The Doosan vs MABE judgment shows that the law has extended the reasons why one can restrain calls on bonds
You may well be familiar with the decision from last October of Doosan Babcock Limited (“Doosan”) vs Comercializadora de Equipos y Materiales Mabe Limitada (“MABE”) which looked at the circumstances where a call on an on-demand bond can be resisted.
The judgment indicated a slight softening in the attitude of the courts when faced with calls where the underlying established facts suggest the call may not be warranted on its merits.
You will recall that the case arose out of Doosan’s concerns that MABE were going to make calls on two “on-demand” performance guarantee bonds. Under the terms of the bonds they expired upon the issuance of taking over certificates. MABE had refused to issue these certificates arguing that they were using the power plant as a “temporary measure”. Unfortunately for MABE this argument did not sit comfortably with their own press releases boasting that the boilers had exported 7,500 hours of power to the grid. Further, there was no hint that MABE intended to do anything other than to continue to run the plant.
The traditional approach was that in the absence of a clear case of fraud a court would not restrain a call on a bond. What Doosan emphasises is that the law has extended the reasons why one can restrain calls on bonds.
It now includes instances where a party can put in issue the validity of the guarantee or the beneficiary’s right to make a call.
There is very little to commend an instrument whereby a beneficiary can wake up one morning and decide without further ado that it will call on the bond despite there being little or no merit in the call
If it can be shown, by reference to the underlying contract, that there is a strong case that the terms of the contract clearly and expressly prevented the beneficiary from making a call then the court will restrain the call. Alternatively if the right to make the call can be shown to be as a result of the beneficiary’s own breach of the underlying contract then a call will be restrained under the old principle that a party cannot rely on its own breach.
On reviewing cases where the call on the bond is, how shall I put this, lacking in objective merit, it makes me question the place “on-demand” bonds should have in connection with the construction process.
Bonds are put in place sometimes almost as an afterthought, like a final piece of the procurement jigsaw puzzle. They are simply a means of security for the performance of the contractor (and sometimes that of the employer).
If you follow this logic through there is very little to commend an instrument whereby a beneficiary can wake up one morning and decide without further ado that it will call on the bond despite there being little or no merit in the call. Given that such bonds are normally backed by a counter indemnity then the contractor will have to make good the payment to the bondsman. This could have a dramatic impact on its business and even push it under.
Despite the obvious dangers in giving such bonds they are widely used in international projects. They are rarely used in the UK where conditional bonds are far more common.
Strangely many international bonds are governed by English Law so perversely a body of law has built up in this area which does not derive primarily from the domestic construction market.
In practice, a contractor is not going to have the chance to lament the inherent injustices of on-demand bonds. The only course of action is to try to protect itself as best it can by seeking amendments to mitigate the risk posed - for example, specifying precise wording to be used on the call or requiring specific authentications by certain persons before a call can be made. Such amendments go to procedure rather than relying on the substantive facts at the time of the call, like in Doosan. Such (often minor) insertions could make all the difference between a successful call and one that is deemed unlawful or unauthorised.
Whilst, as shown in Doosan vs MABE, the law has moved on from a party only being able to restrain a call based on fraud (historically a difficult hurdle to clear), I do question the need for such bonds in the first place. Yes, I accept the employer ultimately has to pay for the provision of such a bond through the contract price, but aren’t they just inherently unfair?
Steven Carey is head of construction and engineering at Speechly Bircham LLP