Mcconnell Dowell Constructors (Aust) Pty Ltd v Sembcorp Engineers and Constructors Pte Ltd (formerly known as SembCorp Construction Pte Ltd)

• Jurisdiction: Singapore
• Judge: Woo Bih Li JC
• Judgment Date: 15 January 2002
• Neutral Citation: [2002] SGHC 8
• Date: 15 January 2002
• Subject Matter: Application for interim injunction to restrain call and receive payment under bank guarantee,Performance bonds,Banking,Whether call unconscionable,Whether to grant injunction,Whether defendants' right to call on bank guarantee depends on bank guarantee's terms or underlying contract between parties,Bank guarantee
• Docket Number: Suit No 379 of 2001 (Summons in
• Published date: 19 September 2003
• Defendant Counsel: Quentin Loh SC and Leonard Yeoh (Rajah & Tann)
• Court: High Court (Singapore)
• Plaintiff Counsel: Kenny Chooi and Kelvin Fong (Yeo-Leong & Peh)

Judgment

GROUNDS OF DECISION

Introduction

1. The Plaintiff is McConnell Dowell Constructors (Aust) Pty Ltd (‘McConnell’). It is a major Australian-based construction company with operating entities carrying out construction activities in Australia, New Zealand, South East Asia, the Pacific Region and the Middle East.

2. The Defendant is Sembcorp Engineering and Constructors Pte Ltd (‘SE’). It is a wholly-owned subsidiary of Singapore Technologies Industrial Corporation Ltd which is in turn a wholly-owned subsidiary of Sembcorp Industries Ltd.

3. An Indian company known as Indian Gas Limited (‘IGL’) held the licence or licences to carry out a proposed development of a project in Manappad in the state of Tamil Naidu, India. The project is known as the IGL Manappad Port, LNG Re-Gas Import Terminal and Gas Pipeline Project (‘the Works’).

4. The chief executive officer of IGL was one Thaburaj Mohan. In about March 2000, he was introduced to Ho Kiam Kheong of SE by a business acquaintance Henrik Gomex of Vineyard Financial Services Limited.

5. Mr Gomez informed Mr Ho that IGL required financing for the project estimated to be US$475m. Mr Gomez had told Mr Mohan that he would be willing to assist to obtain financing for the project if SE was the main contractor and Mr Mohan was agreeable to this. SE agreed to assist IGL to obtain financing on the basis that SE would be appointed the main contractor for the project either singly or as part of a consortium.

6. In late June 2000, another company CB & I Eastern Anstalt (‘CBI’) met up with SE to seek an appointment by the latter of CBI as one of the sub-contractors for the project. CBI is a company incorporated in Dubai U.A.E and specialise in the design and construction of storage tanks for industrial fuels in cryogenic conditions. SE did not give CBI any commitment as it had not yet been appointed the main contractor for the project.

7. Subsequently in about September 2000, McConnell met up with SE to seek a similar commitment from the latter to appoint it as one of the latter’s sub-contractors for the project. Again no commitment was given by SE.

8. On or about 1 November 2000, Mr Mohan met with representatives of CBI and McConnell. He also met with Mr Ho of SE at a separate meeting. He introduced these parties to a company called Ficon Limited (‘Ficon’) as the party which would obtain financing for the project. Ficon had proposed that it would raise the financing with the use of a US$125m standby letter of credit. This letter of credit was to be procured by SE.

9. SE subsequently learned that the letter of credit would be discounted for cash of about US$118m and the cash placed by Ficon into a non-interest bearing account with an agreed financial institution for a period of at least one year. The deposit would be used as leverage to raise up to US$600m to finance the project. The entire scheme was supposed to be sanctioned by the United States Federal Reserve Bank to raise funds for humanitarian projects in Third Word countries. After the US$600m was raised and disbursed to IGL, Ficon would be entitled to keep the US$118m and SE would have to recover the costs and value of the letter of credit from IGL.

10. After further discussions, SE was prepared to provide funds of US$125m rather than procure a standby letter of credit. It wanted to place these funds into an interest-bearing account to be operated by SE.

11. Ficon was receptive to this but wanted the money to be placed in a non-interest bearing account allegedly to facilitate the operation of the scheme. It also wanted (a) a power of attorney from SE to authorise it or its representatives to deal with the deposited funds and (b) SE to enter into a placement/investment agreement under which Ficon could carry out placements or investments on behalf of SE.

12. However, SE required the money to be put into an interest bearing account and was not agreeable to either of the other two requirements of Ficon. It was alleged by SE that:

(a) On or about 4 or 5 November 2000, Ficon orally agreed that the US$125m was to be put by SE in an interest-bearing fixed deposit account for not less than ten months and Ficon dispensed with the other two requirements. The deposit of US$125m would be in the sole name and under the sole control of SE. Ficon would use the presence of the funds to raise at least US$475m. The funds to be raised by Ficon would be paid into an account in accordance with a payment schedule.

