Shapoorji Pallonji & Company Private Ltd v Yumn Ltd & Anor

An English court will restrain enforcement of an on-demand bond only in very limited circumstances. The applicant must establish, to an enhanced evidential standard, an express or properly implied condition precedent preventing the demand, or fraud known to the bank. The same principles apply where the beneficiary has already made the demand and is asked to withdraw it. An arbitration agreement, or the availability of an emergency arbitrator, does not require the court to adopt a different substantive test when exercising its powers under Arbitration Act 1996, section 44. Solvency concerns do not ordinarily justify restraining payment where the applicant accepted the bond on the basis that it was equivalent to cash.

Shapoorji Pallonji sought mandatory orders requiring Yumn to withdraw a demand for US$32.2 million under an on-demand performance bond issued by Standard Chartered Bank. The demand related to alleged delay liquidated damages and failure to provide a top-up bond.

The underlying agreements were governed by English law and contained ICC arbitration agreements with Singapore as the seat. Shapoorji argued that the dispute should be preserved for determination by an ICC emergency arbitrator and that the court should restrain the demand pending that determination. The court considered whether the arbitration agreement, the emergency-arbitrator procedure or the alleged merits of the demand justified intervention.

1. The applications were dismissed. The bank accepted that the demand was formally valid and agreed to comply with the court’s order. The issue was therefore whether Yumn should be required to withdraw the demand or be restrained from making another demand.
2. On-demand bonds are treated as equivalent to cash. Payment is ordinarily required despite a dispute between the underlying contracting parties. The court will intervene only where an applicable exception is established to the enhanced evidential standard.
3. The relevant exceptions were: an express condition precedent to making the demand; a properly established implied obligation to similar effect; or a fraudulent demand of which the bank was aware. No express condition existed. No implied term was alleged, and in any event the evidence could not satisfy the required standard. Fraud was neither properly established nor supported by the evidence.
4. The court accepted that a beneficiary could, in principle, be ordered to withdraw a demand after it had been made, applying essentially the same safeguards as would govern an injunction restraining the making or enforcement of the demand. The court approved the reasoning in Salam Air SAOC v Latam Airlines Group SA and agreed with the relevant obiter reasoning in Tetronics (International) Ltd v HSBC Bank Plc.
5. The arbitration agreement arguably covered the dispute, but that did not alter the result. The emergency arbitrator would be required to apply substantive English law. When an English court is asked under section 44 of the Arbitration Act 1996 to restrain enforcement of an on-demand bond, it applies the same substantive principles as under section 37 of the Senior Courts Act 1981. Shapoorji had delayed referring the dispute to arbitration and could have sought emergency relief before the demand was made.
6. The alternative balance-of-convenience argument also failed. Shapoorji had accepted the bond with knowledge, or presumed knowledge, of its cash-equivalent character and the limited grounds for intervention. Solvency risk would need to be shown to have been unforeseen or not reasonably foreseeable when the contractual relationship was entered into. That was not shown.
7. Permission to appeal was refused. A short stay was granted only until noon the following day, subject to an undertaking not to make further applications to the emergency arbitrator during that period. Yumn’s costs were allowed subject to a small adjustment.

• High Court (Commercial Court): the application to restrain or reverse the demand was dismissed.
• High Court (Commercial Court): permission to appeal was refused. A limited stay was granted until noon the following day, subject to an undertaking.