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Performance Bonds

Citation: Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC)

Keywords: Interim injunctions, on-demand bonds, performance bonds, prevention of payment under bond

The Facts

The parties entered into a written contract where SCL (C) as contractor was employed by EUK (D) as purchaser to carry out and complete works as defined in the Contract.  The works related to the provision of a process plant to produce bioethanol.  The Contract incorporated the General Conditions of Contract for Lump Sum Contracts published by ICE in 2001 (Red Book), which was amended with special conditions as agreed by the parties. The Acceptance Certificate was to be provided by the purchaser’s project manager once the plant had passed all performance tests, listing any known defects which the Contractor was bound to make good.  The special conditions provided that the Performance Bond would become null and void upon the issue of the Acceptance Certificate and returned to the Contractor, save where there were pending claims.  The value of the performance bond was for £18,840,000. In March 2010, following the issue of the Take-Over Certificate, a defect was discovered and D issued a defect notice to C. Following the notice and imminent expiry of the Performance Bond, it was agreed to extend the date of expiry of the performance bond in the reduced sum of £2.3 million. C sought an undertaking from D that the performance bond was null and void.  No undertaking was provided, so C sought an injunction to restrain D from making any demand under the Bond.  Unknown to the court and C, D made a written demand on the Bond 2 days earlier.  The judge applying the Cyanamid principles granted the injunction. C then sought a variation in the injunction to the effect that D should withdraw its demand on the Bank.

Held (Akenhead J)

The following principles were established from the authorities in restraining a party making a demand under the Bond:

(1) fraud must be established, which if not, a bank could not be prevented from paying out under a bond provided that bond conditions had been complied with,

(2) the same applies in relation to a beneficiary seeking payment under the Bond,

(3) there is no legal authority which permits the beneficiary to make a call on the bond when it is expressly disentitled from doing so,

(4) a strong case to satisfy the Court on the arguments and evidence put forward by the party seeking an injunction against the beneficiary at the interim injunction stage.

It was also held that the Bond on its face between D and the Bank remained valid, but between C and D it was to be treated as null and void, and must be returned to C. Therefore, D could not call on it.  C also reserved its position throughout with regard to whether the Bond was and remained null and void, of which was not challenged by D.  In line with “Cyanamid,” damages were not an adequate remedy to C, as there was a risk of substantial damage to the commercial reputation and creditworthiness of the organisation, which was difficult to quantify.

The balance of convenience fell in favour of C, so that D would be restrained from calling on the Bond and must withdraw the demand it had already made as the continued injunction of the Bond in the sum of £2.3million to provided continuing security to D, in addition to £7.7 million retention which D had in hand.