Doosan v MABE: English Court Injuncts Owner From Calling Performance Bond When Owner Has Failed To Issue A Taking-Over Certificate

It is quite rare to see a Court hand down a judgment in relation to a FIDIC-based contract. The reason is that most FIDIC-based contracts contain an arbitration agreement resulting in disputes being resolved privately and confidentially. Unfortunately, that means there is little available precedent to help arbitrators decide cases. However, in October 2013, the Technology and Construction Court in London handed down two judgments in relation to the Pecem 1 Power Project in Brazil. Those judgments followed an application by a contractor, Doosan Babcock Limited (Doosan), for an interim injunction in support of an arbitration agreement. The judgments highlighted the problem a contractor may face when an employer fails to issue a Taking-Over Certificate (or otherwise fails to accept that the work is complete) and holds on to the performance guarantee. The judgments also reinforced the willingness of the English Courts to support the arbitration process, whenever possible.

Doosan had contracted to supply two boilers to Comercializadora de Equipos y Materiales Mabe Limitada (MABE). Doosan's position was that MABE had wrongfully failed to issue Taking-Over Certificates for the boilers given that MABE had been using them for some time.

As part of the security package, Doosan had provided two "on demand" performance guarantees which would expire on the issue of the Taking-Over Certificate for each of the boilers, or on 31 December 2013 (whichever being the earlier). In the contract, the original FIDIC wording in relation to performance guarantees had been deleted and new wording substituted, removing the restrictions as to how and when calls on the guarantees might be made. In short, it gave MABE an unfettered right to make a call on the guarantees, subject only to their terms. The guarantees themselves were incredibly wide, such that MABE would simply have to tell the bank that Doosan had failed to perform its obligations in conformity with the terms of the contract before the sums guaranteed would be paid.

In August 2013, MABE threatened to bring claims against Doosan for sums in the region of US$57 million for delays and defective performance. MABE did not mention the guarantees although Doosan was, nevertheless, concerned that a call on the guarantees might be made. Doosan, therefore, sought an interim injunction from the Court in London restraining MABE from making any call. Even though the parties had agreed in the contract to resolve disputes...