Cases - Sabah Shipyard v The Islamic Republic of Pakistan
Record details
- Name
- Sabah Shipyard v The Islamic Republic of Pakistan
- Date
- [2007]
- Citation
- AII ER (D) 193 (Nov)
- Legislation
- Keywords
- Parent company guarantee - drawdown on letter of credit equalled breach of contract - intention for parent company to honour an award made against the contractor it should be included in the PCG
- Summary
-
Sabah Shipyard ('Sabah') entered into an agreement with The Islamic Republic of Pakistan ('Pakistan') to supply electricity to Karachi Electricity Supply Corporation ('Karachi') using a barge-mounted electric power plant. Sabah provided a letter of credit in favour or Karachi and Pakistan in turn had provided a written guarantee to Sabah.
Karachi drew down on the letter of credit on the basis that Sabah had failed to bring the plant into operation. Sabah claimed that the drawdown on the letter of credit was a breach of contract by Karachi and obtained an arbitration award against Karachi for repayment of the sums drawn down. Sabah then applied for summary judgment against Pakistan seeking payment under the written guarantee of the sums awarded at arbitration. Pakistan submitted (amongst other points) that they were not bound by the arbitration award and thus were entitled to have the case proved against it.
Although the written guarantee extended to any 'monetary damages arising out of any failure by KECS or the Fuel Supplier to perform its [contractual] obligations', Mr Justice Clarke held that:
'I do not regard the fact that the clause extends to monetary damages arising our of a failure to perform obligations under the agreement as amounting to the very clear words indeed required to make a surety liable to honour an award made against[Karachi]. They are perfectly apt to make clear that the surety's obligation is not limited to paying any debts of[Karachi] but extends to paying any amount which [Karachi]is bound to pay in respect of damages for breach of contract'.
The judge went on to say that:
'... it would have been very easy to insert a provision that [Pakistan's] obligations extended to guaranteeing the performance of any Award against [Karachi] or that any such Award should be evidence (conclusive or otherwise) against the surety. The fact that ...the clause fails to do so militates against a construction of the guarantee which would extend to coverage of an Award'.
The court held that Pakistan was entitled to have the case against it proved.
Therefore, if it is the intention of the parties that the parent company honours an award made against the contractor (whether by a court, an adjudicator or an arbitrator), clear words to this effect should be included in the PCG (this principle applies equally to a bond).