Injunction granted to prevent a call on a performance bond

The case of (1) ETC Export Trading Company SA and (2) ETC Group Limited v (1) APLA Importer and (2) Berhan Bank SC [2020] EWHC 3229 is a noteworthy case where the Court prevented a call on a performance bond for reasons other than fraud or a non-compliant demand. The Court was satisfied that a call would breach an undertaking given by Apla not to do so, save in specified circumstances.   

Background Facts 

ETC, in a joint venture with Apla (an Ethiopian commodity importer), agreed to supply 10,000 tonnes of milling wheat to the Ethiopian Government for US$21.8m. The transaction was a complex international one, involving multiple parties in different jurisdictions. They agreed that any disputes under the sale agreement would be referred to arbitration in London. 

The Ethiopian government agreed to pay for the wheat by way of a deferred letter of credit, which was to be issued by the Commercial Bank of Ethiopia.  That letter of credit had not been issued by the time of this judgment.

Under the joint venture arrangement, the wheat was to be supplied by ETC and ETC was also required to provide a performance guarantee (“the Bond”) for US$2.18m which was duly issued by Commerzbank at the behest of BNP Paribas in favour of Berhan Bank in Ethiopia.  

Commerzbank received two separate demands under the Bond which it rejected as non-compliant. Although the judgment does not set out the terms of the Bond, it is clear that the Bond was an on demand guarantee.

On 23 November 2020, Commerzbank advised BNP Paribas that it had received a further demand for payment under the Bond. On this occasion, the demand was compliant and Commerzbank, in turn, sought payment under its own counter-guarantee with BNP Paribas by 25 November 2020. 

Meanwhile, ETC and Apla were treating the sale agreement as not yet capable of performance in the absence of the letter of credit from the Ethiopian government. They had expressly acknowledged this position in an exchange of emails.

ETC objected to the demands upon the Bond in circumstances where Apla had already confirmed that the contract was not yet capable of performance and insisted that there should be no further demands.  Apla’s response was: “Alain just informed us of a request by Berhan Bank to Commerz for a payment of the guarantee amount. This is something that we are not aware of nor privy to…what they are requesting…is totally unexpected to us. On our side, as far as the guarantee is concerned, this morning we had a meeting with the officials of the Ministry of Finance who oversee the PPPDS to instruct the latter for the release of the guarantee. They have promised us to effect the decision of guarantee release by talking with the PPPDS. This is all what we know and we feel there is no cause for concern”.

ETC formally required that Apla should urgently: 

• order Berhan to withdraw its demand on the Bond;
• request that Berhan confirm its withdrawal of the demand under the Bond; and
• provide a copy of Berhan's SWIFT message confirming such withdrawal.

The requests were not met so ETC applied to the Court for an injunction restraining Berhan from making any claim on the Bond.

The Decision 

The Judge reiterated that the purpose of a performance guarantee is that it should be paid out without equivocation. “While the court has always intervened to prevent fraudulent demands upon such guarantees, I am satisfied that the court's jurisdiction is somewhat broader and that ETC does not have to prove fraud where Apla[s] is clearly not entitled to make a claim under the guarantee: Simon Carves Ltd v. Ensus UK Ltd [2011] EWHC 657 (TCC)”

The Court granted the temporary injunction restraining any call on the Bond, notwithstanding the absence of fraud.

Implications

The usual rule is that a compliant demand under an on demand bond must be honoured, save in the case of fraud. This case represents an extension to that general rule where the principal can rely on a contractual agreement with the beneficiary to effectively prevent the beneficiary from calling on a bond if that is in breach of the contractual arrangements between them. Thus, the principal is in a better position than the issuer or surety in that if it has such a contractual arrangement, it has an additional ground for making an application to the court, as in this case.

The case is also a reminder that any surety or bank issuing an on demand instrument, whether a demand guarantee or letter of credit, should be mindful of the beneficiary in whose favour it is being issued.

An interesting feature of the case is that the application for an injunction was made outside of court hours and based on an unsworn affidavit. The Judge proceeded, accepting that the combination of the ongoing COVID-19 pandemic and the urgent nature of the out-of-hours application meant that it had not been possible for the affidavit to be sworn.