Do not interfere! : the High Court of England & Wales restates the (very limited) circumstances for challenging an on-demand bond call

An “on demand” bond imposes a primary obligation on the issuer (usually a bank) to pay when the beneficiary makes a compliant written demand, without having to sue the defaulting principal and prove a breach of the contract in respect of which the on demand instrument is issued.

In Shapoorji Pallonji & Company Private Ltd v Yumn Ltd & Anor [2021] EWHC 862 (Comm) the High Court considered the call of an on demand bond made in the context of a dispute about the delayed construction of a power plant in Rwanda.

The plant would be constructed by Shapoorji and owned and operated by Yumn. As part of the contractual arrangements, Shapoorji provided an on-demand bond for US$32.2m, underwritten by Standard Chartered Bank. English law governed the underlying agreements between Shapoorji and Yumn with disputes subject to Singapore seated arbitration under the ICC rules. The bond, however, although also English law governed, was subject to the exclusive jurisdiction of the English court.

Completion was delayed and Shapoorji’s requests for extensions of time, refused by Yumn. As permitted under the contracts, Yumn demanded a top-up performance bond and a formal demand for payment of liquidated damages—both rejected by Shapoorji. Yumn therefore proceeded to make a call for full payment of the on demand bond. Shapoorji commenced parallel proceedings in both the English court and through the ICC Emergency Arbitrator procedure.

The court was asked to consider two applications (one from each party): Shapoorji requested, pursuant to section 44 of the Arbitration Act 1996, that the court order Yumn to withdraw its demand and refrain from making any further demands pending a decision from an ICC Emergency Arbitrator; and Yumn, on the other hand, requested the court to order the bank to pay the secured funds.

Issues of Jurisdiction

The court was faced with important jurisdictional issues. On the basis that the Emergency Arbitrator would apply “significantly laxer principles” than those applied by the English court, Shapoorji argued that the court should grant an interim order to preclude Yumn from claiming sums due under the bond until an Emergency Arbitrator could determine Shapoorji’s claim for the relief.

While the court conceded that such different treatment was “realistically arguable”, both the English court and the arbitrator would be obliged to apply substantive English law to the question. Singaporean law was merely the procedural law of the seat of arbitration and “immaterial to the substantive questions that arise”. The court therefore rejected Shapoorji’s submission and turned to determine the issue of withdrawal of the demand in accordance with English law principles.

The Restatement

Pelling J helpfully summarised and restated the English law position on challenging bond calls. In short:

(a) English law regards bonds as ‘cash-equivalent’ instruments: injunctions preventing a bank from complying with its obligations would interfere with this principle;

(b) in agreeing to provide a bond a party in Shapoorji’s position has agreed to payment being made notwithstanding the existence of a dispute as to the beneficiary's entitlement to payment; and

(c) the bank made a promise and generally the court will not use its coercive powers to cause a bank to dishonour its promise and thereby run the risk of damage to its reputation.

Notably, the judge referred to the decision in MW High Tech, which held that the court must not interfere unless there is a strong case that there was no entitlement to call the bond (also referred to as the “enhanced evidential standard”). 

Such interference will be restricted to circumstances where (i) the conditions precedent required to be met before making a demand were not complied with (see Sirius International and MW High Tech) or (ii) where extraordinary facts are established to prove that the demand was fraudulent and that the bank was aware of the fraud (Tetronics).

The Decision

Pelling J dismissed Shapoorji’s submission challenging the bond call. There were no express conditions precedent required to be met by Yumn and the bank accepted that Yumn had made a formally valid demand.

Although Shapoorji did allege that the demand was fraudulently made, no evidence was provided to “the enhanced evidential standard or at all”. In dismissing Shapoorji’s arguments, the judge noted that “[o]n the material available there is nothing in the evidence before me that suggests this is anything other than a delay dispute between an employer and contractor of the sort that arises on a regular basis in the civil engineering and construction sectors.”

Comment

While this case helpfully restates the limited circumstances in which an applicant can challenge a bond call, it raises interesting jurisdictional issues about the relationship between English court proceedings and the emergency arbitrator regime.

It’s a reminder that parties should consider the appropriate forum for urgent interim relief where the underlying contract and the bond have different dispute resolution provisions. In similar circumstances, and as indicated by the court in Shapoorji, contractors might be better served by referring the dispute to arbitration as soon as it arises and to (in that context) seek an order (prohibiting a bond call) before one can be made by a beneficiary. If the Contractor chooses instead, as Shapoorji indeed did, to apply for interim relief in the English court, after the event—the hard and fast principles of English law will be applied and (but for the narrow exceptions underscored by the court in this case) the court will not interfere.

Shapoorji Pallonji & Company Private Ltd v Yumn Ltd & Anor [2021] EWHC 862 (Comm)

Tetronics (International) Ltd v HSBC Bank Plc [2018] EWHC 201 (TCC)

MW High Tech Projects UK Ltd v Biffa Waste Services Ltd [2015] EWHC 949 (TCC)

Sirius International Insurance Company v FAI General Insurance Limited & Ors [2003] EWCA Civ 470; [2003] 1 WLR 2214