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Court application to force the withdrawal of a call on an on-demand bond refused

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The case of Shapoorji Pallonji and Company Private Ltd v Yumn Ltd [2021] EWHC 862 concerned an attempt by the principal contractor to obtain a court injunction to prevent payment on a bond.

It was claimed that the issue was something which an ICC arbitrator should decide and different, laxer principles would then be applied by an ICC arbitrator.

Background facts of the Shapoorji Pallonji and Company Private Ltd v Yumn Ltd case

The contractor had been engaged by the defendant employer to construct and commission a power plant in Rwanda. The construction contract provided that disputes would be referred to ICC arbitration.

The contractor was required to provide an on-demand bond for US$32.2 million and this was provided by Standard Chartered Bank. The bond was governed by English law and stipulated that the English courts would have jurisdiction.

Completion of the project was delayed and the contractor made various applications for an extension of time but these were not granted. The employer claimed liquidated damages which the contractor did not pay. Based on the failure to pay liquidated damages, the employer made a demand on the bank for payment of the full bond amount. The contractor asked the employer to withdraw the demand and commenced an ICC arbitration under the contract in respect of the underlying dispute.

The employer did not withdraw its demand, so the contractor applied to the Court for an injunction requiring the employer to withdraw its demand and not submit any further demands until an arbitrator appointed under the ICC arbitration rules could determine the contractor’s claim.

The issue 

The contractor argued: (1) the issue of whether it was appropriate to grant an injunction was one for an ICC arbitrator; (2) the principles which were usually applied by the court did not apply; and (3) an ICC arbitrator would adopt a different and much more lax approach to the issue. The contractor also stated that the employer’s demand on the bond was fraudulent because the delay which had arisen was due to the employer’s bad faith or dishonest refusal to countenance the contractor’s application for extensions of time.

The employer asserted that there was no evidence of fraud, the demand was valid and it should be honoured according to the well-established principles applied to on -demand bonds. It submitted that the fact that there was an arbitration agreement between the parties to the dispute made no difference.

The bank agreed to be bound by whatever order the Court made.

The decision 

The court reviewed many of the cases involving on- demand bonds and attempts to restrain payment. The judge said “It is clear from these authorities that an Injunction restraining a beneficiary from enforcing payment under an on-demand bond will be granted only where it is shown either that the demand would be in breach of an express condition precedent to the right to demand payment or in breach of an implied obligation to similar effect providing such an implied term can be shown to the enhanced standard or it can be shown to the enhanced evidential standard that any demand is fraudulent unless (perhaps) an injunction has been sought before any question of enforcement arose”.

The court decided that the governing law of the bond was English law and that the principles of English law should be applied when construing the bond. In terms of whether there was a difference of approach between a judge and an arbitrator, the judge decided that the same approach to an application for an injunction under s.44 of the Arbitration Act 1996 as under the Senior Courts Act 1981 s.37 would be applied. 

In this case, there was no condition precedent to the presentation of a claim under the bond, no implied term to that effect had been alleged, and there was no evidence of fraud. The application for an injunction was therefore refused.

The implications of the courts decision

The Court yet again confirmed that on- demand bonds are to be treated as equivalent to cash and it is only in extreme circumstances (such as fraud) when a court will intervene.

This case is the first decision on whether a different legal test would be applied to an application for an injunction under the Arbitration Act compared to the Supreme Court Act. The Court decided the approach would be the same. 

Do you require any more information regarding this case?

If you require further information or advice, please contact our specialist surety and construction teams who are able to help.

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