, if there was any ambiguity then those ambiguities were invariably resolved in favour of the surety. Factual Background 20.He accepted that the court in interpreting a document could look at the factual matrix but he submitted that there were two strands to this. The first strand was the general relationship and the position of the parties at the time that they entered into the contract: the underlying commercial transaction involved the extraction of coal in the minefields of Mongolia. There was no dispute that Leighton would want some form of security in those circumstances, because Leighton was putting in plant and equipment and, from a commercial angle, would want some form of security. However, such a need was equally consistent with the provision of a parent company guarantee as it was with a performance bond. 21.The other factual background was the mining agreement itself. Clause 6 of the mining agreement provided:
22.Pursuant to clause 6(a) and (b) Leighton had obtained two lots of security: the CAPEC Security in the sum of US$3 million and they also obtained Progress Payments security in the sum of another US$1 million. Pursuant to clause 6 (c) they were entitled to a company guarantee from MECL. The requirement was not to deliver an unconditional company guarantee, or an irrevocable company guarantee, but a “company guarantee” for the benefit of Leighton. This was the genesis of the guarantee in question. Banking and Non-banking Cases 23.Mr Pennicott referred to his summary of relevant authorities appearing in Appendix II. From the 14 listed cases there, he pointed out 4 cases which did not involve a banking context, that is, they did not involve banking or insurance or financial institutions. Those four cases were 2 cases of the Court of Appeal in England and Wales, Marubeni and IIG Capital decided in 2005 and 2008 respectively. Then there were 2 First Instance decisions, Vossloh decided in 2010, and Carey Value decided in 2011. He submitted that the principle to be derived from those 4 cases was that where one did not have a banking context, which was the situation here in our case, there was a strong presumption against an instrument being anything other than a true guarantee. It was a presumption which was rebuttal and, indeed, was indeed rebutted in the IIG case. 24.In Vossloh, Sir William Blackburne expressly cautioned against adopting the principles in banking cases in a non-banking context. Obviously each case had to depend upon the true construction of the actual words that were used in the instruments that were under consideration. In those cases, where on demand performance bonds had been held to exist, the wording was very strong. Indeed, the instruments in Vossloh, Marubeni, and Carey Value were much more strongly worded than the company guarantee. 25.In IIG Capital, the Court of Appeal in England and Wales determined that, although this was a non-banking instrument, nonetheless it was an on demand guarantee. The crucial points were the express terms that the guarantor “as principal obligor and not merely as surety” unconditionally and irrevocably guarantees to the lender; and more importantly, “Guaranteed Monies” were defined as:
Secondly, clause 4.2 in the IIG Capital provided:
By reason of the aforesaid, the strong presumption that was accepted to exist was rebutted. 26.In Marubeni, the sale and purchase agreement provided for a document described as a guarantee to be issued; and a letter signed by the Mongolian Finance Minister was provided which stated:
Despite the reference to “unconditional pledge” and “simple demand”, the Court of Appeal in England and Wales had no difficulty concluding that this was not an on demand bond but a guarantee. In his judgment, with which the other members of the Court of Appeal agreed, Carnwath LJ stated:
27.In Vossloh, a parent company issued a guarantee in respect of a subsidiary’s obligations under a master purchase agreement whereby:
Notwithstanding such strong language, the learned Judge found that this was not an on demand bond. In §36 of his judgment, Sir William Blackburne said:
He held, viewing the instrument as whole, that the presumption had not been rebutted. This case was an example of the application of the Marubeni strong presumption principle. 28.In Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629; [2013] BLR 74 (CA) the defendant bank provided “payment guarantee” for the buyer’s payment under a shipbuilding contract with the following wording: “…hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as the primary obligor and not merely as the surety, the due and punctual payment by the BUYER of the 2nd instalment of the Contract Price amounting to a total sum of United States Dollars 10,312,500.00 …”. The Court of Appeal held that this was an on demand bond. Although this case was decided after Marubeni, IIG Capital, Vossloh and Carey Value, none of those cases were referred to, probably because this was a banking case and those cases were not. The decision in Wuhan Guoyu underscored the big divergence in England and Wales between cases involving a banking context and those that do not. Longmore LJ in his judgment in Wuhan Guoyu stated:
