Manx Electricity Authority v J P Morgan Chase Bank

A demand guarantee is autonomous from the underlying contract, subject to fraud, and its operation is not ordinarily defeated because the principal has repudiated the contract or can no longer perform it. Where later demands rely on the same alleged breaches as an earlier demand, the subsequent termination or settlement of the underlying contract does not, without more, make those breaches irrelevant to the guarantee. Whether an accrued breach was waived or discharged, and whether the guarantee covers an accrued but no longer actionable breach, may require trial. Summary dismissal is inappropriate where those issues remain materially disputed or have not been properly argued.

Manx Electricity Authority contracted with Nepco Europe Limited for the construction of a generating station. J P Morgan Chase Bank issued a performance security requiring payment on written demand stating that Nepco was in breach and specifying the breach, accompanied by notice to Nepco.

After Nepco repudiated the contract and MEA made a first demand, MEA and Nepco’s administrators entered into a Settlement and Transfer Agreement. MEA later made further demands relying on the same December 2001 breaches. Tomlinson J struck out MEA’s reliance on those later demands under CPR Part 24, holding that the earlier breach was anticipatory and could no longer be a present breach after the settlement. The appeal concerned whether that reasoning was sustainable and whether the later demands raised issues requiring trial.

1. Appeal allowed. The judge’s reasoning could not support striking out MEA’s reliance on the later demands. The demands relied on the same breaches and notices as the first demand. The Bank accepted, for the purposes of the appeal, that the Settlement and Transfer Agreement had not waived or discharged any accrued antecedent breach.
2. A performance guarantee is autonomous from the underlying contract and its merits are generally irrelevant to the guarantee’s operation, subject to fraud. It would be extraordinary to construe the guarantee as ceasing to operate when the principal’s repudiation had caused the underlying contract to fail and the beneficiary most needed the security. The court did not finally decide whether an anticipatory breach alone could trigger the guarantee.
3. Lord Justice Rix held that the characterisation of the December breach as merely anticipatory was at least plainly arguable. It was also arguable that MEA’s notice of 13 December 2001 accepted the repudiatory breach as bringing the contract to an end. Those questions were unsuitable for summary determination.
4. The Bank’s alternative argument was that the guarantee required an actionable breach capable of remedy in proceedings against Nepco. That issue was not self-evident, had not been identified in a respondent’s notice, and depended closely on construing clauses 9(4) and 9(5) of the Settlement and Transfer Agreement. It was unsafe to determine it separately from the unresolved issues of waiver and discharge.
5. Lord Justice Chadwick agreed. He emphasised that, if the judge’s premise that an anticipatory breach could trigger the guarantee were accepted, the later ending of the obligation to perform could not itself defeat later demands, absent an agreement to waive or discharge the breach. The remaining issues could be determined at the trial already required to assess the first demand. Lord Justice Thorpe agreed.

The interests of justice required the disputes to proceed together rather than piecemeal.

• Court of Appeal (Civil Division): [2003] EWCA Civ 1324. Appeal allowed.
• Queen’s Bench Division, Commercial Court: Tomlinson J struck out MEA’s amended claim insofar as it relied on the later demands under CPR Part 24.