Doosan Babcock Ltd v Comercializadora de Equipos y Materiales Mabe Limitada (MABE), 2013 concerned an application for an interim injunction to prevent MABE from making a call on an on demand performance guarantee.
Doosan had granted on demand bonds requiring their provider to pay MABE "on receipt of [MABE's] first written demand to us in writing stating that [Doosan] has not performed its obligations in conformity with the terms of the Contract."
No threat to make a call had been made but MABE had intimated a claim to Doosan for c.US$57m in August 2013 in respect of what they claimed was a breach of contract by Doosan related to the supply of boilers for a power plant in Brazil. The performance guarantee was due to expire on the issue of a Taking-Over Certificates for the boilers or 31 December 2013, whichever occurred earlier.
The contract provided that the Engineer could issue Taking-Over Certificates. The Engineer was MABE (also the Employer).
Doosan claimed it was entitled to issue of Taking-Over Certificates on the basis that the plant had been taken into use by MABE (boiler 1 in November 2012 and boiler 2 in May 2013). MABE refused to issue the Certificates saying it had used the boilers only as a temporary measure (although the boilers had by then exported more than 7500 hours of power at various loads to the local grid).
The court accepted that this was the type of situation in which a demand on a performance guarantee is likely to be made: there was no reason for MABE to refuse to issue Taking-Over Certificates other than to extend the duration of the performance guarantee.
How strong did Doosan's case need to be to justify the Court granting an injunction?
In Simon Carves v Ensus, 2011, it was said that fraud was the only basis for an order preventing a bank paying under a call on an on demand bond as long as the bond conditions had been complied with.
However, at the stage of an injunction to prevent a call in the first place, fraud was not the only ground. If the terms of the underlying contract prevent the party to the contract making a demand under the bond, the court may grant an injunction to prevent it. The party seeking to prevent a call would require to have a "strong case" under the terms of the underlying contract that the beneficiary is not entitled to make a call. That case would be subject to proof and a final determination at a later stage.
Doosan was considered to have a strong case on the issue of whether MABE's refusal to issue Taking-Over Certificates was a breach of contract. A party should not be permitted to make a demand on a bond if it is only able to do so as a result of its own breach of contract. In these circumstances, the injunction was granted.
Preventing calls on on demand instruments tends to be extremely difficult as courts are reluctant to water down their effectiveness when they are widely used in international trade. However, the trend in recent case law, which continues in this case, has been increasingly to scrutinise both the terms of the underlying contract to ensure any calls made are justifiable and the terms of the bonds themselves to ascertain if they are truly to be treated as on demand.
- It is not necessary to wait until a call is threatened if circumstances suggest that one is likely.
- To have any chance of defeating an on demand bond, it is necessary to act quickly to stop the call being made if there is a basis for doing so.
- Once a call is made, barring fraud, the court will not act to prevent payment.