Challenging bond calls on international projects: English courts vs Emergency Arbitrators

A recent decision of the English Commercial Court has refused an application for an injunction requiring a beneficiary under an on-demand bond to withdraw its demand and refrain from making further demands pending the decision of an Emergency Arbitrator. The decision provides important guidance as to the relationship between Emergency Arbitration proceedings and interim relief from the English Courts. The decision also comments on the extent to which the approach of an Emergency Arbitrator may differ from that taken by the English courts when determining questions under a contract governed by English law.

Shapoorji Pallonji & Company Private Ltd v Yumn Ltd

Yumn Ltd (“YL”) appointed Shapoorji Pallonji and Company Private Ltd (“SPC”) (and some of its related group companies) to construct a power plant in Rwanda. The project agreements were based on the FIDIC form, were all subject to English law and provided for disputes to be resolved by ICC arbitration seated in Singapore.

SPC gave an on-demand performance bond in the sum of $32.2m. The bond, which was issued by Standard Bank, was subject to English law and the jurisdiction of English courts. Other than a prescribed form of demand and the requirement for demands to be delivered within business hours, the bond did not stipulate any other conditions precedent for a valid demand.

The original Date for Taking Over of the Works was 23 February 2020. Significant delays occurred for which SPC claimed extensions of time. YL refused to extend time on the basis that SPC had failed to notify its claims with the periods required by the contracts.

On 24 February 2021, YL made a written demand under the project agreements for payment of delay liquidated damages which, in the absence of an extension of time, had reached their maximum limit under the contracts. In the absence of payment, YL demanded the full amount of the performance bond from Standard Bank on 23 March 2021 citing, among other things, SPC’s liability for delay liquidated damages.

Standard Bank informed SPC of the demand on 26 March. SPC immediately requested that YL withdraw the demand and a sent solicitors’ letter alleging that the demand was “fabricated”. SPC also commenced two sets of proceedings seeking to prevent payment under the bond:

• ICC Emergency Arbitrator proceedings seeking orders against YL to suspend its demand against Standard Bank and prevent any further demands being made; and
• An application to the English Commercial Court under section 44 of the Arbitration Act 1996 for orders that YL withdraw its demand under the bond and refrain from making further demands pending the order of the ICC Emergency Arbitrator.

The Commercial Court delivered judgment swiftly, within 8 days of SPC’s application and prior to any consideration of the matter by the Emergency Arbitrator.

Relief pending Emergency Arbitration

Although SPC maintained its position that YL’s demand was fraudulent, its primary position before the Commercial Court was that the propriety of YL’s demand was a matter for the Emergency Arbitrator and, thereafter to the extent necessary, a fully constituted arbitral panel under the ICC rules. SPC therefore submitted that the Commercial Court should grant orders preserving the status quo until the Emergency Arbitrator could decide on the issue. In support of this argument, SPC claimed that an Emergency Arbitrator was likely to adopt a less stringent approach than that taken under English law to the question of whether YL should be compelled to withdraw their demand and/or be restrained from making further demands.

For the purpose of this argument, the Court was content to assume that the propriety of YL’s demand was caught by the arbitration agreement governing the project agreements. However, the Court considered it arguable that disputes as to YL’s entitlement to make a demand under the bond might fall outside the arbitration agreement, given the inclusion with the bond of an English law and jurisdiction clause and the bond being in a form which was annexed to the project agreements.

The Court was also prepared to accept that an Emergency Arbitrator might arguably adopt a different approach to that adopted by the English courts. However, the Court noted that English law was the law governing both the project agreements and the performance bond and, accordingly, the fact that Singapore law (i.e. the curial law governing the arbitration proceedings) appeared to adopt a different approach to attempts to restrain the enforcement of bonds was immaterial. The Court also noted that whilst it was arguable that an ICC Emergency Arbitrator might apply procedural rules and principles that are different from and independent of those applied by an English court, that did not “lead necessarily to the conclusion that the emergency arbitrator will grant the order sought by SPC when a court in England would not.” The principles of substantive English law governing the enforcement of on-demand bonds would “apply irrespective of whether the issues are being considered by a court in England or by an international arbitrator required to apply substantive English law to the dispute between the parties.”

