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A valid claim under an on-demand bond?

Case Reference: AES-3C Maritza East 1 EOOD v (1) Credit Agricole Corporate and Investment Bank and (2) Alstom Power Systems GmbH [2011] EWHC 123 (TCC) 31/1/11

The Facts

The Claimant (C) sought summary judgment against the first defendant bank (D1) in respect of two demands made on an on-demand bond.  The Peformance Bond (the Bond) was provided to the Second Defendant (D2) under a contract for the construction of a power plant in Bulgaria.  The contractors under the engineer procure and construct contract with C were two Alstom Group companies.

The Issue

The court had to determine (1) whether a claim for sums not yet alleged to be due and payable and for which there was no notice to or claim against D2 could be demanded under the Bond, (2) whether the first demand was made fraudulently and (3) whether a second demand was defective if it was for the same sums in circumstances where the first demand had not been withdrawn.

Held

Ramsey J

There was no basis for the allegation of fraud because the evidence provided no support for an assertion that C did not honestly believe the demand which was made to be a correct demand made under the Bond. 

It was evident that the question of whether there had been a relevant demand under an on-demand bond depended in each case upon the wording of the particular bond.  In this particular case, the Bond, like many on-demand bonds, was payable against an appropriately worded demand accompanied by such document as the demand required and without proof of the existence of a liability under the underlying contract.  The proper construction of the Bond was that the claim had to be based on an assertion by C that the sum was due and payable by D2 for breach of its obligations under the construction contract; prospective claims for sums payable by D2 at a future date were not to be the subject of demands under the Bond, even if those sums might inevitably be due and payable at a future date.  That was not to say that in cases where there were defects giving rise to claims for damages for breach of contract such claims could not be made; in such a case there is an accrued right to pay damages although the sum actually paid to make good those damages may not yet have been incurred.  That was different from the position in this case.  D1 therefore had a real prospect of successfully defending the claim on the first demand.  In any event, the first demand was invalid because it did not contain notices to or claims against D2 in accordance with the terms of the Bond. 

Since the first demand was invalid there was only one valid demand in the form of the second demand, were that not the case there would be difficulty in making a second valid demand for the same sums.  D1 had no real prospect of successfully defending the claim made in relation to the second demand.