Case details
Summary
Part 8 is inappropriate only where the defendant identifies a genuinely substantial dispute of fact with legal relevance and a real prospect of success. The court may scrutinise the alleged dispute against the summary judgment threshold, but must not determine the merits.
For an on-demand performance bond, the issuer’s obligation is autonomous from the underlying contract. As between issuer and beneficiary, the recognised defence is fraud known to the issuer when the demand is made. A dispute about the underlying contract, or the issuer’s belief that the counterparty has the stronger case, is insufficient. The claim therefore remains suitable for Part 8 where the alleged facts do not establish, or support an inference of, known fraud.
Factual background
The claimant sought payment of US $6,297,000 under an irrevocable, unconditional on-demand performance bond issued by the defendant. The bond secured obligations under subcontract arrangements between the claimant and two companies in the same commercial group.
The defendant contended that the claimant’s demand was not bona fide because there was a substantial dispute concerning performance of the subcontracts and alleged sums owed by the claimant. It objected to the use of the CPR Part 8 procedure and sought directions for the claim to proceed under Part 7. The central issue was whether the asserted defence involved a substantial dispute of fact requiring ordinary proceedings.
Held
- Part 8 procedure. The defendant’s objections were dismissed. Under CPR 8.8, the court may examine whether the alleged factual dispute would survive the summary judgment threshold, including whether the defendant has a real prospect of success on the issue. A dispute is substantial only if its outcome has legal relevance. The court is not deciding the merits at this stage.
- Nature of the bond. The bond was an autonomous on-demand instrument. The issuer was required to pay upon a conforming demand without investigating the underlying relationship or relying on set-off, counterclaim or the alleged merits of the underlying dispute. The claimant’s and subcontractors’ respective contractual liabilities were matters for resolution between those parties.
- Fraud exception. The only relevant defence as between issuer and beneficiary was fraud of which the issuer had notice when the demand was made. The defendant had to show that the claimant knew it had no right to make the demand, and that the defendant knew of that fraud at the relevant time. An honest but mistaken belief, or knowledge merely that the underlying claim was contested, was insufficient.
- The facts relied upon showed no more than a developing dispute and the defendant’s alignment with the subcontractors’ position. They did not establish that the claimant knew its demand was unjustified, or that the defendant knew it was fraudulent. The defendant’s later evidence and refusal to pay did not cure the absence of the necessary knowledge at the time of demand.
- The cases concerning injunctions sought by the underlying customer against payment were distinguishable because the present claim was brought by the beneficiary against the issuer. The claim was to continue under Part 8. The parties were directed to make written submissions on the form of order and costs.
The court’s approach to earlier authorities
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