Bonds are regularly called for on substantial and public procurement projects. In the English case, Simon Carves Limited v Ensus UK Limited, the court reviewed the legal authorities in relation to the extent to which a party may be prevented from seeking payment under an on-demand bond by the terms of the very contract by which the bond was provided as security. The contractor (S) in this case(s) was employed by Ensus UK Limited (E) to build a process plant to produce alcohol. The parties had entered into a lump sum contract for the work and S had complied with a special condition requiring it to purchase a performance bond as security. The contract stated that the bond would become null and void when E issued its acceptance certificate, except in relation to pending claims.
Upon discovering that certain emissions exceeded the specification requirements, E issued a variation order requiring S to double the height of the emissions stack. S did not implement the remedial work fully, but E issued an acceptance certificate, accepting the plant, subject to the outstanding defects identified.
When the environmental authority issued an enforcement notice to E for contravention of the environmental permit, arguments about responsibility for the problem arose. S's legal adviser agreed to extend the existing bond for two months, without prejudice to S's contractual position. He indicated that S would apply for an injunction if E attempted to call on the bond.
E made a specific written claim against S in accordance with the terms of their contract and S issued proceedings, seeking an injunction against E restraining it from making a demand under the bond.
In considering whether to order E to withdraw its demand for payment under the bond, the court reviewed the legal authorities, which they said, established the following:
1. in the absence of fraud, a bank would not be prevented from paying out under an on-demand bond provided that there had been compliance with the bond conditions.
2. the same applied where a beneficiary sought payment under a bond.
3. there was no legal authority permitting a beneficiary to make a call on a bond when it was expressly disentitled from doing so.
4. if the contract in relation to which the bond had been provided as security clearly and expressly prevented the beneficiary to the contract from making a demand under the bond, the court could restrain it from doing so.
5. at a without notice or interim injunction stage, it would be rare for a court to form a final view as to the meaning of a contract. It could not be expected to make a final ruling and had only to be satisfied that the party seeking the injunction had a strong case.
The court decided that the balance of convenience favoured the continuation of the injunction. It said that although in bond and letter of credit cases, the ordinary “serious issue to be tried” threshold for an injunction is harder to overcome, S had established a strong case that the bond was to be treated as null and void. Damages would not, the court said, be an adequate remedy because the calling on the bond would likely damage the commercial reputation and creditworthiness of S who would not pre-qualify for tenders. The court said that the issues between the parties could be resolved within a sufficiently short time so that whatever prejudice there was thought to be would not last long.