Simon Carves Ltd v Ensus UK Ltd

An on-demand bond ordinarily requires the bank to honour a compliant demand, absent clear evidence of fraud. That principle does not prevent the court restraining the beneficiary where the underlying contract expressly prevents it from making a demand. The beneficiary’s autonomy in relation to the bank does not confer a right, as between the contracting parties, to call the bond contrary to an express contractual restriction.

At the interim stage, the American Cyanamid principles apply, but the serious-issue threshold is more difficult to overcome because of the commercial importance of bonds. A strong case is required before restraining a call. The court may continue an injunction where the bond’s call would create serious and difficult-to-quantify commercial harm and the balance of convenience favours preserving the status quo.

Simon Carves Ltd was the contractor and Ensus UK Ltd the purchaser under an engineering contract for a bioethanol plant. The contract required a performance bond and provided that it would become null and void, and be returned, upon issue of the Acceptance Certificate, save for pending or previously notified claims.

After the Acceptance Certificate was issued, disputes arose concerning plant emissions and alleged defects. The parties agreed to extend the bond in a reduced amount, but Simon Carves reserved its position that the bond was null and void. Ensus later notified contractual claims and demanded payment under the bond. Simon Carves sought an injunction restraining the demand and requiring its withdrawal.

The central issues were whether the contract prevented Ensus from calling the bond, whether the relevant defect notices constituted claims, and what interim injunction principles applied.

1. The injunction was continued. The court held that, although the bank could not ordinarily be restrained from paying a compliant demand on an on-demand bond except in cases involving clear fraud, the beneficiary itself could be restrained from making or pursuing a demand in breach of the underlying contract.

2. The autonomy principle protects the bank’s obligation to pay according to the bond’s terms. It does not entitle the beneficiary, as against the contractor, to call the bond where the underlying contract expressly prohibits that call. Sirius International Insurance Co v FAI General Insurance Ltd established the relevant exception for express contractual restrictions.

3. At final trial the court could determine the contractual meaning conclusively. At the interim stage, the court should apply the American Cyanamid approach, while recognising that the serious issue to be tried threshold is more demanding in bond and letter-of-credit cases because of their commercial importance.

4. The court formed a strong provisional view that Special Conditions 3.7 and 3.8 required the bond to be treated as null and void between the parties after the Acceptance Certificate and required its return, unless there was a pending or previously notified claim. A defect notice seeking remedial work was the operation of contractual machinery, not necessarily a claim. The later statement that a claim would be submitted supported that distinction.

5. There was strong evidence that no qualifying claim had been made before the Acceptance Certificate. Simon Carves had also unequivocally reserved its contractual position when agreeing to extend the bond. A separate argument that no call could be made until liability had been determined raised a serious issue, but was not sufficiently strong for interim relief.

6. Damages were inadequate because a call could damage Simon Carves’s commercial reputation, creditworthiness and ability to pre-qualify for tenders. The balance of convenience favoured preserving the existing security by continuing the reduced bond pending prompt resolution of the parties’ disputes.

Not stated in the judgment.