Sumitomo Mitsui Banking Corporation Europe Ltd v Euler Hermes Europe SA (Nv)

This has been the expedited hearing of a Part 8 claim brought by the Claimant, Sumitomo Mitsui Banking Corporation Europe Ltd ("SMBCE") against

What is at issue is SMBCE's entitlement to recover under a performance bond and

The background to this dispute relates to the construction and commissioning of a waste treatment facility at Sinfin Lane in Derby, which I will call "the Facility". The Facility is intended to be delivered as a public private partnership (or PPP) scheme. It involves, amongst others, Derbyshire County Council and Derbyshire City Council, or "the Councils", as the procuring authorities; Resource Recovery Solutions Derbyshire Ltd (or "RRS"), as the project company responsible for delivering the Facility; Interserve Construction Ltd (or “ICL”), as the construction company responsible for the design, construction, commissioning and completion of the Facility; Interserve PLC (or “Interserve”) as the Guarantor under the construction contract; UK GIP, Bayerische Landesbank, Sumitomo Mitsui Banking Corporation and Shinsei Bank Ltd as lenders; and SMBCE as Security Trustee.

As with many PPP projects, this one involves a concession whereby a private company is given the right to build and operate a particular public sector project. The private company is a legal entity established by sponsors solely for the purposes of the project, ie an SPV. Private parties lend money to and acquire

The Councils contracted in what I will call the Project Agreement with RRS as the project company responsible for designing, constructing, commissioning and operating the facility. RRS procured funding from the lenders for the capital costs associated with the construction of the Facility and it contracted with ICL for the design, construction, commissioning and completion of the Facility. That construction contract was dated 20 August 2014. Under it, ICL was responsible for discharging substantially all RRS's obligations under its contract with the Councils.

Under the terms of that Construction Contract, ICL provided to RRS two bonds. In the first place a performance bond. It was dated 20 August 2014 and was between EH and RRS. I will call it the Performance Bond. In the second place a retention bond dated 18 December 2018, again between EH and RRS. I will call that the Retention Bond. In broad terms, the Performance Bond was to protect RRS in the circumstances defined in the Performance Bond which include an insolvency default of ICL or of Interserve. The Retention Bond was agreed in lieu of retention monies which would otherwise have been retained by RRS during the period of construction against structural or other defects being discovered. The Retention Bond also protects RRS in the circumstances defined

RRS entered into a Borrower Debenture with SMBCE as Security Trustee. It was dated 20 August 2014. Clause 3.1 of the Borrower Debenture provided in part:

It is also convenient to refer at this point to clause 17.1 of the Borrower

The issues which I have to decide include whether there has been an effective assignment of the Performance Bond and the Retention Bond such that SMBCE

The Long-Stop Date for completion of the Facility under the Project Agreement was reached on 30 September 2018. By that date a Completion Certificate had not been issued under the Project Agreement or the Construction Contract in respect of ICL's design, construction and commissioning of the Facility.

On 11 April 2019 the Councils gave notice of their intention to terminate the

Pursuant to the terms of the Funders' Direct Agreement, the lenders were permitted to serve a notice on the Councils if the lenders considered that there was No Liquid Market consisting of at least two replacement contractors that would be prepared to offer Fair Value for the Project. The lenders served such a notice on

It is also of importance for present purposes to note that on 15 March 2019

The Performance Bond named EH as “the Bondsman”, ICL as “the Contractor”, and referred to the Construction Contract as "the Contract". It defined RRS as “the Employer” and provided that this term "shall include it successors in title and

It provided, in part, as follows:

The Retention Bond again defined RRS as "the Employer". It had no provision that the term was to include successors or assignees. It defined EH as “the Bond

In relation to the Performance Bond, RRS sent a Notice of Assignment and Acknowledgement of Receipt to EH, dated 20 August 2014. It was in the form of a letter addressed to EH. It was headed "Notice of Assignment and

That, as I say, was signed for and on behalf of RRS.

