No Easy Escape: The Court confirms test to restrain a call on an on-demand performance bond

In the recent case of TTSJV v BapCo, an EPC contractor sought an injunction requiring, inter alia, the employer to suspend its demand on a performance bond/guarantee issued by HSBC, pending the appointment of a LCIA emergency arbitrator.

The application was ultimately dismissed, however the judgment provides useful guidance on the English law position on:

• when calls on on-demand performance bonds can be restrained, and
• the law on when liquidated damages will be considered a penalty. 

Key Facts

• A consortium of companies was appointed by BapCo under an EPC contract to design, engineer, procure, construct, test and complete a modernisation programme for BapCo's oil refinery in Bahrain. The contract was subsequently novated to TTSJV W.L.L. (a Bahraini joint venture vehicle), as the EPC contractor. 
• The contract was governed by English law, with disputes referable to LCIA arbitration seated in London.
• The dispute concerned whether TTSJV was in delay: 

- BapCo contended TTSJV had failed to achieve a key milestone, triggering liquidated damages capped at approx. US$484.4 million (10% of the adjusted contract price). 

- TTSJV argued it was entitled to an extension of time following an explosion at the refinery, for which it contended BapCo were responsible. 

• BapCo made a demand on the performance bond. On the same day, TTSJV asked the LCIA to appoint an emergency arbitrator. However, with EID about to start, TTSJV had concerns that by the time an emergency arbitrator was appointed, HSBC would pay some or all of the sum demanded.

The Court considered its powers to act in support of arbitral proceedings in accordance with section 44 of the Arbitration Act 1996 (“AA”). Section 44(5) of the AA provides that the courts can only act where an arbitral tribunal cannot act effectively. Given there was a very real prospect that an emergency arbitrator might not be appointed before the funds were released, the Court had power to consider the application.

Test for restraining a bond call 

TTSJV argued the Court could grant injunctive relief to prevent a call on an on-demand bond where there is a “strongly arguable” case the terms of the underlying contract mean the beneficiary of the bond is precluded from making a call.

However, the judge disagreed:

“In my judgment, a seriously arguable case of breach of the underlying contract is not sufficient to justify injunctive relief to restrain a beneficiary from drawing down funds on a performance bond.”

In the absence of fraud, the judge held that an applicant must “clearly establish” the beneficiary is contractually precluded from calling on the bond. 

TTSJV raised three main arguments: 

1.Penalty argument

Under the EPC contract, BapCo could use the works prior to takeover and retain any revenue generated by operation of the plant but the liquidated damages sums were not reduced to reflect this. TTSJV argued this gave BapCo an unjustified windfall and as such was penal, resulting in unenforceable liquidated damages provisions. 

BapCo argued that each case turns on its own facts and pointed out that:

• this was not a new plant being constructed but the modernisation of an existing plant, meaning some production prior to completion was not surprising;
• the parties had already agreed that BapCo had an accrued entitlement to delay damages of US$ 100 million as at 14 July 2024; and
• in reliance on the case authority of Eco World – Ballymore v Dobler, the absence of a mechanism for reducing the level of damages to reflect early possession was something to consider but was not automatically fatal.

The Court referred to the test in Cavendish Square v Makdessi: 

“whether the sum stipulated in the contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract.”

The Court held that in a carefully negotiated contract between commercially sophisticated parties, there is a strong initial presumption against finding the liquidated damages clause to be penal. TTSJV had not clearly established that the clause was penal.  At best it had established a “potentially arguable case that the liquidated damages might be penal”. 

2.Compliance argument

TTSJV argued the call on the bond was not compliant with the terms of the guarantee. The guarantee incorporated the Uniform Rules for Demand Guarantees (“URDG”). Article 15(a) of the URDG requires a statement as to what obligations have been breached.  TTSJV argued that, the demand on the bond had not specified the breach and therefore was not compliant with the URDG . The demand made by BapCo used the pro forma wording required by the guarantee. There was a line in the pro forma which said that the Beneficiary “…does hereby: …2. certify that the beneficiary is entitled to payment of such amount pursuant to (.) agreement ”. BapCo completed the space denoted (.) by identifying the EPC contract. TTSJV argued that the (.) should have contained the details of the claim not the EPC contract for it to be compliant with Article 15(a).

The Court rejected this argument, finding that “(.)” only required the inclusion of the contract details. Further, details of the claim were submitted with the demand so Article 15(a) had been complied with.

3.Due and payable argument

TTSJV argued that delay damages claimed were not due and payable pursuant to the terms of the EPC contract, and asserted that BapCo wrongly rejected TTSJV’s extension of time claim. The Court rejected this argument on the basis it had failed to make out a strongly arguable case never mind clearly establishing that the delay damages were not due and payable. A key consideration for the Court was that the extension of time claim was rejected by a determination, which included a 34-page report identifying the grounds for rejection. TTSJV had not engaged with this report. 

A further argument raised by TTSJV was that the retention bond was not security against delay liquidated damages. However, the contract expressly permitted BapCo to call on the retention bond in relation to claims for “damages (including liquidated damages)” and so this argument was abandoned. 

Key points to consider

• The Court reaffirmed that, absent fraud or a clear contractual prohibition, the English courts will not intervene to restrain a bond call. 
• Whilst the absence of a mechanism to reduce delay damages upon sectional completion or early use is not automatically fatal, it may create litigation risk. Contractors and employers alike should consider whether it is appropriate for liquidated damages provisions to expressly address partial possession and early-use scenarios. 
• The compliance argument turned on the interpretation of a placeholder in a pro forma demand. Parties should ensure that demand requirements are drafted without ambiguity.
• TTSJV's argument that the retention bond did not cover delay damages was quickly dismissed on the contractual wording. Contractors should carefully review the scope of each bond and guarantee at the outset to understand their full exposure.