Lukoil Mid-East Ltd v Barclays Bank Plc

Hearing dates: 27 January 2016

Introduction

This is an application for summary judgment made by the Claimant ["Lukoil"] against the Defendant ["Barclays"] in the sum of US$7,115,034 plus interest, pursuant to a call it made on an on demand guarantee issued by the Defendant ["Barclays"] by letter dated 26 October 2015. By a counter-application Barclays applies for summary judgment against Lukoil on the basis that Lukoil's demand was defective and that no obligation to make payment under the bond has arisen.

The applications raise a short point of construction. The material facts are not in dispute.

The Factual Background

Lukoil is an oil and gas company registered in Cyprus. It is the Operator of the West Qurna (Phase 2) oil field in South East Iraq. Barclays is a bank registered in England. Its business includes issuing (to contractual counterparties of its clients) on demand bank guarantees upon the provision by its clients of counter-indemnities (or other securities) and the payment of its charges.

In 2011 Lukoil engaged Baker Hughes Asia Pacific Limited (a company registered in the Cayman Islands) ["BH"] under a suitably detailed written contract known as Contract No. CY-11–8015–0060 to drill and complete 23 production wells in the Mishrif formation in the West Qurna (Phase 2) oil field on a turnkey basis (the "Contract"). The estimated Contract Price was US$142,300,680.

The Contract included the following relevant provisions:

i) Article 6.18 provided:

"Bank Guarantee

Within 10 days from the Effective Date of this Contract [BH] shall deliver to [Lukoil], as security for [BH's] performance of its obligations under this Contract and its insolvency, an irrevocable, unconditional, on demand bank guarantee issued by an international bank rated not lower than B+ by international ratings agencies Fitch, Moodys or Standard and Poors and being in the form acceptable to [Lukoil], for 5% (five percent) of the estimated Contract Price… Such bank guarantee shall provide that, and [BH] shall ensure that, the bank guarantee remains valid until the 90th (ninetieth) day following handover, in accordance with Article 6.17, of the last well to be drilled and Completed under this Contract or earlier termination of this Contract. [BH] shall bear all costs and charges related to the issue and maintenance of the said bank guarantee."

ii) Article 22 provided for Variations and for extensions of time to be given where reasonable and appropriate:

a) Article 22.1

"The scheduled Completion Dates established pursuant to this Contract and Key Dates shall be subject to adjustment only in accordance with the provisions of this Article 22 (Variations). Any Variation shall be governed by all the provisions of the Contract.

Any Variation is effective only when it is made in writing and agreed or determined in accordance with this Article 22."

b) Article 22.2

"At any time during the term of validity of the Contract, the Company shall be entitled to initiate the introduction of changes in the Work, including:

(a) changes to any Detailed Drilling Program once it has been approved by the Company in accordance with Article 5.1.2;

(b) omission of any Work, cancellation of the supply of any equipment;

(c) change in the nature, quality or kind of any Work or equipment to be supplied as part of the Work;

(d) execution of Additional Work or supply of additional equipment.

For the purposes of the Contract the matters described in this Article 22.2, including items (a) to (d) inclusive, shall be referred to as a "Variation". Any changes made through Variation shall be in a written form and shall be signed by the authorized representatives of the Parties."

c) Article 22.11

"If the Contractor considers himself to be entitled to any extension of time under the Contract, the Contractor shall give notice to the Company, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable.

Subject to the foregoing paragraphs of this Article 22.11, the Contractor shall be entitled to an extension of the Key Dates as shall be reasonable in all the circumstances if and to the extent that completion of Work is or will be delayed by any of the following causes:

(a) a Variation (unless an adjustment to the Completion Date or Key Date has already been agreed under Articles 22.1 to 22.10);

(b) any delay, impediment or prevention caused by or attributable to the Company or the Company's personnel (including as a result of breach of this Contract); or

(c) force majeure (as such term is defined in Article 19),

in each case whether occurring before or after the relevant Completion Date or relevant Key Date has expired, but, in any event, excluding delay which is due to any breach, neglect, or default of the Contractor or any person for whom the Contractor is responsible in accordance with the Contract."