On Demand – Trigger of Liability 29.The words “on demand” were not definitive or conclusive as they appeared in many cases where the instrument was construed to be a traditional guarantee. 30.The Court of Appeal in Dragages et Travaux Publics (HK) Ltd v Citystate Insurance Ltd [2001] 1 HKC 196 (CA) had to consider a performance bond issued by an insurance company to guarantee due performance by subcontractor of its obligations under a subcontract in an airport project. The terms of the bond included the following:
It was held that the wording of the bond was not clear and unambiguous enough to establish an “on demand” bond. Reading the bond as a whole, it was clear that the amount payable had to be determined and the words “payable on demand in writing” did not take the matter further. At page 199G of the judgment, Mayo VP stated:
31.Carey Value concerned a “deed of guarantee and indemnity” issued by parent company to guarantee its subsidiaries’ obligations under a loan agreement with following wording:
Clause 20.6 provided that the claimant’s certificate as to any “amount under [the] deed” was conclusive of the matters to which it related. The court held that the deed of guarantee and indemnity was not an on demand bond. Any ambiguity in clause 20.6 should be resolved in favour of the defendant, with the result that the word “amount” referred to the amount advanced, not the amount due and payable. Accordingly, the certificate under clause 20.6 was not conclusive evidence as to liability. Primary Obligation 32.The words “primary obligation” or “primary obligor” were not conclusive because the courts had reached the conclusion, in many cases with such words, that the document in question was not an on demand bond. The court had to construe the instrument as a whole as the Court of Appeal did in Marubeni. If other clauses were inconsistent with a primary obligation, then the court would conclude that the document is simply not clear enough, such that it could not construe it as an on demand bond. JCG Finance Co Ltd v Group Life Investment Ltd & Anor, HCA 2417/2001 (27 March 2002, unreported, Deputy High Court Judge To) concerned a private company that entered into a “Security Assignment of Shares” as part of the consideration for a debt restructuring arrangement containing the following terms:
On an Order 14 application, the court held, looking at other relevant clauses, that it was arguable that the instrument was not an on demand bond notwithstanding the reference to “primary obligation in clause 2.2. The Guarantee in Question 33.Under Clause 1:
Those words had to be read conjunctively: due payment and due performance by the principal. The question was what is due. “Due” meant something that was required to be done or required to be paid and, therefore, was much more akin to the words that one found in a guarantee. An on demand bond did not have such phraseology. 34.Clause 2 provided:
This clause also raised the question of what is due. 35.The third clause was the maximum aggregate liability clause:
This clause clearly reflected the coextensive principle as the clause equated the liability of MECL and MoEnCo and was indicative, therefore, of a contract of guarantee. If the plaintiff made a demand which was in excess of the maximum aggregate liability, both the guarantor and the subsidiary could run a defence that the demand that has been made was in excess of the maximum aggregate liability, and the ability to do so was a contrary indication to the company guarantee being an on demand performance guarantee. The clause militated against the company guarantee being an on demand bond because it would be necessary to look at the underlying transactions before MoEnCo’s liability could be determined. 36.The fourth clause was the discharge clause:
This was indicative of a guarantee as one needed to ascertain whether MoEnCo’s obligations and liabilities have been discharged in order to determine whether the company guarantee has been discharged. 37.The fifth clause stated:
This clause is not a clear indication that the company guarantee created a primary obligation and was an on demand bond. The clause was commonly found in guarantees and was neutral, and did not deprive, in any way, the guarantor from any defences which would have been open to the principal. 38.Clause 6 dealt with variations and amendments. This clause was commonly inserted in guarantees to negate the rule in Holme v. Brunskill that a material variation in the terms of the guarantee would discharge the surety. Leighton’s Reply Submissions 39.In his reply, Mr Brock made the following submissions. 40.The security that had been provided under clause 6(1)(a) and 6(1)(b) were modest amounts and it was established in the evidence that they had been exhausted. 41.He could see that there was the presumption in Marubeni against a performance bond in the non‑banking scenario but he emphasised the reasoning of the court in IIG Capital, where in a non-banking scenario an instrument was construed to be a performance bond, as further analysed by Blair J in Carey Value at §24:
