Doosan Babcock Ltd & Anor v Comercializadora De Equipos Y Materiales Mabe Limitada

Interim relief may restrain a beneficiary from calling an on-demand performance guarantee where the underlying contract clearly and expressly prevents the call, or where the claimant has a strong case that the beneficiary’s own contractual breach has kept the guarantee alive. The court must not finally construe the contract or determine disputed facts where those matters are reserved to arbitration. A claimant may also rely on a realistic prospect of showing that the beneficiary’s asserted contractual entitlement was not held bona fide, although that question need not be finally resolved where a strong case of breach is established.

The claimant supplied two boilers for a Brazilian power plant under contracts containing on-demand performance guarantees. It sought continuation of an interim injunction restraining the defendant from calling the guarantees.

The claimant argued that the defendant should have issued Taking-Over Certificates when the boilers entered commercial operation. The defendant maintained that completion depended on satisfactory performance testing and that the operational use was only temporary. The central issues were whether the claimant had a strong case of contractual breach, whether the defendant’s refusal required a realistic prospect of bad faith, and how the principles governing injunctions involving performance guarantees applied.

1. Interim jurisdiction and provisional nature. The court had jurisdiction under section 44 of the Arbitration Act 1996. Because the parties had agreed to London arbitration, the court could not make binding findings of fact or finally construe the contract. Its task was confined to deciding whether interim relief was justified.
2. Construction and Taking-Over Certificates. The contractual scheme strongly supported the claimant’s case that Taking-Over Certificates were not dependent on completion of the performance tests. The contractual remedy for failure to achieve the performance specification appeared to be performance liquidated damages, rather than indefinite prevention of completion and withholding of the certificates.
3. Guarantees and underlying breach. Although performance guarantees ordinarily enjoy autonomy similar to letters of credit, the court accepted the principled and incremental approach in Simon Carves v Ensus UK [2011] BLR 340. Where the underlying contract clearly prevents the beneficiary from making a demand, or where the beneficiary’s own breach is the direct reason why the guarantee remains in existence, an injunction may be granted. The claimant had shown a strong case on this issue.
4. Own-wrong principle and good faith. The principle recognised in Alghussein Establishment v Eton College [1991] 1 All ER 267 supported relief where the defendant could call only because its alleged refusal to issue the certificates had kept the guarantees alive. The claimant also had a realistic prospect of establishing that the defendant’s reliance on temporary use was not bona fide. It was unnecessary to decide whether, in an own-wrong case, a realistic prospect of success would suffice instead of a strong case.
5. The injunction was continued until the arbitrators determined whether the refusal to issue the certificates was a breach of contract, or until further order, subject to the claimant’s undertaking to assist the arbitral process. There was liberty to apply.

Not stated in the judgment.