A court has rowed back on two previous decisions over the grounds contractors on which can try to prevent calling under on-demand guarantees or performance bonds.
A decision of the Technology and Construction Court earlier this year has intensified controversy over the grounds on which contractors can seek to prevent employers from calling under on-demand guarantees or performance bonds.
Until recently, such calls could only be challenged where there was a clear case of fraud or where there was a ‘positively established’ case that an employer’s call was in breach of an express restriction in the underlying construction contract.
Examples of such restrictions include that the employer obtain consent before calling or only call in respect of certain prescribed matters.
Two TCC decisions in the past three years, known as Simon Carves and Doosan Babcock, broadened these grounds to allow a challenge on the basis of only a ‘strong case’ as to a restriction in the underlying contract and possibly only a ‘realistic prospect of success’ in some circumstances.
Going back to trickier test
The present decision has refused to follow these two cases and has reverted back to the much more difficult ‘positively established’ test.
In MW High Tech Projects UK v Biffa Waste Services, Biffa entered into 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.
“The court disagreed that there was any validity requirement within the condition precedent”
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 argued that Biffa had not satisfied the condition precedent, as its demand under the parent company guarantee was not “valid” and lacked an adequate contractual basis.
The court disagreed that there was any validity requirement within the condition precedent, noting that it was intended simply to give the parent company advance notice of a potential call under the retention bond.
“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”
In reaching his conclusion, Mr Justice Stuart-Smith adopted the ‘positively established’ test applied in earlier cases.
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 [early cases] should prevail as being in accordance with the substance of the decisions of higher authority, to which I have referred”.
Fears start to ease over bond strength
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.
Aidan Steensma is counsel at CMS London