42.The presumption arising from the maximum aggregate liability in that clause was that each and every underlying obligation was in full force and effect. There was no need to prove them. There was a disconnect between the underlying obligations and the performance bond. The reference to “due payment” was no more than saying that a matter was due and owing and did not require any ascertainment or adjudication. 43.Finally, in respect of the variation provision, Mr Brock referred me to §25 of the judgment of Tuckey LJ in Gold Coast that the presence of such a clause was not definitive of the question whether the instrument was an on demand bond or a true guarantee. It could have been included to avoid any argument that a variation of the underlying contract would imperil recovery under the instrument in question or it could have been inserted to ensure that the rule applicable to true guarantees did not apply to this instrument. Decision 44.I have concluded, on my construction of the instrument in question, that the company guarantee is a traditional type of guarantee under which the liability of the guarantor is dependent on the liability of the principal. Strong presumption in non-banking context 45.There can be little dispute that in England and Wales, and in Hong Kong, there exists a strong presumption, where an instrument relates to an underlying transaction between parties in different jurisdictions which is issued by a bank, contains an undertaking to pay on demand, and does not contain clauses excluding or limiting the defences available to a guarantor, that such an instrument is an on demand performance guarantee. Such a guarantee would be almost useless if the bank could resist payment on the ground that the foreign buyer was disputing whether or not a payment was due. 46.I also accept that there exists in Hong Kong, as there exists in England and Wales, a strong presumption that, in a non-banking context, the payment obligation undertaken by a guarantor does not constitute an on demand performance guarantee in the absence of clear and unequivocal language describing the instrument as an on demand performance bond, or an on demand performance guarantee, or some other term having similar legal effect. It is accepted that MECL is not a bank, or an insurance or financial institution, but the parent company of MoEnCo. Factual Background 47.My review of the factual background does not lead me to conclude that the strong presumption that exists in this case has been rebutted. It was not in dispute that Leighton would need some form of security before it would commit its resources to performing the mining agreement in Mongolia. Such need was equally consistent with the provision of a guarantee from the parent company of MoEnCo, which is an substantial concern publicly listed in Hong Kong, as it was with the provision of an on demand performance guarantee. 48.Notwithstanding that the amounts provided as security under clause 6(1)(a) and 6(1)(b) of the mining agreement were modest when compared with the liability of MECL under the company guarantee, the security that was required to be provided under sub-clauses (a) and (b) was described to be “an irrevocable and unconditional bank guarantee” and “an irrevocable bank guarantee … or a cash deposit”. Sub-clause (c), however, only spoke of the provision of “a company guarantee” in the form set out in Appendix 4 of the mining agreement which was subsequently executed as the company guarantee. 49.Mr Brock made a strong point that the minutes of the meeting of 2 June 2010 stipulated that MECL was also required to provide a performance bond or a performance guarantee to Leighton on behalf of MoEnCo. However, those words do not appear on the company guarantee and, whatever might have been the intention of the parties, absent such language in the company guarantee, the minutes of meeting is insufficient, by itself, to rebut the strong presumption that arises in this case, particularly given the contrary indication that is to be found from a comparison of clauses 6(1)(a) and (b) with 6(1)(c) of the Mining Agreement. Primary Obligation 50.If the obligation is expressed in an instrument to be a primary obligation, then such a provision may go some way to rebutting the strong presumption, which exists in a non-banking context, that the instrument is a guarantee and not an on demand performance guarantee. This is because in a contract of guarantee, the surety assumes a secondary liability to answer for the debtor who remains primarily liable; whereas in a contract of indemnity the surety assumes a primary liability, either alone or jointly with the principle debtor: Chitty on Contracts (31st ed) Volume 2, p.1639, at §44-008. On demand performance bonds or performance guarantees are, in essence, exceptionally stringent contracts of indemnity: Chitty on Contracts (31st ed) Volume 2, p.1694, at §44-009. 