Construction

Resisting calls on on-demand bonds

Tetronics (International) v HSBC Bank Plc (BlueOak Arkansas LLC intervening) [2018] EWHC 201 (TCC)

A party faces a formidable challenge when trying to prevent a bank from making a payment in respect of a call on an on-demand bond or guarantee. This case also illustrates the importance of ensuring that a consistent factual position is advanced both before a court granting an ex parte injunction and an emergency arbitrator.

Tetronics entered into a supply contract for work at an electronics waste recovery plant belonging to BlueOak. Tetronics was a customer of HSBC, who provided an instrument entitled a guarantee that would pay out £3.08 million following a valid demand by BlueOak.

BlueOak made a valid call on 17 January 2018. Tetronics applied for an injunction against HSBC to prevent the bank from making payment.

The difficulty of resisting a call on an on-demand bond

Fraser J stressed the difference between an application to restrain a beneficiary from making a call and an application to injunct the bank itself. There is a fundamental principle of autonomy in relation to performance bonds and equivalent instruments: the bank itself is autonomous from the parties’ contractual relations between one another ([30]-[31]). The beneficiary must expect that the bank will pay out notwithstanding any dispute with the bank’s customer in relation to the performance or existence of the underlying contract, as the bank is personally undertaking to pay the beneficiary provided that the specified conditions are met (Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 WLR 392 Practice Note). The exceptional case is where it is proved that the bank knows that any demand will clearly be fraudulent.

Fraser J recited the requirements that must be satisfied when seeking to bring a case within the strict fraud exception at [37]:

  1. It must be seriously arguable on the material available that the only realistic inference is that Blue Oak could not honestly have believed in the validity of its demands under the guarantee.
  2. The Bank must have been aware of the fraud.
  3. The balance of convenience must favour granting Tetronics an injunction. This required “extraordinary facts” and the company faced very considerable difficulty in having that balance found to be in favour of injunctive relief.

Inconsistent positions in different venues

Fraser J, in his first draft judgment, considered that all three aspects of the test he had recited were made out. It then transpired, however, that Tetronics had commenced an ICC arbitration against Blue Oak before its application for an emergency injunction from the High Court: the company did not tell the court or those acting for Tetronics in the TCC at the first two hearings this. Further, the ICC appointed an emergency arbitrator to seek a restraint on the call on the guarantee. Tetronics gave an inconsistent account of its future solvency in each forum. Fraser J cited Clarke J’s summary of the duties that a party making an application for an interim remedy without notice at [67]-[72] in Millhouse Capital UK Ltd and Abramovich v Sibir Energy Plc [2008] EWHC 2616 (Ch), including the need to make full, fair and accurate disclosure of material information to the court. Having found that Tetronics failed to comply with these requirements, Fraser J discharged the injunction.

Conclusion – legal and procedural difficulties when resisting an unfair call

This case usefully distils the case law as to the high hurdle a bank’s customer faces when it seeks to restrain payment pursuant to what it regards as an unfair call on an on-demand instrument. It also highlights the distinction between an application to restrain the beneficiary of such an instrument from making the call, and an application against the bank itself.

The case also highlights the importance of ‘joined up thinking’ when applying for complimentary orders and remedies in different jurisdictions or fora. Those advising clients seeking an ex parte order in the High Court in England and Wales should be careful to warn of the need to give appropriate disclosure at the hearing, or face the possibility of having the order subsequently discharged for this very reason.

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