Article

Note: In connection with the construction of an immigration detention center for the UK Home Department, an electrical subcontractor, Lorne Stewart Plc, Principal, was required to post a performance bond in the amount of 10% of the subcontract fee, or UK£1,506,226.70, in favor of the contractor, Amey Asset Services Ltd., Beneficiary.

At Principal's request, Hermes Kreditversicherungs AG, Surety, issued a bond guaranteeing "the proper and punctual performance by [Principal] of their obligations under the subcontract." Clause 2.3 of the performance bond dealt with payment by Surety on receipt of a request for payment by Beneficiary:

"2.3 The Surety irrevocably and unconditionally undertakes, upon a receipt of a requirement for payment made by [Beneficiary] and without any further proof by [Beneficiary] to pay directly to [Beneficiary] the sum stated in the relevant requirement. The Surety shall pay the sum so stated in the requirement without challenge on any grounds and without set off, counterclaim or deduction of any nature and notwithstanding any contesting or disputing by the Surety, [Principal] or [Beneficiary] of the requirement for payment, the requirement or of the matters to which they relate or any other matters or circumstances provided that each demand shall specify:

2.3.1 that it is a requirement for payment;

2.3.2 the amount of the requirement for payment;

2.3.3 that the Longstop Date has not occurred; and

2.3.4 the Outstanding Bond Amount.

2.3.5 The assessed amount of loss, damage, costs and expenses incurred and/or to be incurred by [Beneficiary].

2.3.6 That notice of default has been served on [Principal], (not less than 14 days before the notice of a requirement for payment was served on the surety) which included the assessed amount of loss, damage, costs and expenses incurred and or to be incurred by [Beneficiary]."

Clause 2.5 of the performance bond dealt with payment and required "[i]f a requirement for payment is presented in accordance with this Bond ... payment will be made forthwith but in any event not later than five (5) Business Days following the date of presentation of the requirement for payment."

Finally, Clause 4 of the agreement provided that "[t]he Surety shall have no liability and shall not be required to accept or entertain any requirement for payment under this Bond in respect of which a requirement for payment has not been presented in accordance with paragraph 2 above before the Termination Date."

The construction project did not go according to plan. The court noted that "[t]he work started late, delay and disruption occurred. As is usual in such a situation, the various parties involved blamed one another. There were even allegations of criminal damage. The main contract overran substantially."

As a result, Beneficiary, on the longstop (termination) date, as explained in the opinion, demanded payment under the bond accompanied by statements that "[t]he Longstop Date ... had not yet occurred" (when, in fact, it had that very day) and that "[n]otice of the default of [Principal] has been served upon [Principal] more than 14 days prior to the date of this demand ... ."

Principal sought an injunction in order to prevent payment from Surety to Beneficiary under the performance bond. The Queen's Bench Division Court, Garland, J., granted the injunction, ruling that the demand was not timely.

Principal argued that Beneficiary's demand to Surety was invalid because, under clause 4 of the bond, the demand had to be made before, not on, the termination date. The court ruled that clause 4 of the bond made the request for payment late and "a demand made out of time is not a demand at all."

Principal also argued that the request was fraudulent in that the letter contained misrepresentations: (1) that the longstop date had not yet occurred when, in fact, it had; and (2) that a notice of default had been served when it had not. Beneficiary denied the allegations of fraud and argued that without fraud a challenge to the validity of the demand could not form a basis for the grant of injunctive relief. The court stated there was no evidence of fraud but it would be just to grant the injunction since Principal "has a strongly arguable case for declaratory relief and that the balance of convenience is in favor of preserving the status quo rather than provoking further litigation ... ."

Comments:

1. It is not apparent from the quoted portions of the bond whether it is independent or not. The bond could be understood to be independent since it only required a "request for payment" without further proof and under what it will specify. Therefore, the first order of business was to determine whether it was an independent undertaking. The court did not do so.

2. One must also wonder about the "longstop date." This term is not explained or its application clarified, but one wonders if it had occurred at the beginning or at the conclusion of the stated date. For example, it would be correct to say that expiration of an LC had not occurred on the expiration date. If the latter, there would be no fraud in making a statement that the demand was made before the date.

Comment by James G. Barnes of Baker & McKenzie:

The undertaking is not fully quoted, but it includes a statement that in the event of any failure of performance, "the Surety shall ... indemnify ... .", so there is serious question as to whether it is a suretyship undertaking and not independent. In this case the court never quite realized that it had to decide whether or not the undertaking was independent and instead treated it as independent for some purposes and not for other purposes. The court ignored the defense that the principal was not liable to pay based on the underlying contract, but enforced non-documentary conditions in the undertaking. The court decided that the beneficiary had not committed fraud but enjoined payment anyway because the demand was made after the "Termination Date" (which is defined in the undertaking by reference to nondocumentary future events).

[JEB/lhd]

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