It was then signed on behalf of EH on the duplicate, which was addressed to

In relation to the Retention Bond, RRS sent a Notice of Assignment and Acknowledgment of Receipt to EH dated 19 July 2019. It was in essentially the same terms, mutatis mutandis, as the Notice of Assignment in relation to the Performance Bond. As I understand it. EH has not signed or returned

It has not been in dispute that the entry of Interserve into administration constituted an Insolvency Default as defined in clause 1.1(b) of the Performance Bond, and an “event” for the purposes of clause 2.1 of the Retention Bond.

The Bonds were not immediately called on. However, on 19 July 2019 SMBCE

Both demands were in very similar terms. I will quote from the demand on the

an Insolvency Default (as defined in clause 1.1(b) of the Performance Bond)

we hereby make a written demand for the full Bond Amount of

The demand under the Performance Bond and the demand under the Retention Bond were each signed by a director of SMBCE twice. The first signature was said to be for and on behalf of SMBCE as Security Trustee. The second was said to be for and on behalf of SMBCE as Security Trustee “in its capacity as attorney for [RRS] pursuant to clause 17 (Power of attorney) of the debenture dated

EH did not pay under the Bonds on 2 August.

On 5 August 2019, Gateley Legal, on behalf of EH, sent a letter to SMBCE's solicitors which read, in part, as follows:

The reference in that letter to "information received from ICL", was apparently to a notice given on 2 August by ICL of an intention to refer a dispute with RRS to adjudication. In that notice ICL stated that the administration of Interserve was

On 6 August 2019 SMBCE commenced Part 8 proceedings against EH.

The Claim Form appended Points of Claim. In the Claim Form and the Points of Claim SMBCE claimed for declarations and orders as follows:

At the same time SMBCE stated that it was applying for an order that the Part 8 claim be heard and determined before 20 August 2019, and for directions that there should be an abridgement of the time for service on EH, directions for an expedited hearing in the vacation, and other procedural directions needed for such an expedited hearing. The basis on which an expedited hearing was sought was set out in a witness statement of Andrew Hartley, and in a skeleton argument served on behalf of SMBCE on 6 August 2019. What was said was that the matter was urgent because of the impending expiry of the Performance Bond on 20 August 2019. It was said that if there was an unarticulated defect in the demand on the Performance Bond, SMBCE needed to know what it was in order,

A hearing took place on 7 August 2019 at which SMBCE was represented by

On 9 August 2019 EH served its Grounds for Refusing to Make Payment in Accordance with the Demands dated 19 July 2019 made under the Performance

The document which was served identified the grounds on which EH relied. They

As I have said, EH's submission was that there had been no effective assignment of the Performance Bond because there had not, prior to the assignment of the

For its part, SMBCE pointed out that there was no dispute that the assignment contained in the Debenture was valid as between the assignor, RRS, and the assignee, SMBCE. The only question was whether there was an effective assignment vis-à-vis EH. The issue was whether, because of non-compliance with clause 9 of the Performance Bond, and in the absence of waiver or agreement to the contrary, there was no transfer of the chose in action on the Performance Bond. It referred in this context to Linden Gardens v Lenesta Ltd [1994] 1 AC 85 at 108 C-G. I agree that there was no dispute as to the validity of the assignment as between the assignor and the assignee, and that the significance of the issue is as SMBCE submitted. I add here that if there was no effective assignment, in the sense that I have described, then it would follow -- and I did not understand SMBCE seriously to dispute -- that SMBCE would not have become a "permitted

SMBCE disputed that the opening words of clause 9 of the Performance Bond

Ultimately, however, it appeared to me that nothing turned on whether the opening words of clause 9 created a condition precedent or not. This is because SMBCE accepted that they did create a "requirement" whereby, waiver or agreement otherwise apart, there would not be an effective assignment of the chose in action unless there had been a confirmation of the assignee's acceptance of the Employer's repayment obligation pursuant to clause 8 of the Performance Bond. As SMBCE has not at any point, up to and including today, given such a confirmation, it was, as I understood it, accepted that, subject to there having been an agreement otherwise or a waiver of the requirement, the assignment was not effective to have

