Lessons from Daewoo v INPEX: calls on bank guarantees

By Julian Berenholtz, Nick Rudge, Matthew Shnookal
Banking & Finance Construction & major projects Infrastructure & Transport

Courts will look to the purpose of the guarantee 3 min read

Last week the NSW Supreme Court published an important decision concerning a principal's ability to call on a bank guarantee in circumstances where a contractor is facing financial troubles and/or potential insolvency in Daewoo v INPEX [2022] NSWSC 1125.

The decision was also noteworthy for the amount in dispute: the bank guarantee was worth $467m.

The outcome was that the principal was not restrained from calling on the bank guarantee.

Key takeaways

  • Financial difficulties for a contractor—which may be exacerbated by a call on a bank guarantee—will not (without more) be grounds to injunct a principal from calling on a bank guarantee (and indeed could make it less likely that a principal will be so restrained); and
  • A principal is less likely to be restrained from making a call on a bank guarantee where the commercial purpose of the bank guarantee is to serve as a 'risk allocation device', providing a ‘pay now, argue later’ regime.


Daewoo is a Korean shipbuilding company. INPEX is a Japanese oil and gas company which operates the Ichthys Gas Field Development Project, a major LNG field off the northern coast of Western Australia.

In 2012, Daewoo and INPEX entered into a contract for Daewoo to construct a Floating Production Storage Offloading Facility (FPSO), known as the Ichthys Venturer. The FPSO was built and delivered, but the parties subsequently fell into dispute, with INPEX claiming it had suffered loss and damage as a result of defects and delays to delivery of the Ichthys Venturer. INPEX's claim exceeds the value of the bank guarantee. INPEX commenced an arbitration in Singapore with the International Court of Arbitration on 29 July 2022.

The following business day, Daewoo applied to the NSW Supreme Court for an urgent interlocutory injunction restraining INPEX from calling on the bank guarantee and seeking its return.

Decision: bank guarantee was a risk allocation device

The court noted that there are broadly two reasons why parties agree to provide bank guarantees. The first is to provide security—if there is a valid claim and there are difficulties with recovery from the party in default, the principal can have recourse against the bank. The second reason is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. This is referred to as the 'risk allocation device'. It is a question of contractual interpretation in every case whether a bank guarantee is intended as a risk allocation device, or merely as a security.

The court held in this case that the bank guarantee was a risk allocation device, providing a ‘pay now, argue later’ regime. The commercial agreement was for INPEX to be 'in the money', to the extent of the bank guarantee, pending resolution of any dispute. In those circumstances, the court held Daewoo did not have a sufficiently strong case to justify an injunction preventing INPEX from calling on the bank guarantee.


Impact of Daewoo's financial troubles

Daewoo reported a loss of $1.85 billion in 2021 and announced to the market that it was in a financial 'emergency period'. Daewoo's financial struggles were attributable to international sanctions following Russia's invasion of Ukraine, as well as supply chain issues, the COVID pandemic and sustained industrial action.

Daewoo led evidence that a call on the bank guarantee could cause it to be unable to meet its payment obligations under other contracts, potentially triggering default events and calls on other bank guarantees. A call on the bank guarantee carried a risk of irreparable harm to Daewoo's reputation and business. Daewoo therefore argued that the balance of convenience favoured an injunction because damages would be an inadequate remedy for these 'profound financial and reputational consequences', if it was ultimately successful in the arbitration proceeding.

INPEX argued, on the other hand, that Daewoo's financial troubles were a factor pointing against an injunction, rather than for it, due to the risk to INPEX that Daewoo may be unable to continue to extend the bank guarantee, and/or satisfy any judgment if INPEX was ultimately successful on the substantive dispute.

The court appeared to prefer INPEX's argument in this regard, saying it could not ignore that Daewoo's financial troubles could have adverse consequences for INPEX.

We would be happy to answer any questions you have arising from this Insight, or concerning bank guarantees more generally.