51.Mr Pennicott made a strong submission that the words in clause 2 of the company guarantee “if the Principal fails to so pay or perform its obligations and liabilities which are due and fails to comply with the Mining Agreement, the Guarantor shall on demand …”, supports the construction that proof of breach by the principal was required, notwithstanding that the obligation of MECL was described as “primary obligation”. 52.Similar wording appeared in Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd’s Rep. 546 where the instrument, issued by a bank and described as a “performance bond” contained a clause stating that “we undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance”. The court did not accept the literal meaning of this clause, as to do so would be inconsistent with the commercial purpose of the performance bond issued by the bank to enable the beneficiary to obtain prompt and certain payment, in a context in which the bank was “not concerned in the least” with the relations between the supplier and the customer: per Ackner LJ at p.549. 53.In Marubeni, the Court of Appeal held, distinguishing Esal (Commodities) Ltd v Oriental Credit Ltd, that, in a non-banking context, the words “amounts payable under the agreement (are) not paid when the same becomes due” in the instrument in question, was appropriate to a secondary obligation that was conditional upon default by the buyer, notwithstanding that the instrument contained the words “unconditionally pledges to pay to you upon your simple demand”. 54.As has been pointed out by the editors of Paget’s Law of Banking (11th Ed), as quoted by Longmore LJ in Wuhan Guoyu at p.79, §26:
55.In the present non-banking context, the words “primary obligation” are not, on my construction of this instrument, sufficient to displace the strong presumption that applies in the present case. Notwithstanding that an on demand performance guarantee is an exceptionally stringent contract of indemnity under which the guarantor undertakes a primary obligation, I accept and adopt the observations of Blair J in Carey Value,at p.148, §22, that, in a non-banking context: “… the difference between secondary liability and primary liability is not in itself decisive… In any case, the language of primary and secondary liability is routinely found in the same contracts, and is not in itself a guide to the content of the liability.” On Demand - Trigger of Liability 56.The words “on demand” appear very often in traditional contract of guarantee and do not assist Leighton to rebut the strong presumption that arises in this case. In my judgment, if the trigger of liability is connected to the breach of the underlying contractual obligations of the principal, then the instrument is likely to be construed to be a traditional guarantee. However, if the trigger of liability is simply the demand and some other easily ascertainable objective fact which does not require investigation or adjudication by the court, then the instrument is more likely to be construed to be an on demand performance guarantee. 57.Mr Brock urged me to apply the reasoning of the court in IIG Capital as further analysed in Carey Value. However, in IIG Capital,the instrument, in addition to containing a provision making the guarantor a primary obligor who unconditionally and irrevocably guaranteed due and punctual payment of the guaranteed money and agreed immediately upon demand unconditionally to pay the lender the guaranteed money, also contained a conclusive evidence clause in that the “guaranteed money” was defined as including money and liability due owing payable or “expressed to be due, owing or payable” and, under clause 4.2, a certificate in writing signed by a duly authorized officer, stating the amount due and payable “shall, save for manifest error, be conclusive and binding on the Guarantor”. The Court of Appeal rightly concluded that this conclusive evidence clause put the matter beyond doubt. A similar reliance on a conclusive evidence clause in Carey Value did not succeed because the court there held that the clause in question contained an ambiguity and was not a conclusive evidence clause as to liability. Accordingly, the strong presumption that applied in the non-banking context of that case was not rebutted. No conclusive evidence clause appears in the company guarantee, the subject of this action. The Clauses of the Company Guarantee 58.My review of the other clauses referred to does not make me conclude that the strong presumption that exists in this case has been rebutted. The maximum aggregate liability clause does not assist me one way or the other. Whilst the equation of the liability of MECL with the liability of MoEnCo conformed to the co-extensive principle, the words in parenthesis at the end of the clause, that MECL was liable under the company guarantee, as if each and every provision of the mining argument was valid binding and enforceable, whether or not such was the case, did not conform with the coextensive principle. 