Interaction Between On-Demand Bonds And The Underlying Contract Revisited By The English High Court On-Demand Bonds And The Underlying Contract Revisited By The English High Court

Introduction From our previous alerts, which can be found here and here, we know that bonds and guarantees are complex instruments, the consequences of which depend not on what they are called, but their terms, the circumstances in which they are provided, the terms of the underlying contract and the manner in which they are called.

This alert looks at the recent English High Court case of MW High Tech Projects UK Limited & Anr v Biffa Waste Services Limited [2015] EWHC 949 (TCC), which considered whether the court can or should intervene if it is established that the breach of obligation under the underlying contract, upon which the beneficiary relies as the basis for demand on an on-demand bond, is unfounded.

The relevant principles The judge, Mr Justice Stuart-Smith, considered and reaffirmed the principles that determine when it is open to a party to interfere with the process by which on-demand bonds are called and paid were as follows:

only in exceptional cases will a court interfere with the machinery of irrevocable obligations, such as bonds and letters of credit; such instruments are intended to be autonomous contracts, so, a beneficiary will not be restrained from calling on a bond simply because there is a dispute as to whether the underlying contract has been broken; there are two established exceptions to the rule that the judge will not intervene: firstly, where there is a seriously arguable case of fraud; and secondly, where the terms of the underlying contract, expressly or impliedly, prevent the beneficiary from making the call; and when considering whether or not to grant an injunction restraining the beneficiary from calling on the bond, the burden is a high one and it must be positively established that he was not entitled to draw down under the underlying contract. The background Biffa Waste Services Limited ("Biffa") was engaged under a resource management contract by a local council to manage and dispose of waste in the area. One of the requirements of the contract was that a waste treatment plant should be designed and constructed. To this end, Biffa entered into a contract with MW High Tech Projects UK Limited ("M+W") for the design, construction, installation, commissioning and testing of the plant (the "EPC contract"). Under the EPC contract, M+W was required to procure a parent company guarantee and a retention bond.

Parent company guarantee The parent company guarantee ("PCG") was entered into between Biffa and...