Having nevertheless assumed the above two matters in SPC’s favour, the Court found it would not be appropriate to grant relief under section 44 merely to preserve the status quo pending the determination of SPC’s application to the Emergency Arbitrator. The Court considered that the same English law principles as to the enforcement of on-demand bonds should apply regardless of whether interim relief was sought in aid of an arbitration or generally in relation to court proceedings (under section 37 of the Senior Courts Act 1981). The Court also emphasised SPC’s delay in commencing Emergency Arbitration proceedings. The dispute over extensions of time was longstanding and YL’s formal demand for payment of delay liquidated damages had been issued a month prior to the demand under the bond. As the Court noted: “It was open to SPC to refer the failure of YL to grant any of its applications for extensions in time to arbitration as soon as those applications had been refused and the contractual mechanisms for resolving such disputes had been exhausted and in that reference to seek an order from an EA from restraining YL from calling on the demand bond pending the resolution of that dispute. It chose not to do so.”

The English law principles

Having rejected SPC’s primary position, the Court considered whether SPC was entitled to have YL withdraw its demand under English law. The Court noted there was little prior authority on the principles governing applications to require the withdrawal of demands, but guidance could be taken from cases dealing with other bond enforcement scenarios.

In relation to applications to restrain underwriters, such as the bank in this case, from complying with their obligations under an on-demand security, in the absence of a dispute as to the formal validity of the demand a Court would only grant an injunction where it is established that “the only realistic inference is that (a) the beneficiary could not honestly have believed that it was entitled to make a demand for payment and (b) the bank was aware that the demand was fraudulent.”

In relation to applications to restrain a beneficiary, the Court noted that an injunction would generally only be granted to restrain a beneficiary from breaching an express or implied restriction contained in the underlying contract. In this case, however, there were no express conditions precedent to a demand and no implied obligations were asserted. Short of such restrictions, an application to restrain a beneficiary would need to satisfy the same test for fraud quoted above applicable to applications against underwriters. Provided these requirements were met, there was no reason why a beneficiary could not be forced to reverse the steps it has taken to enforce its rights under the instrument in question (i.e. through an order requiring the withdrawal of a demand).

In the present case, SPC had not come close to satisfying the fraud exception. It had not submitted any evidence to challenge YL’s belief that SPC’s failure to comply with the notification requirements of the project agreements had invalidated its claims to extension of time. There was nothing to suggest the dispute was “anything other than a delay dispute between an employer and contractor of the sort that arises on a regular basis in the civil engineering and construction sectors.”

Conclusions and implications

Emergency Arbitrator proceedings are still a relatively new procedure in the arbitral world and guidance as to the relationship between such proceedings and interim relief from the English courts under section 44 of the Arbitration Act has been scant. This decision therefore provides valuable guidance as to the approach to be taken under section 44 where relief is sought in relation to calls under on-demand securities.

The Court’s refusal to play second-fiddle to Emergency Arbitration has considerable strategic implications for parties involved in such disputes. The arguments made by SPC suggest a perception that Emergency Arbitration provides a more lenient forum for Contractors wishing to challenge the enforcement of an on-demand security. The Court’s refusal merely to preserve the status quo pending Emergency Arbitration will encourage Contractors to pursue such proceedings at an earlier stage and in advance of a call being made if it all possible.

The Court’s comments as to the potential for Emergency Arbitrators to apply a more lenient approach are also of note. The comments are likely to be quoted in support of the application of English law principles by Emergency Arbitrators where English substantive law is applicable to the underlying contracts. On the other hand, the Court was concerned not to make a “pre-emptive challenge” to the decision of the Emergency Arbitrator and noted that “he must be left to do his work as he considers appropriate”.

Somewhat more significant is the Court’s suggestion that a general arbitration clause may not extend to disputes in relation to an on-demand bond where that bond has applicable law and jurisdiction clauses and its form is annexed to the underlying construction contract. This is a fact pattern which is likely to apply to a great many cases and beneficiaries may well seek to rely on these comments to resist Emergency Arbitration proceedings commenced by a Contractor.

Finally, the decision provides helpful confirmation as to the English law principles which apply where orders are sought against a beneficiary for the withdrawal of an existing demand – an area in which some uncertainty had previously existed.

References: Shapoorji Pallonji & Company Private Ltd v Yumn Ltd [2021] EWHC 862 (Comm).