Arbitration Is No Bar For Bank Guarantees

In Daewoo Shipbuilding & Marine Engineering Co Ltd v INPEX Operations Australia Ltd [2022] NSWSC 1125, Daewoo sought to prevent INPEX from calling on a bank guarantee. The Supreme Court ruled against Daewoo.

Under a construction contract, the Principal may be entitled to call on a bank guarantee, even while the parties are involved in arbitration.

The Court is unlikely to intervene on the "life blood of commerce" and restrict a party from calling on bank guarantees, unless presented with a strong or serious prima facie case.

Background:

INPEX contracted with Daewoo to construct a Floating Production Storage Offloading Facility (FPSO). Daewoo built the ship, but INPEX issued a claim for losses suffered due to Daewoo's alleged defects and delays.

On 1 August 2022, while the parties were attempting to resolve their dispute by way of arbitration, Daewoo applied to the NSW Supreme Court seeking urgent interlocutory relief restraining INPEX from having recourse on the bank guarantee.

Decision:

The Court noted, if asked to step-in on an interim basis (such as prohibit one party from calling on the guarantee), that this would be done "in accordance with [the Court's] own procedure", albeit "in consideration of the special features of international arbitration."

Rees J held that, although the existence of arbitration did not automatically restrict the Court from hearing the application, Daewoo would need to demonstrate a strong or serious prima facie case to validate the Court's intervention.

In coming to his decision, Rees J canvassed the existing law on interlocutory injunctions, bank guarantees, and the interplay with the International Arbitration Act 1974 (Cth).

Key Takeaways:

The case of Daewoo v INPEX reinforces the principal's right in calling upon a guarantee even while the parties are involved in alternative dispute resolution.

The judgment can be accessed here: https://www.caselaw.nsw.gov.au/decision/182cd00a1f2656b3d348bc08

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

James Gilronan
Vincent Young
Level 12
20 Bond Street
Sydney
AUSTRALIA
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