59.The fourth clause supported the presumption that applied in this case, because it stipulated that the MECL would be discharged from liability and the guarantee when MoEnCo’s obligations and liabilities under the mining agreement had been discharged. 60.The fifth clause, that the guarantee was additional to any other security and may be enforced without first having recourse to such other security, was neutral to the construction of the instrument as either an on demand performance guarantee or a traditional guarantee. 61.Finally, I accept the submissions of Mr Brock that the variations and amendments clause contained in clause 6 of the company guarantee was not definitive of the question for the reason, as explained by Tuckey LJ in Gold Coast, that it could have been included to avoid any argument, whether or not the document in question was an on demand performance guarantee or a traditional guarantee. Costs 62.After finding in favour of MECL on the Order 14A application, I had indicated that I was minded to make an order that the costs of the application be costs in the cause. However, after hearing further argument, I decided to reserve costs and I directed the parties to exchange short written submissions on costs. 63.My decision to reserve costs was in respect to all applications before me, not simply the Order 14 application which I had granted leave to Leighton to withdraw. Unfortunately, my order, which was subsequently in engrossed and sealed on 16 July 2013, contained an error in that it stated that the plaintiff had leave to withdraw its summons filed on 15 April 2013 with costs to be in the cause. I hereby correct the error that is contained in my sealed order pursuant to the slip rule and under the inherent jurisdiction of the court by replacing §§2 and 3 of my order with the following 3 paragraphs:
Written Submissions on Costs 64.Instead of short and concise submissions on costs not exceeding 2 pages I received an 11-page submission from MECL, a 10-page submission from Leighton and a 7-page reply submission from MECL. I am tempted to impose sanctions for breach of my order, but, given the matters raised in these written submissions, I decline to do so. 65.Although it is now increasingly common for the court to adopt an issue-based approach in considering costs of the action after trial, I decline to accede to the submission of MECL that the fair and appropriate order for costs is for Leighton to pay MECL’s costs of and incidental to the Order 14A application in any event, such costs to be taxed if not agreed. I order that the costs of the Order 14A application be in the cause. I decline to award a certificate for 2 counsel on the Order 14A application. 66.However, I am persuaded that the original Order 14 application and application for interim payment under Order 29, should never have been brought, given the substantive defences raised. Leighton knew or ought to have known that its claims were seriously disputed. 11 of the 13 hearing bundles before me related to the Order 14/Order 29 application. It was only when Leighton’s written submission was served, 5 days before the hearing, that the parties and the court became aware that the only application being pursued was the application under Order 14A. In these circumstances, it is only right that Leighton pays the costs of the Order 14 and Order 29 application to MECL. 67.I am asked to make an order that those costs be paid forthwith, to be taxed on an indemnity basis, with a certificate for 2 counsel. I decline to do so for the reason that I am not familiar with the matters raised on the Order 14 and Order 29 applications, and I am unable to assess the merits of the parties’ respective cases on the matters in dispute. I am not saying that MECL ought not to be granted an order for costs to be taxed on an indemnity basis, with a certificate for 2 counsel. I would wish to reserve that decision to the trial judge who would be in a better position to gauge whether or not Leighton’s conduct in bringing the Order 14 and Order 29 applications was so unreasonable that it ought to be ordered to pay costs on an indemnity basis. Further, the trial judge would be better able to assess whether the complexity of the matters raised justify a certificate for 2 counsel. For these reasons, I make an order that Leighton pays the costs of the Order 14 and the Order 29 applications to MECL in any event; and I reserve to the trial judge the decision of whether or not such costs ought to be taxed on a party and party basis or on an indemnity basis, and whether or not a certificate for 2 counsel ought to be awarded.
