Is Fraud The Only Ground Available To Restrain A Call On An On-Demand Performance Bond?

The recent case of Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC), shows that fraud is not the only ground upon which a call on an on-demand performance bond can be restrained by an injunction.

The purpose of a performance bond is to ensure a third party delivers goods or performs services in accordance with the terms of an underlying contract. The issuer of the bond (usually a bank) undertakes to pay to the beneficiary a sum of money if the third party fails to comply with its obligations. The case here concerned an "on-demand" performance bond, and raises issues as to the extent to which a beneficiary may be prevented from seeking payment under a demand bond by the terms of the contract.

Simon Carves Ltd (SCL) was employed by Ensus UK Ltd (Ensus) to construct a bioethanol plant. One of the contract's conditions required SCL to provide Ensus with a performance bond as security for its performance. This was issued by SCL's bank to Ensus, and was initially in the sum of £18.4m.

Importantly, the special conditions to the contract provided that on the issue of the acceptance certificate by Ensus' project manager, the bond would "become null and void". The conditions further provided that the bond should be returned to SCL as soon as it became null and void, "save where there are pending claims (including previously notified claims), in which case it shall be returned following final determination". If the bond was subject to a fixed expiry date, SCL should extend or replace the bond if it had not yet been returned by Ensus.

On 19 August 2010, Ensus' project manager issued an acceptance certificate. This listed a number of known defects that SCL was bound to make good. One of these defects related to odour emissions from the plant. Ensus asserted that the odour was attributable to a fault with the plant's dryer system caused by SCL, and sought to retain the bond as security for this alleged defect. But SCL argued that the odour was attributable to the way in which Ensus had chosen to operate the plant, and in any event, no claim had been made under the contract, which obliged SCL to maintain the bond. SCL accordingly asserted that the bond was null and void and that it should be returned along with any retained money.

SCL sought an injunction restraining Ensus from making any demand under the bond, which was granted.

The decision

On 15 March 2011, Mr Justice Akenhead held that the injunction was...