What SMBCE submitted, however, was that the effect of the Notice of Assignment and Acknowledgment of Receipt of 20 August 2014, which had been signed and returned to SMBCE by EH, was either a contractual agreement that there was an effective assignment notwithstanding that SMBCE had not accepted the Employer's repayment obligation pursuant to clause 8 of the Performance Bond; or was a waiver of the requirement that SMBCE had to accept that repayment obligation for there to be an effective assignment. SMBCE submitted that clause 2 of the Notice of Assignment, by stating that "[RRS] shall remain liable under [the Performance Bond] to perform all the obligations assumed by it under [the Performance Bond] and neither SMBCE nor any receiver, delegate or sub-delegate appointed by it shall at any time be under any obligation or liability to you under or in respect of the [Performance Bond]", embodied a clear agreement (or statement giving rise to a waiver) that SMBCE had not assumed and was not required to assume any of RRS's obligations under the Performance Bond, including the repayment obligation under clause 8. SMBCE's argument was further to the effect that the Notice of Assignment made it clear that, notwithstanding that SMBCE had

EH countered this argument by contending that the Notice of Assignment gave rise neither to a contract nor a waiver as contended for by SMBCE. Especially given its heading, it was not clear enough to do either. Furthermore, in relation to the suggestion of a contract, it was not clear who it was that SMBCE was contending were parties to the contract alleged. In any event, there was no consideration provided for the alleged promise by EH. As to waiver, there was no 'express statement' of an amendment, deletion or addition to the terms of the Performance Bond as required by its clause 12.2, and therefore, for that reason if no other, there

I am unable to find that the Notice of Assignment constitutes a binding contract. It is true that it contains the language of agreement by EH, in particular by the words "Please acknowledge receipt of this notice of assignment and confirm that ... you agree to and will comply with the other provisions of this notice of assignment." EH, in providing its copy confirmed the matters referred to in the notice of assignment, and these included the agreement to comply with the other provisions

If there was an agreement then in my judgment it was a bilateral agreement between EH and RRS. RRS was the sender of the letter and EH its recipient. It is RRS which is referred to as "we" within the document and the Security Trustee is referred to as an entity separate from "we" and "you", ie, apparently distinct from the parties to the agreement. That is relevant to the issue of whether there was consideration, which in my judgment is the most difficult issue for SMBCE in establishing a binding contract. As Mr Croall accepted, if the agreement was bilateral then consideration must be found to have been provided by RRS. I consider that it is very difficult to see how anything of value in the eyes of the law, whether by way of benefit to EH or detriment to RRS, was provided.

Mr Croall identified two possibilities. In the first place, and as a result of questions from me, he suggested that the provision in clause 3 that RRS would not waive or vary or agree to waive or vary any provision of the Performance Bond, or exercise a right to rescind or terminate it, without the prior written consent of the Security Trustee might constitute a valuable promise. What he suggested was that the addition of the point that the rights would not be exercised without the prior written consent of the Security Trustee was a new promise made to EH, and that new promise was valuable consideration. But if that was a promise at all it would only be good consideration if its performance would be regarded as good consideration. The performance of this promise would restrict the circumstances in which RRS could agree to vary or waive provisions in the Performance Bond or exercise a right to rescind or terminate it. In each of these cases it seems clear that the variation, waiver, rescission or termination envisaged is something which would benefit EH. Indeed, it is because these are matters which may potentially prejudice the security that the clause states that they are not to be exercised without the prior written consent of the Security Trustee. Accordingly I do not see that the promise that these matters will not be done without the consent of the Security Trustee can be

Secondly, Mr Croall suggested that the terms of clauses 1 and 3 (at least) provided "practical benefits", in that they allowed EH to know where it stood. I do not consider that the nomination of a bank account into which payments are to be made, unless and until directed otherwise, or the provision that rights would be exercised by the Chargor until notice is provided by the Security Trustee saying that they will be exercised by it, provide practical benefits or amount to

