Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC)

"The Acceptance Certificate shall list any known Defects which the Contractor is bound to make good under the provisions of Clause 37 (Liability for Defects) and any minor items still remaining to be completed following the issue of a Take-Over Certificate."

“2. The Bank hereby irrevocably and unconditionally undertakes to pay to the Purchaser upon the fifth business day immediately following that on which it receives a written demand from the Purchaser in accordance with Clause 4 below an amount equal to the lesser of: 2.1 the amount specified in such demand and 2.2 the Bond Amount less the aggregate of all amounts previously paid under this Bond. 3. The Bank’s obligation to make payments under this Bond shall arise on receipt of a demand made in accordance with the provisions of this Bond without any further proof or condition and without any right of set-off or counterclaim, and the Bank shall not be required or permitted to make any other investigation or enquiry. For the avoidance of doubt this Bond is not a guarantee and the bank’s obligations hereunder do not have the character of suretyship… 6. This Bond is irrevocable. This Bond will be valid up to the earlier of: 6.1 14.00 hrs London time on 31 August 2010… 6.2 the date on which all payments under this Bond equal the bond amount. The Bank shall be liable to pay the Bond Amount or any part thereof under this Bond only if the Purchaser serves a written claim or demand on the Bank (and which should be received by the bank) on or before 14.00 hrs London time on 31 August 2010, after which time this Bond shall cease to be ineffective in all respects whether or not the original of this Bond is returned to the bank…”

“Ensus would recover its costs under clause 37.9 and keep contemporaneous substantiating records in compliance with clause 4.3 and submit a claim in accordance with clause 19.5.”

“Ensus certifies that the Plant, as described in the EPC Contract and the Variations to the Contract passed the 5 Day Performance Test as defined in Schedules 16 and 17 of the Contract on 5th August 2010. In accordance with clause 36.3 of the Contract, as of the 19th August 2010, the Plant is accepted by the Purchaser subject to outstanding defects being rectified as per the attached schedule and subject to resolution of liability of certain of the rectification works…”

“because odour at levels likely to cause annoyance outside the site has been identified by an authorised officer and the operator has not used appropriate measures to prevent, or where that is not practicable to minimise the odour.”

“Please cease and desist your ponderances and return the original of the bond to us forthwith without the need for this matter to be escalated to full legal confrontation.”

“This is a note to record the solution we have reached over the phone on the performance bond. I would be grateful if you could e-mail back to confirm this is agreed. Simon Carves agrees to provide, as soon as practicable, an extension to the existing bond, in the amount of £2.3m and with an initial expiry date of 31st December 2010 which will subsequently [be] extended to 28th February 2011, should we not have reached the final solution regarding defects by 31 December 2010. I know you are doing your best to get this in place by 31st August, however we recognise it may take a few days longer and would imagine it should be possible to get the new Bond not later than end of next week, but certainly by 14th September - please confirm if you agree that is a reasonable backstop. In return Ensus, with the support of its lenders, agrees not to make any demand under the existing £10.8m performance bond before its current expiry date….”

