The recent case of J Murphy & Sons Ltd v Beckton Energy Ltd [2016] EWHC 607 (TCC) considered, amongst other things, whether an employer’s call on an on demand bond was fraudulent in circumstances where their claim for LADs under the Contract was disputed by the Contractor and had not been agreed or determined by the engineer.

Beckton Energy Ltd (Beckton) entered into a contract with J Murphy & Sons Ltd (Murphy) in relation to the design and construction of a combined heat and intelligent power plant in east London. The contract was FIDIC Yellow Book Contract, subject to some bespoke amendments (the Contract). The Contract required Murphy to obtain an on demand performance bond, which it duly did.

Murphy’s work was subject to significant delays (409 days) and due to its failure to meet the various contractual dates, Beckton notified Murphy that it was entitled to liquidated damages (‘LADs’) in the sum of £8,274,000. Murphy disputed Beckton’s entitlement to LADs and argued that it had applied for a number of extensions of time which the engineer had failed to agree/determine.

Following a number of notifications from Beckton to Murphy, in February 2016, Beckton notified Murphy of its intention to make a claim under the performance bond on the basis that Murphy had failed to pay the LADs within 30 days of their request to do so, which was a breach of contract.

The key issue that was determined by the court related to the interpretation of the amended FIDIC Yellow Book Contract and whether Beckton was entitled to recover LADs from Murphy in the absence of agreement or determination by the engineer. Murphy argued that this was a prerequisite to recovery of LADs under the Contract. Ultimately, the court found in favour of Beckton on this issue.

The court however then went on to consider Murphy’s argument that Beckton’s call on the bond was fraudulent in the absence of agreement or determination by the engineer on Beckton’s LAD entitlement.

The bond in this case was a conventional on-demand bond and the purpose of the bond was to act as security for Murphy's performance.

The court held in this case that all that was required to trigger payment under the bond, after notice from Beckton to Murphy, was a written demand signed by two directors stating that Murphy had committed a breach of the Contract, with particulars, and the amount claimed as a consequence of such breach.

There was no requirement for any proof of the validity of Beckton's claim, let alone an inquiry into its correctness. The request by Murphy for declaratory relief failed and the court held that the bond had been correctly called upon by Beckton.

This case reaffirms that relief preventing a beneficiary from calling an on demand bond will be rarely granted and where a party can argue that they honestly believed the validity of its call, as was the case here, the courts will be slow to interfere.

This case is a timely reminder to contractors of the risk of providing on demand bonds. On demand bonds, like an indemnity, impose an obligation to pay without the beneficiary of the bond having to sue or prove breach. This leaves open to contractors very limited rights of challenge and the consequences of such a call can be significant to a contractor’s business.