In Power Projects Sanayi Insaat Ticaret Ltd v. Star Assurance Co Ltd,[[1]] the English Commercial Court held that under what it considered a “classic performance bond” the issuer could not resist payment by pointing to underlying contractual disputes and could only rely on a fraud defence known at the time of demand.
A bond was issued by Star Assurance Co. (Issuer) to support two subcontracts between Power Projects(Contractor) and two other companies (Subcontractors) relating to construction of a power-generation plant in Ghana. The Subcontractors had been required to provide the bond to secure their performance obligations. Alleging a number of failures by the Subcontractors under the subcontracts, Contractor made a demand on Issuer to pay the full amount of the bond. Contending that the subcontracts had been executed and that Contractor had failed to comply with its obligations, Issuer did not honour the demand.
In response, Contractor resorted to use of Civil Procedure Rule (CPR) Part 8, seeking to dispose quickly of claims that do not involve any substantial dispute of fact. Issuer objected.
In the court’s review of English case law governing on-demand performance bonds, it said the basic principles are well established. In citing Wuhan Guoyu Logistics Group Co Ltd v. Emporiki Bank of Greece SA, the court said that on-demand bonds are to be treated as autonomous contracts “independent of disputes between the seller and the buyer as to their relative entitlements pursuant to the different contract between themselves”. In its discussion of the fraud exception, the court stated: “Fraud alone does not do; the bond issuer must have notice of the fraud at the time of the demand.”
In taking up Issuer’s objections to Contractor’s use of Part 8, the court deemed them ill-founded and emphasized the legal nature of a “classic performance bond”. The court stated:
“[A]s a matter of law the only defence that [Issuer] could raise is that the Demand was fraudulent, in other words that [Contractor] knew that it had no right to make it, and that [Issuer] knew that it was fraudulent at the time when its obligation crystallised, namely on the making of the Demand. [Issuer] was not entitled to fail or refuse to pay pending investigation of the state of the underlying account or relationship between [Contractor] and [Subcontractors]. Nor was it entitled simply to rely on [Subcontractors’] case as against [Contractor], however confident it was that [Subcontractors’] case was well founded.”
“In my judgment none of the facts identified by [Issuer] go anywhere near satisfying those strict legal requirements.”
