Injunction to restrain on demand bond

Doosan Babcock v Materiales [2014] Building Law Reports page 33.TCC

Facts

Doosan Babcock contracted to supply 2 boilers for a power plant in Brazil.  Its customer was Materiales.  Doosan gave an on demand performance bond in respect of each boiler, expiring on the earlier of either issue of Taking Over Certificate by Materiales or by 31 December 2013.  Materiales appeared to deliberately stall over issuing the TOC’s and matters came to a head when Materiales refused to issue TOC’s even though they had been using the boilers for 7 months and had produced 7,500 hours of power generated to the local grid.  Doosan applied for an injunction to restrain Materiales from demanding payment of the bonds from the bondsmen.

Held

Although the issue of Taking Over would have to be determined in arbitration, subsequently, Doosan had an arguable case to say that TOC should have been granted and therefore Materiales would be injuncted until the arbitrators ruled on the point (which could take the bond past the expiry date of December 2013).

Comment

1. Generally the courts will not intervene to restrain on demand bonds being called.  All that usually matters is that the proper formalities are performed.
2. BUT where the on demand bond is subject to a contingency such as the issuing of a Taking Over Certificate then if the aggrieved party can show that the other side are arguably in breach of contract (for failing to issue a TOC) and are therefore seeking to take advantage of their own wrong doing, then the Court will intervene.

For more information, help or advice on this issue please contact Rob Langley on

0191 211 7975.