The courts enjoy a fairly regular diet of cases concerning the validity of calls on performance bonds and similar securities. I have blogged on this before, in early 2017.
Bond issuers who are reluctant to pay out on a bond will raise either:
- A formal defence, for example that the demand is invalid because it is in the wrong form, signed by the wrong person, or not accompanied by the right documents (as in AES v Alstom or MUR Joint Ventures BV v Compagnie Monegaseque de Banque).
- A fraud defence, that the demand is invalid because it contained a false statement or the beneficiary had no honest belief that the sums were due (as in NIDCO v Banco Santander SA or Tetronics v HSBC Bank).
Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV), heard by Butcher J in the Commercial Court a couple of weeks ago, is a formal defence case, which grapples with the situation where the original beneficiary has tried to assign the benefit of the bond to a third party, and problems with that assignment cause problems for the ultimate beneficiary.
The facts
RRS is a project company responsible for delivering a waste treatment facility in Derby. In 2014, it employed Interserve Construction Ltd (ICL) to build it. ICL had to provide a performance bond (£21.81 million) and a retention bond (£7.27 million). Euler Hermes issued the bonds in favour of RRS. On the same day, RRS entered into a borrower debenture with Sumitomo Mitsui Banking Corp Europe Ltd (SMBC) in which it assigned to SMBC the benefit of the two bonds. It also (crucially as we will see) appointed SMBC as attorney with power to do any act in its name and on its behalf.
In relation to the performance bond, RRS sent Euler a notice of the assignment, which Euler signed and returned.
The project did not go well, both before and after ICL’s parent, Interserve, went into administration in March 2019. By August 2019, both the project agreement and construction contract were terminated. Just before that, and no doubt nervous at the impending expiry of the performance bond, SMBC sent demands under both bonds. It signed each demand twice: once as itself, and once as attorney for RRS.
The problem under the performance bond
The performance bond defined RRS as “the Employer”, which term included its permitted assignees. But it also provided that RRS could only assign the benefit of the bond if the assignee confirmed to the bondsman in writing that it accepted RRS’ repayment obligation under the bond. (RRS was obliged to repay any amount by which the sums paid under the bond exceeded ICL’s liability in a dispute under the construction contract.) Sadly, when taking the assignment, SMBC did not send that confirmation to Euler. So, said Euler, the demand was not sent by a “permitted assignee” and was invalid on its face.
The answer
SMBC had to accept that the assignment was ineffective under the terms of the bond. The judge was not persuaded by its arguments that Euler’s signature on the acknowledgement of receipt of the notice of assignment was either:
- An agreement that there was an effective assignment.
- A waiver of the formal requirement for confirmation in the bond (Butcher J’s rapid but careful assessment of the impact of the Rock Advertising line of authority on non-waiver provisions is worth reading).
But SMBC had an alternative argument. If the assignment was not valid, then the claim must still have lain with RRS, and RRS had in fact issued the demand because SMBC had signed the demand as RRS’s attorney.
This simple point won the day. While the court could not make an order that Euler pay the performance bond monies (because SMBC could not make the demand, and RRS was not a party to the proceedings), the judge could and did make a declaration that the demand was valid. Presumably an actual order for payment can be made once RRS is joined to the proceedings, and presumably it will hand the money over to SMBC.
The problem under the retention bond
The problem under the retention bond was different. There, the definition of RRS as “Employer” made no mention of assignees, but the bond did permit assignment and without the special requirement as to the assignee assuming the repayment obligation. So assignment was not an issue. The problem was one of pure form. The bond required a demand to bear the signature of a duly authorised officer of the employer and, said Euler, the demands were invalid because they were not signed by an officer of RRS.
The answer
Butcher J resolved this more swiftly, finding for SMBC on two alternative bases:
- Because the retention bond expressly contemplated assignment, he held that it must have been the intention for a demand to be signed by the assignee, so signature by an officer of the assignee counted as a signature of an officer of the employer.
- The second signature being by a director of SMBC as attorney for RRS, was itself a signature of an officer of the employer.
Lessons learned
From what is perhaps a fairly technical case spring some important lessons of wide application. The first, essentially a commercial one, is that many bond issuers are reluctant to pay out on on-demand bonds, and apparently not concerned at the risk to their reputation posed by publicity about court proceedings arising on major projects in which they resist payment. This includes not just minor regional players, but major household names in the finance world such as Euler Hermes.
The second lesson is a reminder of the importance of paying close and precise attention to the formal requirements (or “conditions”) for making a claim under a bond, some of which need to be attended to right at the start of the project (like the assignments in this case).
Third, when it is too late to fix historic oversights in the formalities, and matters have come to a crunch, the case shows the value of a belt-and-braces approach, typified by SMBC’s ultimately winning strategy of signing both as itself and as RRS. In a case revolving around an assignment, and if in doubt about whether the assignment is valid, one cannot go far wrong signing in two capacities.