“11. It seems to me that I should be primarily concerned today with the best way of preserving the status quo pending a full argument. Mr Rowlands has made it clear, and it is not surprising, that he and indeed his solicitors have not yet had a full opportunity to review all the evidence put before this court last week and all that Mr Hooker's witness statement deals with is logistics and what was said and done as between the parties between Wednesday of last week and Saturday or Sunday. He has not had time to review the merits of the application. The argument which is relied upon by the respondent, Ensus, through counsel is effectively that the court in effect in practice cannot and certainly should not grant any further injunctive relief and such injunctive relief as has been granted should be discharged. 12. I am very reluctant on the basis of an argument that has run for no more than about 45 or 50 minutes from both parties to make any final findings of law about this. I do not think that it would be appropriate to do so because both parties have put limited authority before me. I suspect that there is more helpful authority which would cast light on the matter. I am going to proceed on the following basis, at least at this stage. It is certainly the case, and the law and practice establishes this over many years, that a bank or surety which has provided an on demand bond, sometimes called an unconditional bond, cannot be enjoined against paying against a valid demand unless there is the clearest at least prima facie evidence of fraud, either fraud at the bank or fraud by the giver of the demand. I am not going to go into what may constitute fraud because fraud is not alleged to take place here. But I am, at least on the authorities that have been put before me, not satisfied on the argument as it is run so far that the only ground of granting an injunction in bond cases is fraud. 13. There are two scenarios to consider. One is the case where a bank is being enjoined and the other is when the beneficiary under the bond is being enjoined from either making a call or enjoying the proceeds of the call. As the bank is not involved in these proceedings, I do not really need to consider its position in this case. But what I am concerned to consider is the relationship between the Contractor and the Purchaser, which is a contractual one, and the extent to which under the terms of the contract in the light of the facts which are said to have happened (or not happened, as the case may be) whether this call, this demand, could legitimately have been made. In the ordinary course of events and historically a court of equity, and indeed now any court, can act by way of injunction to enjoin a party who is about to commit or is committing a breach of contract to prevent that occurring. Of course I cannot decide today whether there is a breach of contract. All I can decide is as to whether there is at least a reasonably good or good arguable case or, at least on the argument as it is run today, a serious issue to be tried for Cyanamid purposes, whether there is a sufficiently good argument. 14. It seems to me that, and I am not going to put it any higher than this at this stage for obvious reasons because I have not heard full argument, but there is a reasonably good arguable case in relation to whether or not as between the two contractual parties the performance bond has become null and void and as to whether it should have been returned before any demand was made on it. As I have said, I am not going to go any further than that. I look forward, if the argument comes back, to considering any argument that under the contract that must be wrong. In those circumstances, in accordance with ordinary contractual principles and ordinary principles relating to an injunction, subject to any further argument I may hear next week, it seems to me that the court should act in appropriate circumstances to prevent breaches of contract which can be shown to cause or to be likely to cause serious and significant commercial upset to the purportedly innocent party to this alleged breach. 15. I do not see that any of the authorities put before me suggest that the court does not have jurisdiction, to be exercised properly of course, in the circumstances said to exist in this case and it seems to me that, if the bank has not yet paid, then steps should be taken by way of injunctive relief to preserve the status quo between the parties, at least until full argument can take place. It seems to me that full argument has not taken place today, and the respondent is not in any way to be criticised for that, it simply has not had enough time. Therefore I would be minded to continue some injunctive relief to preserve the status quo at least until next Monday when I have set aside at the moment an hour and a half, but that can be extended if necessary, to hear the parties in full on this. 16. I have not heard any argument about any temporary inconvenience to the respondent, Ensus, if that were to happen, but any further injunctive relief would have to reflect the need for the bond to be extended for some reasonable period of time at least pending the resolution by the court of inter partes injunctive proceedings next week, so that, if need be and if the decision of the court permits, the respondent, Ensus, would still have time to make an effective call under the bond and to secure payment from the relevant bank. What I propose to do in those circumstances is just to give you five or ten minutes to talk about the best way of achieving that.”

“It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by bank. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the court will leave the merchants to settle their disputes under the contract by litigation or arbitration…The courts are not concerned with their difficulties to enforce claims these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international commerce could be irreparably damaged.” 29. "‘I am not saying that in such cases [that is, cases where parties have entered into confirmed that a credit] the courts would not again assume jurisdiction. Indeed, as was said in some of the authorities, in cases of obvious fraud to the knowledge of banks, the courts may preclude banks from fulfilling their obligations to third parties. But in the present case there is simply a contractual dispute between the plaintiffs and their customers in Libya, in which the rights and wrongs are not clear, though as mentioned above I assume that the rights are on the side of the plaintiffs. They will unfortunately have to pursue those rights against the buyers as best they can.’”

