The good, or bad, thing about on-demand bonds, depending on whether you are a giver or receiver, is that they do what it says on the tin. Just follow the prescribed procedure and the bond will pay out without proof of liability, but with the real risk of damage to a contractor’s commercial reputation and creditworthiness and an impact on qualifying for future work. No ifs, no buts - just ask. Except that two recent cases have shown that on demand bonds don’t always work.
In AES-3C Maritza East 1 Eood v Crédit Agricole a bond required a demand to contain both a statement to the effect that the contractor had failed to comply with its contractual obligations and any notice to, or claim against, the contractor relating to the relevant breach. The demand was for €93 million but only enclosed notices or claims in a total sum of some €27million. Was it valid?
No, said the court. It did not comply with the bond requirements because it made a claim for which there was no notice to, or claim against, the contractor. In addition, the sums claimed were not due and payable by the contractor for any breach of obligation relied upon in the demand and were therefore not recoverable under the bond.
The contractor also alleged fraud, on the basis that the claimant had demanded a sum it knew was not due, but the evidence did not support an assertion that the claimant did not honestly believe the demand was correctly made. A mistaken belief that the bond covered prospective loss was no basis for any inference as to dishonesty or fraud.
In Simon Carves Ltd v Ensus UK Ltd the contractor asked the court for an injunction to stop the employer making a call on an on-demand bond and, when it discovered a call had already been made, to withdraw the demand already made. But was fraud the only ground on which a call on an on-demand bond could be restrained?
Mr Justice Akenhead’s review of the case law showed that fraud is not the only ground on which a call on the bond can be restrained by injunction and that, if the contract that the bond supports clearly and expressly prevents the beneficiary from making a demand under the bond, it can be restrained by the court from doing so. The contractor had a “strong” case that, as between it and the employer, the bond was null and void and so returnable. In addition, damages were not an adequate remedy, because of the potential commercial damage to the contractor from a call on the bond. The injunction previously awarded, restraining a call on the bond, was therefore continued until the final resolution of the issues.
Benjamin Franklin is said to have observed that there are only two certainties in life. Now we know for sure that the principle that on-demand bonds always work is not one of them.