Guarantees And On Demand Bonds: The Difficulties That Conflicting Governing Law Provisions Can Cause Parties To A Project When Trying To Resolve Disputes. Arbitration? Court?

The recent case of Autoridad del Canal de Panamá v Sacyr S.A. and others [2017] EWHC 2228 (Comm) demonstrates (i) the importance of consistency in the drafting of surety instruments by parties to construction contracts, and (ii) the care that needs to be taken when determining the governing law provisions, jurisdiction and dispute resolution clauses to be used in contract documentation.

Problems were encountered in Autoridad del Canal de Panamá v Sacyr S.A. and others as a result of the main contract and a series of financial guarantees being subject to Panamanian law and providing for the resolution of disputes by International Chamber of Commerce (ICC) arbitration, but a number of advance payment guarantees ("APGs"), procured by the contractor, being subject to English law and the exclusive jurisdiction of the English court.

Background

The case arose from a construction project for the widening of the Panama Canal.

Autoridad del Canal de Panamá ("ACP") was the employer and it contracted with a consortium of mainly European construction contractors to carry out the works. The consortium then assigned the contract to a company incorporated in Panama, called Grupo Unidos por el Canal S.A., because Panamanian labour regulations required such an arrangement.

The main contract governing the design and construction was subject to Panamanian law and provided for disputes to be referred to ICC arbitration with its seat in Miami.

As is common with many large-scale construction projects, the performance of the contractor's obligations under the main contract was secured through a series of financial guarantees and these were governed by Panamanian law and subject to ICC arbitration.

During the carrying out of the works the contractor encountered cash flow difficulties and this led them to enter into a number of APGs with the employer.

In contrast to the previous guarantees, the APGs were governed by English law and provided for the exclusive jurisdiction of the English courts.

The disputes

Disputes arose between the parties in relation to the financial guarantees under Panamanian law. The contractor filed a request for arbitration under the main contract in relation to these. They sought a declaration that repayment of the sums that were the subject of the guarantees was not due and/or payable under Panamanian law.

At a similar time, the employer brought proceedings in the English courts seeking the repayment of US$290m, plus interest, which had...