iii) Article 23 provided for BH to pay Lukoil liquidated damages for BH's delay in achieving any of the Key Milestones by the Key Dates set out in Appendix No. 12.

iv) Article 24.7 was an entire agreement clause, which included the provision that: " No changes or amendments to this Contract shall be binding on either Party, unless executed in written form, duly signed and sealed by both Parties, unless otherwise set forth herein." As we have seen already, Variations did not require to be sealed, having their own detailed contractual machinery;

v) Appendix No. 12 to the Contract, #1.10, provided for Key Milestones and Key Dates for achieving them, including "End of Completion of the last well (#23)" on 1 January 2013.

On or about 2 November 2011 BH delivered to Lukoil an irrevocable, unconditional, on demand bank guarantee issued by Barclays dated 2 November 2011 (the "Bank Guarantee"). It provided (with paragraph numbering added):

"OUR GUARANTEE REFERENCE: MRGI55024596

To: [Lukoil]

[1.] Whereas [BH] … has undertaken obligations under Contract No. CY-11–8015–0600. For Drilling and Completion of Production Wells Mishrif Formation in West Qurna (Phase 2) (hereinafter referred to as "the Contract"), and whereas the mentioned Contract states that [BH] shall provide a bank guarantee for the amount defined therein to secure the fulfilment of [BH's] obligations under the Contract, and whereas we Barclays … agreed to provide [BH] with such a bank guarantee, we hereby unconditionally and irrevocably declare that we are the Guarantor and on behalf of [BH] we bear responsibility and obligations to you for the total amount of USD 7,115,034.00 … and this amount shall be paid in the same currencies and proportions as the Contract price. We undertake to pay you, at your first written request, without any disputes or objections, any amount or amounts within the limit of USD 7,115,034.00 … as stated above, not requiring from you to provide any proof or justification of your request for the amount defined in this document.

[2.] We hereby relieve you of the need to collect the debt from [BH] before presenting a request to us.

[3.] [Barclays] is bound with this obligation in its own name.

[4.] From the date of the issuance of the Guarantee [Barclays] shall be responsible for the payment of the total above mentioned amount in full at [Lukoil's] first written request submitted to [Barclays] before the expiry date if [BH] fails to fulfil the Contract provisions, on the condition that no amendment has been made to the Contract concluded between [Lukoil] and [BH] impacting the timely performance of the Works under the Contract.

[5.] We hereby agree that no amendments nor addenda to the Contract, nor any contractual documents made by you and [BH] shall relieve us from our responsibilities under this Guarantee, and we hereby waive the right to be notified of such amendments or addenda.

[6.] The conditions of this Guarantee are as follows:

[7.] The GUARANTEE shall be valid until April 30, 2014 (the "Expiry Date")

[8.] This guarantee shall be governed by English law.

Yours faithfully…"

Various steps were taken thereafter either to amend or reissue the Bank Guarantee as follows:

i) On or about 15 November 2011, as evidenced by a letter from Barclays to Lukoil of that date amending the Contract number in #1. from "CY-11-8015-0600" to "CY-11-8015-0060";

ii) On or about 29 April 2014, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7 from 30 April 2014 to 28 February 2015;

iii) On or about 23 December 2014, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7 from 28 February 2015 to 30 April 2015;

iv) On or about 20 April 2015, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7. from 30 April 2015 to 31 July 2015;

v) On or about 23 July 2015, as evidenced by a letter from Barclays to Lukoil of that date amending the date in #7 from 31 July 2015 to 31 October 2015.

On 22 April 2015 and 26 July 2015 BH wrote to Lukoil enclosing, respectively, the letters from Barclays dated 20 April 2015 and 23 July 2015 referred to at paragraphs 7(iv) and 7(v) above and each time stating:

"[BH] undertakes that: (i) it will not challenge or take any steps to cancel or invalidate the Bank Guarantee at any time during the...