“On demand” guarantee – restraining a party from making a call

[2013] EWHC 3201 (TCC)



Doosan Babcock Limited as Claimant (“Doosan”)
Counsel: Steven Walker Esq, QC & Miss Serena Cheng


Comercializadora de Equipos y Materiales Mabe Limitada as Defendant (“MABE”)
Counsel: Stephen Dennison Esq, QC

On demand performance guarantee. Interim injunction. Dependent on the facts of the case a party can be prevented from drawing down on an “on demand” performance guarantee if the other party can show a strong case that there is a breach of contract, alternatively if that other party has a reasonable prospect of showing that there was a breach of contract

The background
On 4 October 2013 Mr Justice Edwards-Stuart granted Doosan an interim injunction to restrain MABE from making a call on two performance guarantees. The two performance guarantees the subject of this dispute are “on-demand” guarantees, so the banks concerned are required to pay on receipt of a demand by MABE that complies with the requirements of the guarantees. The application arises out of a contract by which Doosan agreed to supply two boilers for a power plant in Brazil. The performance guarantee in relation to each unit expires either on the issue of a Taking-Over Certificate for that unit or, under the current letters of guarantee, 31 December 2013, whichever is earlier.

Doosan’s case is that it was entitled to Taking-Over Certificates when the boilers were taken into use by MABE on 30 November 2012 for Unit 1 and on 10 May 2013 for Unit 2. By two letters dated 10 July 2013 Doosan requested the issue of the Taking-Over Certificates. MABE refused, relying on a provision in the contract which, it says, permits it to withhold a Taking-Over Certificate where the unit has been used by the employer only as a temporary measure in accordance with the terms of the contract or by agreement of the parties.

Doosan submits that this ground for withholding these certificates is spurious. The evidence shows that the units have been in commercial operation for several months, since when they have exported more than 7,500 hours of power at various loads to the local grid.

As he said in his first judgment (see paragraphs 42-43) the consideration for Mr Justice Edwards-Stuart at this stage is whether or not Doosan has shown a strong case that MABE’s refusal to issue the Taking-Over Certificates is a breach of contract, alternatively that it has areasonable prospect of showing that it was a breach of contract

Parties’ positions
MABE said that it was not arguable, that Doosan was or is entitled to the Taking-Over Certificates. It said that Taking-Over by MABE, was to occur after the Tests on Completion (including performance tests) had been satisfactorily completed.

Doosan submitted that the performance tests were to be carried out by MABE after the Tests on Completion had been satisfactorily carried out by Doosan.

Mr Justice Edwards-Stuart’s view
After having considered the facts and the contract, Mr Justice Edwards-Stuart said that it was his view that the “Tests on Completion” were the factory tests and that it was the employer (MABE) who was to carry out the performance tests. Furthermore, Mr Justice Edwards-Stuart said that it seemed to be clear that some, if not all, of these performance tests could only be carried out once the units had been put into use.

Mr Justice Edwards-Stuart said that Doosan has established a strong case that the Taking-Over Certificates were not dependent on completion of the performance tests. He concluded that Doosan has a strong case that it was entitled to Taking-Over Certificates at the time when it requested them in July 2013. He said that if all Doosan needs to show, in order to cross the threshold for interim relief, is that it has a strong case to the effect that MABE’s failure to issue Taking-Over Certificates was (and is) a breach of contract, then it has done so.

The authorities
Doosan argued that in cases in which the parties had agreed expressly that the beneficiary’s entitlement to make a demand on the guarantee was either qualified or would be extinguished if certain events occurred, in order to obtain an interim injunction a claimant would only have to show that he had a realistic prospect of proving that, in the events that had occurred, the beneficiary could not make a demand on guarantee. Doosan referred to Simon Carves v Ensus UK [2011] BLR 340. In that case Akenhead J said

“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.”

Mr Justice Edwards-Stuart said that in his view it is clear from that passage that Akenhead J was concerned with whether or not there had been a breach of the underlying contract and that the position in the case in hand (Doosan v MABE) is virtually indistinguishable. Mr Justice Edwards-Stuart said that Arkenhead’s decision in Ensus justifies the grant of interim relief in this case if Doosan can show a strong case.

Mr Justice Edwards-Stuart said that if he were wrong with regard to the Ensus case, alternatively he would reach the same decision by applying Alghussein Establishment v Eton College [1991] 1 All ER 267. That case raised the general question of the extent to which a party could be permitted to benefit from his own wrong. In that case Lord Jauncey said that no man can take advantage of his own wrong.

Mr Justice Edwards-Stuart said that he considered that Doosan has a strong case that MABE’s refusal to issue Taking-Over Certificates for Units 1 and 2 was and is a breach of contract. It is as a result of that breach, and only that breach, that MABE is in a position to make a call on the performance guarantees. If MABE had issued the certificates, the guarantees would have expired and so there would be no guarantee on which to make a call.

In the light of the principle established or recognised by the House of Lords in the Alghussein case, Mr Justice Edwards-Stuart said he could not see how it would be just to refuse interim relief in a case where MABE could only make a call on the bond by setting up a state of affairs which is the direct result of his own deliberate breach of contract. For example, as in this case, where the continuing validity of the bond is solely the result of the absence of the Taking-Over Certificates, which in turn is the result of MABE’s wrongful refusal to issue them.


Mr Justice Edwards-Stuart said that he was content to agree with Akenhead J in Ensus that, in a case involving a bond, a performance guarantee or letter of credit, Doosan will need to show a strong case that there has been such a breach of contract by MABE. However, if the principle set out in the Alghussein case is in play, it may be that it would be sufficient for Doosan to demonstrate only that his case had a realistic prospect of success. Mr Justice Edwards-Stuart said that in this case he was satisfied that Doosan has a strong case so that it was not necessary for him to decide this point.

Mr Justice Edwards-Stuart held that it considered that Doosan has made out its case for interim relief. There is a strong case that MABE’s failure to issue the Taking-Over Certificates was a breach of contract. There is also a strong case that MABE is seeking to take advantage of its own breach of contract to derive a benefit, namely the continuing existence of the performance guarantees.

The full judgment that has been discussed above can be downloaded at http://www.bailii.org/ew/cases/EWHC/TCC/2013/3201.html. Alternatively, see the PDF of the judgment hereinbelow.

Download the document here.