Doosan Babcock Ltd v Comercializadora De Equipos Y Materiales Mabe Limitada

For an interim injunction restraining a demand under an on-demand bond or guarantee, the claimant must show a strong case that the underlying contract prevents the beneficiary from making the demand. The court must not determine the final dispute at the interim stage. A contractual right may constitute an asset for the purposes of section 44(3) of the Arbitration Act 1996 where the order preserves the value of that right. A beneficiary should not obtain the benefit of a bond through its own breach of the underlying contract. A call on a performance bond may cause reputational and commercial harm that damages cannot adequately remedy.

The claimant sought interim relief in support of London-seated arbitration. It supplied two boilers under a FIDIC-based contract. The defendant, which was also the contractual Engineer, had used both units in commercial operation but refused to issue Taking-Over Certificates. The certificates would have brought the related performance guarantees to an end.

The claimant alleged that the refusal was a breach of contract and that the defendant was likely to call the on-demand guarantees. The defendant challenged urgency, service, jurisdiction and the substantive basis for relief. The court had to determine whether section 44(3) of the Arbitration Act 1996 empowered it to preserve the claimant’s contractual right and whether the interim threshold was met.

1. Interim relief granted. The court ordered interim relief restraining demands under the performance guarantees, subject to the return date of 18 October 2013 and the claimant’s usual undertakings. The defendant was given an opportunity to file evidence on whether the units were being used only as a temporary measure.
2. A contractual right is capable of being an asset within section 44(3) of the Arbitration Act 1996. The court may preserve that right where failure to give effect to it would destroy much or all of its value. The claimant’s right to Taking-Over Certificates could therefore be preserved because their issue would cause the guarantees to expire.
3. The claimant showed a strong case that the units had entered commercial operation and were not being used as a temporary measure permitted by clause 10.2. On the material available, the defendant’s refusal to issue the certificates was likely to be a breach of contract. A beneficiary should not be permitted to call on a bond if it can do so only by relying on its own breach.
4. Following the approach in Simon Carves v Ensus UK [2011] BLR 340, the ordinary interim injunction framework applies, but the commercial importance of on-demand bonds means that the claimant must establish a strong case that the underlying contract prevents the demand. This assessment is provisional and does not determine the final dispute.
5. Damages would not adequately compensate the claimant for the commercial and financial reputational damage likely to follow an unjustified call. Conversely, the defendant could be compensated for a short delay in payment, particularly if the guarantees remained valid or their validity were extended. It was therefore unnecessary to decide the balance of convenience, although it strongly favoured the claimant.
6. Service on the defendant’s solicitors was authorised. The correspondence represented that they were instructed to accept service, and in any event provided a good reason for alternative service under CPR 6.15(1).