“8. Sirius contended in the alternative that the letter of credit was an autonomous contract not affected by the conditions as to its draw down agreed between themselves and FAI. They were entitled to draw the letter of credit according to its terms. Even if Sirius resorted to it in breach of those conditions, the remedy would be a claim for damages and an injunction would not be granted. Sirius further contended that, in the light of the terms of the Tomlin order, any damages would be nominal. 9. The judge rejected this submission. He referred to Deutsche Ruckverscherung AG v. Walbrook Insurance Co Ltd [1995] 1 WLR 1017 1030, where Phillips J (as he then was) declined on the facts of that case to imply a term in an underlying contract preventing recovery under a letter of credit which did not itself contain such a term. But in the present case there was an express term that Sirius would not draw down the letter of credit except in certain circumstances. The judge did not see why such a contract should not be enforced. He accepted that the principle of autonomy was of vital importance, but it was not undermined in the very special case where a party expressly agreed not to draw down unless certain conditions were met. To seek to draw down in breach of those terms would be breach of an express negative covenant which could be restrained by injunction. Sirius could also be restrained by injunction from disposing of the proceeds held in escrow. The fact that the letter of credit was an autonomous contract between Sirius and Westpac did not determine the entitlement as between Sirius and FAI to the money now held in escrow. Sirius, if necessary, seek to appeal this decision.”

