On Demand Bonds: A Strategic Retreat?

An On Demand Bond1 is as an unconditional undertaking to pay a specified amount to a named beneficiary, usually on demand and sometimes on the presentation of certain specified documents2. In other words, Big Bank promises to pay Mr Employer £x immediately, and without hesitation or further investigation, on presentation of the correct documents (normally a certificate) to him, completed in the way specified on the face of the On Demand Bond. The contract to pay out in these circumstances is directly with Big Bank and Mr Employer. (Big Bank will have a separate agreement with Mr Contractor to ensure he doesn't end up out of pocket).

Historically, under English Law, the only circumstances in which the courts would prevent a call on an On Demand Bond once it has been made, and monies being paid out, were "when there is a clear fraud of which the bank has notice."3 This was a hard test to satisfy.

In 2011 and 2013, two TCC cases on the issue of whether calls on On Demand Bonds could be restrained via injunction seemed to indicate that the Courts may be moving away from such a rigid adherence to these principles and, arguably, closer to the more relaxed position in other jurisdictions (for example, in Singapore where the notion of "unconscionability" has developed)4.

In Simon Carves -v- Ensus5, the contract provided that the bond was to become null and void upon the issue of an Acceptance Certificate, save in respect of pending or previous claims. An Acceptance Certificate had been issued, but a dispute arose as to whether any claims were pending or had been previously notified by the time of its issue. Simon Carves then sought an injunction restraining a call being made on the Bond, and later, requiring the beneficiary to withdraw a call that had been made in the meantime. Akenhead J stated that, if the underlying contract in relation to which the Bond had provided by way of security, clearly and expressly prevented the beneficiary from making a demand under the Bond, then the beneficiary could be restrained by the court from making such a demand. In his view, there was no legal authority permitting a call on a bond when it is expressly disentitled from doing so and, in his view, the party seeking the injunction had a "strong case" that the call was not a permitted one.

In the case of Doosan Babcock -v- Comercializadora de Equipos6 ("MABE"), (Mr Justice Edwards-Stuart) used the principles set out by Akenhead J in Simon Carves v Ensus, to grant...