Injunction to restrain calling of on-demand performance bond

Facts

Beckton Energy was the employer on a project for a combined heat and power plant at Beckton in East London.  It appointed Murphy as its contractor under the FIDIC Plant Design and Build Contract (Yellow Book), under which Murphy was required to provide an on-demand performance bond.

Clause 2.5 of FIDIC provides that if the employer considers itself entitled to payment from the contractor (for liquidated damages or otherwise) it should give proper written notice after which the Engineer should proceed to agree or determine the amount to which the Employer is entitled.  Clause 8.7 of the Contract provides that if the Contractor fails to achieve certain milestones it will pay the Employer liquidated damages at £4,000 per day.

Beckton said that clause 8.7 was a separate entitlement but Murphy said that the entitlement depended upon the Engineer’s Determination.  When Beckton then sought to enforce its alleged entitlement to liquidated damages by issuing a demand to the “Bondsman” (Zurich Insurance) for payment of the Bond, alleging a delay of 409 days, Murphy applied for an injunction to restrain the demand on the Bond.

Held:

1. Clause 8.7 was not subject to clause 2.5. It provided a “self-contained regime” for the trigger and payment of delay damages.  Note the original wording of clause 8.7 in FIDIC Yellow Book states “subject to clause 2.5” but this had been expressly deleted as one of the special conditions.  The Judge concluded that this deletion was deliberate and significant.
2. Even if Murphy’s interpretation of the clauses was correct, the Judge said she would have refused to restrain the call on the bond. Only fraud or a defect in the paper work can justify an injunction. An honest belief by Beckton that it was entitled to make the call, even if this was completely wrong, would be sufficient to prevent fraud from arising.

Comment

This is yet another case in a long line of policy decisions.  The Courts in many countries have a strong and clear commitment to upholding the banking system, and the smooth functioning of banking and insurance bonds.  Only the clearest cases of fraud (or alternatively a gross failure in the paper work expressed in the demand) can justify a bondsman in refusing payment.  Murphy’s only remedy would be to subsequently obtain a separate decision that liquidated damages were unjustified on the merits, followed by a ruling ordering Beckton to return the money.

For more information, contact Robert Langley on 0191 211 7957 or at [email protected].