Walking direction on asphalt

In a recent case heard in the TCC[1], a contractor brought a claim against its employer for an injunction, after the employer notified the contractor of its intention to make a call on a performance bond regarding a claim for LADs.

This case demonstrates the difficulties in obtaining injunctive relief in general, particularly in relation to attempting to prevent a call on a performance bond. It also highlights the importance of seeking legal advice before agreeing any contract amendments.

Facts

The parties had entered into a contract for the design and construction of a power plant, and the contract was in the form of the FIDIC yellow book, substantially amended.

The contractor, Murphy, sought a declaration that until an engineer had determined the amount of LADs due in accordance with the contract, the employer, Beckton, was not entitled to be paid any LADs. As Beckton had threatened to make a call on an on demand performance bond, Murphy also applied for an injunction preventing Beckton from making a call on the Bond. The court was also asked to consider whether in fact a call on the Bond would be fraudulent.

The Court decided three issues:

  • Whether or not Beckton was entitled to call on the Bond in respect of the LADs, without agreement or determination by the engineer;
  • If not, whether a call on the Bond would be fraudulent; and
  • If a call would be fraudulent, whether an injunction should be granted, preventing any call on the Bond.

Decision

The court held that Beckton was entitled to the LADs, as the contract had been amended so that its right to LADs was not  subject to two clauses setting out the procedure for determining the amount of the LADs. The standard form FIDIC yellow book referred to the right to LADs being subject to such clauses, which set out a procedure for an engineer to determine the amount of LADs payable.

The court agreed with Beckton’s case that the parties’ intention was that the right to LADs would not be conditional on such procedure for determining the amount due.

The decision on LADs meant that the Court did not need to consider the call on the Bond in any detail, however, it did comment on this briefly. The Court concluded that the call on the Bond would not be fraudulent because it was a true on demand bond and there was nothing making the entitlement to LADs conditional on an engineer’s determination. The trigger for making a call on the Bond was the employer’s belief in its entitlement, not the entitlement having been finally determined by an engineer.

The Court also noted that another clause within the amended contract, concerning how a demand under the Bond could be made, differed substantially from the standard FIDIC. The amended clause included additional wording requiring Beckton to give notice before making a demand on the Bond. The reference to the determination procedure was deleted which meant the employer could make a call on the Bond if the contractor failed to pay any  amount due, rather than an amount that was agreed or determined.

Commentary

This case confirms previous authorities on on demand bonds, that injunctive relief preventing a beneficiary calling on a bond on the basis that the claim is fraudulent will not be granted where the claimant has a belief in its entitlement. It must be seriously arguable that the beneficiary could not, honestly, have believed in the validity of the call.

The court also emphasised that the purpose of an on demand bond is to act as security for the contractor’s performance, and that there is no requirement for any proof of the validity of the employer’s claim. This emphasises the importance of the surety having a strong indemnity.

For more information, email blogs@gateleyplc.com.

[1] J Murphy & Sons Ltd v Beckton Energy Ltd [2016] EWHC 607 (TCC)


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.