Mr Denis Brock, of King & Wood Mallesons, for the plaintiff Mr Ian Pennicott and Ms Catrina Lam, instructed by Deacons, for the defendant Appendix I COMPANY GUARANTEE THIS GUARANTEE (the “Guarantee”) is entered into on the 2nd of June 2010. By: Mongolia Energy Corporation Limited, a company incorporated in and in accordance with the laws of Bermuda of Clarendon House, Church Street, Hamilton HM 11, Bermuda with company number 15584 (the “Guarantor”); IN FAVOUR OF: Leighton LLC, a company incorporated in and in accordance with the laws of Mongolia, having its registered office at Monnis Tower, 9th Floor, 1st Khoroo, Chinggis Avenue, Sukhbaatar District, Ulaanbaatar, Mongolia, (the “Contractor”) WHEREAS (A) The Guarantor indirectly holds the entire ownership of MoEnCo LLC, a company incorporated and duly registered under the laws of Mongolia having its office at Central Tower, 11th Floor, 2 Sukhbaatar Square, Sukhbaatar District - 8 Ulaanbaatar 210620 Mongolia, (the “Principal”). (B) By a contract dated June 2, 2010 (the “Mining Agreement”) made with the Principal and the Contractor, the Principal has agreed to procure the provision of a guarantee in the terms hereof. (C) At the request of the Contractor, the Guarantor has agreed to guarantee the performance of the Mining Agreement by the Principal as set out herein. IT IS HEREBY AGREED as follows: In consideration of the Contractor entering into the Mining Agreement with the Principal, and accepting this Guarantee pursuant to the Mining Agreement, the Guarantor guarantees to the Contractor, as a primary obligation, the due payment and performance by the Principal of all the Principal’s obligations and liabilities under and arising out of the Mining Agreement, including the Principal’s compliance with all its terms and conditions according to their true intent and meaning. If the Principal fails to so pay or perform its obligations and liabilities which are due and fails to comply with the Mining Agreement, the Guarantor shall on demand of the Contractor pay and/or procure performance of the obligation which arise from any such failure for which the Principal is liable to the Contractor under the Mining Agreement. The maximum aggregate liability of the Guarantor under this Guarantee shall not exceed the maximum aggregate liability that the Principal would have under the Mining Agreement if each and every provision of the Mining Agreement were valid, binding and enforceable in accordance with its terms (whether or not such is the case). This Guarantee shall come into full force and effect when the Mining Agreement comes into full force and effect. This Guarantee shall continue in full force and effect until all the Principal’s obligations and liabilities under the Mining Agreement have been discharged, when this Guarantee shall expire and shall be returned to us, and the Guarantor’s liability hereunder shall be discharged absolutely. This Guarantee is in addition to any other security which the Contractor may at any time hold and may be enforced without first having recourse to any such security or taking any steps or proceedings against the Principal. This Guarantee shall apply and be supplemental to the Mining Agreement as amended or varied by the Principal and the Contractor from time to time. We hereby authorize the Principal and the Contractor to agree any such amendment or variation, the due performance of which and compliance with which by the Principal are likewise guaranteed hereunder. The Guarantor’s obligations and liabilities under this Guarantee shall remain in full force and effect and will not be discharged by any allowance of time or other indulgence whatsoever by the Contractor to the Principal, or by any variation or suspension of the works and services to be executed or provided under the Mining Agreement, or by any amendments to the Mining Agreement or to the constitution of the Principal or the Contractor, or by any other matters, including but not limited to, any breach of the Mining Agreement by the Principal or any termination of the Mining Agreement, whether with or without the Guarantor’s knowledge or consent. Appendix II Cases involving instruments found to be On Demand Performance Bonds 1. Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 at 166G (string of performance guarantees for 10% of contract price to build greenhouses in Libya – English suppliers guaranteed Barclays Bank, Barclays Bank guaranteed Umma Bank in Libya and Umma Bank guaranteed Libyan buyers): “Please confirm that you will pay total or part of the said guarantee on first of our demand without any conditions or proof … ”; “We confirm our guarantee … payable on demand without proof or conditions [emphasis added]” 2. IE Contractors Ltd v. Lloyds Bank Plc and Rafidain Bank [1990] 51 BLR 1 (cited in Dragages at 204F : “ … we undertake to pay you, unconditionally, the said amount on demand, being your claim for damages … [emphasis added]” 3. Cargill International SA v Bangladesh Sugar & Food Industries Corp [1998] 1 WLR 461 (CA) (performance bond provided by a bank on behalf of the seller covering 10% of total c&f value as part of a contract for the sale and delivery of sugar):
4. Airport Authority Hong Kong v American Home Assurance Company, HCA 17807/1999 (2 February 2000, unreported) (10% performance bond issued by Home Assurance to guarantee due performance by a subcontractor of its subcontract works at Chek Lap Kok Airport):
5. Gold Coast Ltd v Caja de Ahorros del Mediterraneo & Ors [2001] EWCA Civ 1806 (CA) (refund guarantee issued by defendant banks to ship buyer):
6. IIG Capital LLC v Van Der Merwe [2008] 2 All ER (Comm) 1173 (CA) at §8- §10 (documents described as “deeds of guarantee” issued by directors in favour of company):
7. Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629; [2013] BLR 74 (CA) (defendant bank provided “payment guarantee” for buyer’s payment under shipbuilding contract): “…hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as the primary obligor and not merely as the surety, the due and punctual payment by the BUYER of the 2nd instalment of the Contract Price amounting to a total sum of United States Dollars 10,312,500.00 …” Cases involving instruments found to be Contracts of Guarantee 8. Tins’ Industrial Co Ltd v Kono Insurance Ltd [1988] 2 HKLR 36 (CA) (performance bond issued jointly by contractor and insurance co as surety for building contract – Held: a double or conditional bond requiring proof of breach by contractor and damages):
9. Trafalgar House Ltd v General Surety Co [1996] 1 AC 199 (joint bond given by subcontractor and surety company):
10. Dragages et Travaux Publics (HK) Ltd v Citystate Insurance Ltd [2001] 1 HKC 196 (CA) at 199A-B (performance bond issued by insurance co to guarantee due performance by subcontractor of its obligations under a subcontract in an airport project):
Held: Wording of the bond was not clear and unambiguous enough to establish an “on demand” bond. Reading the bond as a whole, it was clear that the amount payable had to be determined and the words “payable on demand in writing” did not take the matters further. 11. JCG Finance Co Ltd v Group Life Investment Ltd & Anor, HCA 2417/2001 (27 March 2002, unreported, Deputy High Court Judge To) at §15 (private company entered into a “Security Assignment of Shares” as part of the consideration for a debt restructuring arrangement):
12. Marubeni Hong Kong Ltd v Mongolian Government [2005] 1 WLR 2497 (sale and purchase agreement provided for document described as a “guarantee” to be issued; letter signed by Mongolian finance minister was provided): “ … the undersigned Ministry of Finance of Mongolia unconditionally pledges to pay to you upon your simple demand all amounts payable under the Agreement if not paid when the same becomes due (whether at stated maturity, by acceleration or otherwise) and further pledges the full and timely performance and observance by the Buyer of all the terms and conditions of the Agreement … [emphasis added]” 13. Vessloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch) at §35 (parent company issued a guarantee in respect of subsidiary’s obligations under a master purchase agreement):
14. Carey Value Added SL v Grupo Urvasco SA [2011] 2 All ER (Comm) 140 (“deed of guarantee and indemnity” issued by parent company to guarantee its subsidiaries’ obligations under a loan agreement):
NB Cl 20.6 provided that the claimant’s certificate as to any “amount under [the] deed” was conclusive of the matters to which it related. Held: The deed of guarantee and indemnity was not a demand bond. Any ambiguity in cl 20.6 should be resolved in favour of the defendant, with the result that the word “amount” referred to the amount advanced, not the amount due and payable. A certificate under cl 20.6 was not conclusive evidence as to liability. | ||||||||||||||||||
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