“24. The Sirius accepted that the second condition of the 3rd September 1999 agreement was not fulfilled when the letter of credit was drawn down and that it is not now fulfilled. The case proceeded before the judge on the basis that it could never have been fulfilled once the terms of the Funding Agreement disabled Agnew from proceeding against Sirius. The cross-appeal arises on a finding by this court that the first condition was not fulfilled either. As between Sirius and FAI, Sirius were not entitled to draw down the letter of credit. To do so would have been a breach of contract. Sirius maintain nevertheless that they would have been entitled to draw down the letter of credit even though to do so would have been a breach of contract. They point to the autonomous nature of letters of credit and say that the court would not have restrained them by injunction from drawing down, notwithstanding their breach of contract. The judge was wrong to decide otherwise. They say that the terms of the underlying agreement which purport to regulate draw down could at best give rise to a personal obligation sounding in damages. They alternatively say that in the circumstances of this case, the grant of an injunction would have been discretionary only, and that the court would not have granted an injunction because FAI's damages in the alternative would have been nominal. FAI were admittedly liable to Sirius. Sirius were liable to Agnew. Payment from each to the other was due. Realising the security of the letter of credit would result in no loss to FAI. I observe parenthetically that it would result in a diminution of any dividend payable to FAI's creditors in liquidation, if, as this issue has to acknowledge, Sirius were not, as against FAI, entitled to realise their security… Cross-appeal – discussion and decision 26. Letters of credit are an important commercial means of providing cash or security for those who in return provide goods or services. Typically a seller agrees to sell goods to a buyer. The buyer establishes a letter of credit with a confirming bank in favour of the seller. The terms of the letter of credit spell out the circumstances in which the beneficiary – the seller – is entitled to draw it down. The terms will typically include presentation to the bank of specified shipping and insurance documents and the like. The bank's concern is to be satisfied that the terms of the letter of credit are fulfilled, whereupon the bank is obliged to pay the beneficiary. Because the letter of credit is, subject to its terms, the equivalent of cash, the bank is not concerned with any disputed question, not within the terms of the letter of credit itself, which may arise under the underlying sale contract between the seller and the buyer, as for instance, if the goods were said to be defective or to have arrived late – see generally United City Merchants (Investments Ltd) v. Royal Bank of Canada [1983] 1 A.C 168 183. This is also the effect of Article 3(a) of the ICC Uniform Customs and Practice for Documentary Credits (1993 Revision) which was incorporated in the letter of credit in this case. Absent fraud by the seller presenting documents to the confirming bank seeking payment, the court will not restrain a bank from paying a letter of credit which is payable according to its terms, nor a beneficiary from seeking payment: see Group Josi Re (formerly Groupe Josi Reassurance SA) v. Walbrook Insurance Co Ltd [1996] 1 Lloyd's R. 345 at 360-1. Nor, again absent fraud, will the court restrain a beneficiary from drawing on a letter of credit which is payable in accordance with its terms on the application of a buyer who is in dispute with the seller as to whether the underlying sale contract has been broken – see for both these propositions the Deutsche Ruckverischerung case [1995] 1 WLR 1017, 1030 where Phillips J considered the authorities. This is the autonomous nature of letters of credit. By means of it, banks are protected and the cash nature of letters of credit is maintained. There is no authority extending this autonomy for the benefit of the beneficiary of a letter of credit so as to entitle him as against the seller to draw the letter of credit when he is expressly not entitled to do so. 27. The present case is in more than one important respect a variant of the more typical. Here the relevant underlying agreement is, not the commercial transaction that the letter of credit was intended to support, as in the typical case the contract of sale or in the present case the retrocession treaties, but a related agreement regulating as between FAI and Sirius terms on which the letter of the credit would be established. The terms included express contractual restrictions on the circumstances in which Sirius would be entitled to draw on the letter of credit. To that extent the letter of credit was less than the equivalent of cash and Sirius's security was correspondingly restricted. Although those restrictions were not terms of the letter of credit, and although the bank would have been obliged and entitled to honour a request to pay which fulfilled its terms, that does not mean that, as between themselves and FAI, Sirius were entitled to draw on the letter of credit if the express conditions of this underlying agreement were not fulfilled. They were not so entitled. I reject Mr Vos's submission that in the present case the parties must be taken, as between themselves, to have afforded Sirius the right to draw on the letter of credit in defiance of the conditions of this underlying contract. 28. In my judgment, this analysis without more answers the question who is now entitled to the money in the escrow account. The letter of credit was drawn down by an agreement – the Tomlin order agreement – which changed the circumstances in which it could be drawn while preserving each party's position and arguments in relation to it. Sirius are not entitled to the money because the conditions of the 3 September 1999 agreement have never been fulfilled so as to entitle them to draw the money. They did not draw the money in breach of the agreement and did not try to do so. The question whether the court would have granted FAI an injunction never arose and a hypothetical answer to that hypothetical question is not, I think, determinative of the issue before the court. Whether in other circumstances the bank would have been obliged and entitled to pay is not in point. What determines the issue against Sirius is the fact that, as between themselves and FAI, the protagonists on the issue who is entitled to the proceeds of the letter of credit, they were never entitled to draw the letter of credit. I rather think that strictly the money should revert to the bank, but we were told that, if it did, it would get back to FAI. 29. I should add that, had it been necessary to do so, I should have been very strongly inclined to agree with the judge's implicit finding that, had the question arisen out of the facts in the present case, the court would have granted an injunction restraining Sirius from drawing on the letter of credit in breach of conditions of the 3rd September 1999 agreement: see Doherty v. Allman (1878) 3 App. Cas. 709, 719-20, modified perhaps as explained in Insurance Co. v. Lloyd's Syndicate [1995] 1 Lloyd's Rep. 273, 277 and see also Meagher, Gummow & Lehane, Equity – Doctrines and Remedies, 3rd Ed (1992). 30. This analysis accords with the judgment of Phillips J in the Deutsche Ruckverischerung case [1995] 1 WLR 1017, 1030. He was concerned that the commercial effectiveness of letters of credit would be eroded if a claimant could prevent a beneficiary from drawing on the letter of credit by doing no more than to persuade the court that there was a seriously arguable case that the claim under the underlying contract was invalid. He did not consider that it was correct to imply a term into the underlying contract that the beneficiary would not draw on the letter of credit unless payment under the underlying contract was due. In the present case there is an unusual underlying contract and an express term restricting the circumstances in which Sirius were entitled to draw on the letter of credit. There is no need for implication. Further, FAI do not have only a seriously arguable case. They have in my judgment positively established that Sirius were not entitled to draw on the letter of credit when its proceeds were placed in the escrow account.”