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American Express Bank Ltd. v. Banco Espanol De Credito

February 11, 2009

AMERICAN EXPRESS BANK LTD., PLAINTIFF,
v.
BANCO ESPAÑOL DE CRÉDITO, S.A., DEFENDANT.



The opinion of the court was delivered by: Richard J. Holwell, District Judge

MEMORANDUM OPINION AND ORDER

This case is about international demand guaranties, a form of commercial credit used to secure the performance of international construction contracts. In particular, it involves a bank's attempts to enforce another bank's counterguaranties, despite the fact that it has refused to pay the primary guaranties on the ground that demand was made in bad faith.

The banks' dispute originates in two contracts to build power substations in Pakistan. The contractor, a Spanish company, claims that it fully performed the contracts. The purchaser, a semi-autonomous agency of the government of Pakistan, thinks otherwise. A panel of arbitrators appointed by the International Chamber of Commerce ("ICC") sided with the contractor and directed the Pakistani purchaser to cancel guaranties securing the contractor's performance. Instead of abiding by the arbitrators' decision, the purchaser continued to demand payment of the guaranties and initiated an action in Pakistan to set aside the award and enforce the guaranties. Neither the contractor nor the purchaser is a party to this action.

In this dispute between the banks, the Court holds that: (1) the guaranties and counterguaranties are governed by letter-of-credit law; (2) in light of the final, binding ICC award, the guarantor, plaintiff American Express Bank ("AEB"), has no obligation to pay under its guaranties and, therefore, no good faith basis to demand payment of the counterguaranties issued by Banco Español de Crédito ("Banesto"); and (3) AEB's request for a declaration that it will be entitled to payment in the event that it is compelled at some future date to pay in Pakistan is not presently justiciable. AEB's complaint is therefore dismissed without prejudice to the filing of a new action following further developments in Pakistan.

I. BACKGROUND

The history of this case is long and spans four jurisdictions. The Court recounts only enough of it to explain the basis for the current decision. In doing so, the Court accepts as true the factual allegations of the complaint, see, e.g., City of New York v. Smokes-Spirits.Com, Inc., 541 F.3d 425, 432 (2d Cir. 2008); relies on undisputed facts contained in public records, see, e.g., Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004); and makes additional findings of fact necessary to determine whether the Court has subject matter jurisdiction, see, e.g., Kamen v. Amer. Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d Cir. 1986).

A. The Underlying Contracts

In April and July 1995, Isolux Wat S.A. ("Isolux") and the Pakistan Water and Power Development Authority ("WAPDA") entered into two contracts for the construction of electrical substations in Pakistan. (See Isolux Wat, S.A. (Spain) v. Pakistan Water & Power Dev. Auth. (Pakistan), ICC Case No. 13158/KGA, at 2 (Feb. 6, 2007) ("ICC Award"), Cadarso Decl. Ex. B.; Terms of Reference, Isolux Wat, S.A. (Spain) v. Pakistan Water & Power Dev. Auth. (Pakistan), ICC Case No. 13158/KGA, at 2 (Oct. 22, 2004) ("Terms of Reference"), Walker Decl. Ex. C.) Isolux is a Spanish engineering and construction company. (ICC Award 2.) WAPDA is a semi-autonomous agency of the government of Pakistan, which is responsible for coordinating infrastructure development schemes in the water and power sectors. (WAPDA, The Authority, http://www.wapda.gov.pk/htmls/auth-index.html (last visited Nov. 7, 2008).)

The contracts required Isolux to install two 220/132 KV substations (the numbers refer to voltage), and to supply and install telecommunication equipment for twenty lower voltage peripheral grid stations. (ICC Award 2.) In exchange, WAPDA apparently agreed to pay Isolux about $35 million. (See ICC Award 11.) In the event of a dispute, the parties agreed to submit their claims to arbitration at the ICC. (See ICC Award 2.) The arbitration clause provided that "any difference, dispute or question arising out of or with reference to this agreement which cannot be settled amicably . . . shall within 60 days from the date that either party informs the other in writing that such difference[,] dispute or question exists, be referred to arbitration of three arbitrators." (Id.) The clause further provided that "[t]he award of the majority of the [arbitrators] shall be final and binding on both parties." (Id.)

B. The Guaranties and Counterguaranties

To secure Isolux's performance, WAPDA required Isolux to obtain two demand guaranties.*fn1 Such guaranties, which are common in international construction contracts, provide a simple way for a buyer to obtain cash for substitute performance if a contractor defaults. (See generally David J. Barru, How to Guarantee Contractor Performance on International Construction Projects: Comparing Surety Bonds With Bank Guarantees and Standby Letters of Credit, 37 Geo. Wash. Int'l L. Rev. 51 (2005).) Isolux asked defendant Banesto to arrange the guaranties. (See Compl. Ex. 1.) Banesto in turn asked AEB, the plaintiff here, to execute guaranties in favor of WAPDA in Lahore, Pakistan. (See id.) This kind of arrangement is also common, since buyers frequently prefer to work with local banks, such as the AEB branch in Pakistan, instead of unfamiliar foreign institutions. (See generally John F. Dolan, The Law of Letters of Credit: Commercial and Standby Credits ¶ 1.03[1], at 1-16 (Rev. Ed. 1996) ("Dolan").) The AEB branch in Pakistan agreed to issue guaranties to WAPDA, provided that Banesto issue counterguaranties in its favor.

The following diagram summarizes the legal relationships between WAPDA, Isolux, and the banks. The instruments at issue in this action appear in bold:

Banesto Counterguaranties AEB

Commercial banking relationship

Guaranties (on construction contracts)

Isolux Construction contracts WAPDA

Figure 1

Banesto and AEB made arrangements for the guaranties in a series of SWIFT messages sent in November 1995.*fn2 On November 16, Banesto sent AEB a message asking that it issue two guaranties in WAPDA's favor, both for a total of U.S. $1,778,571.50 and 5,486,500 Pakistani rupees. (Compl. Ex. 1.) The critical undertakings in the guaranties provided: the surety [i.e., AEB] waiving all objections and defences under the aforesaid contract, hereby irrevocably and independently guarantee[s] to pay to WAPDA without delay upon WAPDA's first written demand any amount claimed by WAPDA upto [sic] the sum named herein, against WAPDA's written declaration that the principal [Isolux] has refused or failed to perform the aforementioned contract. (Compl. Ex. 1 (capitalization normalized).)

AEB, in other words, agreed to pay WAPDA under the guaranties based on a written certification that Isolux had failed to perform. For its part, Banesto agreed to repay any liabilities AEB incurred under the guaranties. Specifically, Banesto's messages to AEB promised, in banker's pidgin, that "Our counterguarantee irrevocable unconditional in your favour is valid to receive your eventual claims made under your guarantee that we undertake to pay to you on your first demand ...


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