Cases - Simon Carves Ltd v Ensus UK Ltd

Record details

Simon Carves Ltd v Ensus UK Ltd
EWHC 657 (TCC)
Performance bonds - lump sum contracts - ICE contracts - acceptance certificate issued despite unresolved disputes

This case deals with on-demand bonds. Historically, the English courts have been reluctant to interfere with banks paying out under this type of bond on the basis that such agreements are said to underpin trust in commerce and to undermine that trust (by permitting challenges to circumstances surrounding ‘the demand’) would adversely affect the security value of the bonds. Only in exceptional cases where it is thought likely that fraud is present (and the issuer knows the demand is fraudulent) have the courts typically interfered.

Simon Carves Ltd was employed by Ensus UK Ltd (‘Ensus’) to undertake works in relation to a bioethanol process plant on Teeside. The contract incorporated the General Conditions of Contract for Lump Sum Contracts published by ICE (‘the Red Book’) as amended by certain special provisions.

As part of the contractual arrangements, Ensus required Simon Carves to procure an on-demand bond. The parties also agreed an amendment to the Red Book provisions which stated that upon Ensus issuing an acceptance notice to Simon Carves the bond would become null and void save for any outstanding claims.

Under the Red Book provisions an acceptance notice is to be issued when the plant passes all of its performance tests and it signifies the acceptance of the works as at the date of the certificate.

In this case the acceptance certificate was issued despite various issues and disputes remaining unresolved between the parties. However, in line with the amended provisions of the Red Book, Simon Carves informed Ensus that it expected the return of the bond on the grounds that no ‘claims’ had been brought. Ensus refused to return the bond.

Given the significant financial consequences of a call on the bond and the absence of means (under the bond) to challenge the validity of a demand, Simon Carves then learnt that a demand had already been made and it sought an order for its withdrawal.

The case was heard by the head of the Technology and Construction Court, Mr Justice Akenhead. He found that fraud was not the only ground for granting an injunction restraining an on-demand bond. Where, as here, the parties had agreed a provision that expressly prevented a beneficiary calling on a bond in certain circumstances, and those circumstances had arisen, the call on the bond could be restrained by injunction. There is no legal authority which allows the beneficiary to make a call on the bond when it is expressly disentitled from doing so.

The Judge found that as the acceptance certificate had been issued before any claims had been brought the bond was null and void and could not be relied on by Ensus. As such, the bond had to be returned to Simon Carves.

Despite earlier authorities, fraud is not likely to be the only basis upon which a court can restrain a call on an on-demand bond. If the parties intend that an on-demand bond will cease to be capable of being called in certain circumstances (on say completion of certain obligations) the underlying contract must make that plain.

Furthermore, where the anticipated circumstances have occurred good practice dictates that a written request for return of the bond should be made as soon as possible.