(b) Before placing US$125m into a fixed deposit account, SE obtained a letter of confirmation dated 17 November 2000 from IGL that it would be awarded the main contract. The letter said IGL would advance US$79m and US$46m in two tranches provided the US$125m was placed into a fixed deposit account by 30 November 2000.

(c) In the meantime, SE and Ficon were supposed to enter into a written Project Venture Agreement but Ficon required SE to place the US$125m in a fixed deposit account first.

(d) SE were concerned that a huge sum would be locked up for a considerable period of time in a low-yield interest-earning fixed deposit account. It was also concerned that if Ficon failed to deliver on its end of the bargain, then SE might wish to terminate the fixed deposit before maturity to put the US$125m to more profitable use. This might incur a pre-mature termination penalty/loss of 1% i.e US$1.25m.

(e) Accordingly SE discussed with CBI and McConnell about their sharing some of the risk of the loss since these two parties wanted to be appointed exclusive sub-contractors for the project. Both these parties were agreeable and negotiated with SE with a view to each of them covering SE for US$625,000 making a total of US$1.25m.

(f) On 5 December 2000, SE placed US$125m in an interest-bearing fixed deposit account with Societe Generale in Singapore.

(g) On 6 December 2000, CBI and SE signed an Exclusive Sub-Contract Pre-Bid Agreement in which CBI would pay US$625,000 to SE if Ficon failed to arrange for US$158m (not US$475m) to be paid into a Project Escrow Account by 31 March 2001. This undertaking was to be secured by the provision of a bank guarantee for US$625,000 in favour of SE.

(h) On 16 December 2000, McConnell and SE signed an Exclusive Sub-Contract Pre-Bid Agreement. Its terms were substantially similar but not identical to the agreement dated 6 December 2000 between CBI and SE.

(i) Pursuant to these Exclusive Sub-Contract Pre-Bid Agreements (‘PBAs’), CBI and McConnell procured bank guarantees to be issued each for US$625,000 and in favour of SE.

13. It is common ground that Ficon was unable to obtain the US$158m or any part thereof by 31 March 2001 or at all.

14. Indeed, prior to 31 March 2001, it became clear that Ficon was not going to obtain the anticipated funds. CBI and McConnell then entered into some negotiations with SE. Eventually SE made a call on the bank guarantee issued to secure McConnell’s liability to SE.

15. McConnell disputed that SE was entitled to make such a call and sought an interlocutory injunction to restrain SE from making a call and from receiving any monies under the bank guarantee. After hearing arguments, I dismissed McConnell’s application with costs and made certain consequential orders. McConnell has appealed against my decision.

The Bank Guarantee

16. The bank guarantee that McConnell had procured was dated 5 January 2001 and was issued by Australia and New Zealand Banking Group Limited. In this bank guarantee (‘BG’), SE was referred to as ‘the Principal’ and McConnell was referred to as ‘the Customer’. The material terms of the BG stated:

‘Australia and New Zealand Banking Group Limited (the Bank) asks the Principal to accept this Undertaking in connection with the exclusive subcontract pre-bid agreement dated 16 December 2000 between the Principal and Customer:-

for the design and construction of the gas pipeline for I.G.L Manappad Port, LNG re-gas import terminal and gas pipeline project, Manappad, India.

In consideration of the Principal accepting this Undertaking, the Bank undertakes unconditionally to pay the Principal on written demand from time to time any sum or sums to an aggregate amount not exceeding USD625,000.00 (United States Dollars Six Hundred and Twenty-Five Thousand Only).

The Bank will pay this amount or any parts of it to the Principal on demand without reference to the Customer and even if the Customer has given the Bank notice not to pay the money, and without regard to the performance or non-performance of the Customer or Principal under the terms of the contract or agreement.

Any alteration to the terms of the contract or agreement or any extensions of time or any other forbearance by the Principal or Customer will not impair or discharge the Bank’s liability under the undertaking.’

McConnell’s contentions

17. McConnell relied primarily on unconscionability. Mr Kenny Chooi, Counsel for McConnell, submitted that although the BG appeared to be payable on demand, it was not an on-demand guarantee.

18. He referred to an e-mail dated 4 December 2000 from Mr Ho of SE to Alan Black of CBI and Mark Twycross of McConnell. It stated:

‘Subject: Pre-Bid Agreement & Bank Guarantee Drafts

….

Dear Alan & Mark,

I am pleased to enclose herewith the drafts of the above-mentioned documents for your review.

Pse let me try to capture the spirit of the revision. We are all agreeable that if FICON fails to deliver USD158m by 31 Mar 2001, CBI and MacDow will pay SCC USD625,000 each in cash. These are made very clear in the proposed Pre-bid agreement. To ensure that the payments of USD625,000 are made, SCC needs some form of guarantees and this is provided by BG from banks of CBI and MacDow. The condition for calling on the BG is written in the Pre-Bid agreement but not in the BG.

This is not unlike a contractor’s performance bond to a client. The contractor’s bank issues a guarantee to the client and if for some reason the contractor...