A recent TCC decision has considered the ability of parties to seek orders restraining calls under on-demand securities by reference to the terms of the underlying contract to which the security relates. This is a controversial area of the law, with two previous TCC decisions in 2011 and 2013 having sought to widen the test applicable in such cases. The present decision has declined to follow these decisions, preferring a narrower test which requires any alleged restrictions on the right to call such securities to be positively established before any injunction will be granted.
Calls under on-demand securities were traditionally only able to be restrained by an English court where a call was shown to be fraudulent and the bank involved was aware of the fraud. In 2003, the Court of Appeal extended this rule to allow calls to be restrained where they could be shown to be in breach of an express restriction in the underlying contract and such a restriction had been “positively established” (Sirius International Ins Co v FAI General Ins). The restriction in that case was a requirement to seek consent before any call was made. The "positively established" requirement was subsequently applied by Mr Justice Ramsay in 2007 inPermasteelisa Japan KK v Bouyguesstroi.
In Simon Carves v Ensus UK decided in 2011, the TCC sought to develop this rule by requiring a“strong case” as to an alleged restriction in the underlying contract rather than one which was positively established. A further TCC decision in 2013 confirmed the “strong case” test and queried whether the still lesser standard of a “realistic prospect of success” might apply to situations in which a call under an on-demand security could be said to fall within the principle that no party should benefit from their own wrong (Doosan Babcock v Comercializadora De Equipos Y Materiales Mabe).
MW High Tech Projects UK v Biffa Waste Services
The present case concerned an EPC Contract for the construction of a waste treatment plant by MW High Tech. The works were delayed and Biffa sought to terminate the contract due to the passing of a long stop date. It then sought to recover amounts alleged to be due in respect of liquidated damages under an on-demand retention bond.
As a condition precedent to calling under the retention bond, the contract required Biffa to first make a demand under a parent company guarantee provided by MW High Tech. If after 10 days the parent company had not accepted in writing each and every aspect of the demand, the condition precedent would be satisfied. Biffa duly made its demand under the parent company guarantee and proceeded to call the retention bond in the absence of any acceptance of the demand by MW High Tech’s parent company.
MW High Tech sought to challenge the call on the basis that Biffa’s demand under the parent company guarantee lacked an adequate contractual basis. It argued that in order for the condition precedent to be satisfied, the demand under the parent company guarantee was required to be a “valid” demand.
The court disagreed that there was any validity requirement for a demand under the parent company guarantee. The requirement for a demand was intended rather to give the parent company the opportunity of paying the claim and avoiding a call under the on-demand securities.
In reaching his conclusion, Mr Justice Stuart-Smith adopted the “positively established” test applied by Ramsay J in Permasteelisa. In referring to the Simon Carves and Doosan Babcock decisions, he noted that to the extent they “suggest that a less rigorous test is to be applied, I respectfully consider that the views of Ramsey J should prevail as being in accordance with the substance of the decisions of higher authority, to which I have referred.”
The Simon Carves and Doosan Babcock decisions had been thought by some to have diluted the strength of on-demand bonds governed by English law, which have historically been held in high regard and are popular on international projects (irrespective of the law governing the underlying contracts). The present decision will go some way to ease these concerns, although it is likely that authoritative guidance will be needed from the Court of Appeal before the broader grounds of challenge suggested in Simon Carves and Doosan Babcock can safely be disregarded.
To register or adjust your preferences for our updated Law-Now service, please click here.