Call on a guarantee—interim injunction against bank discharged (Tetronics (International) v HSBC Bank (BlueOak Arkansas intervening))

10 May 2018 | 5 min read

Mr Justice Fraser in the Technology and Construction Court discharged an injunction restraining HSBC Bank from making a payment in respect of a call on a guarantee. Even though, unusually, the fraud exception applied, the injunction was not justified on the balance of convenience given the claimant’s failure to provide full and accurate disclosure of relevant information to the court.

Tetronics (International) Ltd v HSBC Bank plc (BlueOak Arkansas LLC intervening) [2018] EWHC 201 (TCC)

What are the practical implications of this case?

The case provides a useful summary of the principles governing injunctions preventing banks from making a payment in respect of a call on a guarantee. It also serves as a reminder of the rarity of such injunctions.

In addition to meeting the exacting test of the fraud exception to the strict general rule that the court would not intervene to prevent a banker from making payment under a letter of credit following a compliant presentation of documents (Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31), ‘extraordinary facts’ are required for the injunction to be granted on the balance of convenience.

The judgment also highlights the following practical points for arbitration practitioners:

  • parties should ensure consistency of disclosure in any parallel court and arbitration proceedings when seeking interim relief in multiple fora
  • the content of confidential arbitration proceedings may become a matter of public record when the same or similar relief is sought to be obtained before the English court. In this case, neither party objected to the English court's examination of documents pertaining to private arbitration proceedings, although it can easily be imagined that such objections could be run (whether successfully or not)
  • facts and matters arising in confidential arbitration should, where relevant, also be considered for the purposes of complying with full and frank disclosure obligations before the English court

What was the background?

The dispute concerned a call on an advance payment guarantee (the Guarantee) made by BlueOak Arkansas LLC (Blue Oak), the beneficiary of the Guarantee, against HSBC Bank plc (the Bank). The Guarantee had been provided in relation to an underlying contract for an electronic waste recovery plant (the Supply Contract), which was governed by the law of the State of New York and contained an arbitration clause.

On 17 January 2018, the Bank received a call on the Guarantee by Blue Oak (the Call). Tetronics (International) Ltd (Tetronics), a customer of the Bank, made an application for an ex parte injunction on an urgent basis against the Bank, which was granted on 18 January 2018, preventing the Bank from making any payment in respect of the Call.

Tetronics also commenced an arbitration under the rules of the International Court of Arbitration of the International Chamber of Commerce (the ICC Arbitration) against Blue Oak under the Supply Contract. An emergency arbitrator was appointed in the ICC Arbitration as the claimant sought urgent interim relief in respect of the call on the Guarantee against Blue Oak (rather than against the Bank as was the case before the English court).

On 25 January 2018, Blue Oak applied for the Injunction to be discharged.

What did the court decide?

The court held that for the injunction to continue, Tetronics would have to satisfy the court that:

  • (i) it was seriously arguable on the material available that the only realistic inference was that Blue Oak could not honestly have believed in the validity of its demands under the Guarantee
  • (ii) the Bank had been aware of the fraud, and
  • (iii) the balance of convenience favoured granting the injunction, requiring ‘extraordinary facts’

On the facts, the court held that:

  • it was seriously arguable that the only realistic inference was fraud. The facts set out in the Tetronics’ CEO’s witness statement demonstrated a cogent and compelling case of fraud, which Blue Oak had chosen not to challenge
  • the Bank had been put on notice of the fraud by a legal opinion from a US law firm (which had been sent to the Bank) and phone calls from the Tetronics’ CEO, during the course of which he expressly used the word ‘fraudulent’
  • nevertheless, the balance of convenience favoured a discharge. In these proceedings, Tetronics adduced evidence that a demand from the Bank for the sum in question would make Tetronics immediately and unavoidably insolvent. However, this evidence was inconsistent with Tetronics’ evidence in the related ICC emergency arbitration proceedings. Dr Gerbay, an emergency arbitrator, said in his Order in the ICC Arbitration that Tetronics’ counsel conceded that the Tetronics’ shareholders would in fact be able to make additional contributions for the purposes of satisfying a request for reimbursement by HSBC (although they were unwilling to do so). Immediate and unavoidable insolvency of Tetronics would have been a significant factor in favour of continuing the Injunction, but in its absence, there were few factors in favour of doing so

Accordingly, the court discharged the injunction.

Case details

  • Court: High Court, Queen's Bench Division (Technology and Construction Court)
  • Judge: Fraser J
  • Date of judgment: 12 April 2018

 

 

 

 

Filed Under: Courts

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