I do not regard the finding that there was no consideration simply as a technical point. Reading the Notice of Assignment as a whole it appears to me clear that it was not intended to provide benefits to EH, but was rather intended (in relevant part) to impose requirements on EH and to lay down or indicate the limits to its rights. This is perhaps unsurprising. It is not a document which represented a negotiation with EH, and thus was not seeking to embody matters which EH

SMBCE contended that even if there was no contract contained in the Notice of Assignment, it contained a waiver of the requirement that SMBCE should have accepted the repayment obligation for there to be an effective assignment. In this regard, SMBCE relied on the well-known statement of Lord Denning MR in W J Alan and Co Ltd v El Nasr Export and Import Co [1972] 2 QB 189 at 231

Mr Croall's submission was that clause 2 of the Notice of Assignment amounted to a clear indication by EH that its strict rights under the Performance Bond to require there to have been an undertaking of the repayment obligation before there was an effective assignment would not be insisted upon, which it was intended should be acted upon by SMBCE, and which had been acted upon, not least by the making

Ms Doerries contested that clause 2 amounted to a clear indication that the terms of clause 9 of the Performance Bond would not be insisted upon. She also relied heavily on the terms of the non-waiver provision, clause 12 in the Performance

In my judgment, whatever otherwise might have been the effect of clause 2 of the Notice of Assignment it was not effective as a waiver of the requirement for there to have been an assumption of the repayment obligation under clause 8 of the

The waiver which SMBCE contends for must at least, in my judgment, be "a single ... waiver of any right or remedy" within clause 12.1 of the Performance Bond. Under clause 12.2, no waiver within clause 12.1 shall amend, delete or add to the terms, conditions or provisions of the Bond unless and then only to the extent expressly stated in that waiver. It is, as indeed Mr Croall accepted, SMBCE's case that the effect of the alleged waiver was to amend, delete or add to terms etc of the Performance Bond.

The question then arises as to whether, in the waiver, this “amendment, deletion or addition to the terms etc of the Performance Bond” can be said to have been “expressly stated in that waiver”, and, if it cannot, what, if any, significance

Mr Croall's submission was in essence that the requirement of express statement in the waiver meant only that the waiver had to be sufficiently clear such that, on its natural meaning, it was plainly inconsistent with the exercise of rights pursuant to or insistence on the terms of clause 9 of the Performance Bond. He submitted that there was no requirement for the waiver to refer to the terms of the Bond, or to

In my judgment clause 12.2 requires the waiver to be more specific than that. If that were all that was required it would add little to the requirement that there should be a waiver, which is provided for by clause 12.1. The first part of

I do not consider that the alleged waiver meets this requirement. It does not expressly identify any terms of the Performance Bond, and in particular does not refer to clauses 8 or 9. Equally, there is no specific reference to a repayment obligation. The wording "shall [not] at any time be under any obligation or liability to you under or in respect of the Document" is wide wording which could cover a range of different potential liabilities. Indeed it is apparent that this wording was not drafted with any specific reference to the repayment obligation in the

Accordingly, and in the absence of citation of authority, I concluded that the alleged waiver did not meet the requirements of clause 12.2 and that as a result was

Because of the potential significance of the issue of the effect of clause 12.2, however, I asked the parties at the hearing to seek to identify any further authorities on the effect of a clause in the terms of clause 12 or similar terms. I have been helpfully provided by SMBCE with a number of authorities, including Credit

Consideration of these authorities has not caused me to exchange my view set out above as to effect of clause 12.2 of the Performance Bond or its application to the facts of this case. As is made clear in Rock Advertising, the parties to a contract may, in that contract, make provisions which limit the effectiveness which their subsequent dealings might otherwise have had in altering their obligations under that contract. While I accept, as stated in Crédit Agricole Indo-Suez and in RGI International, that a non-waiver clause can itself be waived, it would appear to me to be inconsistent with the recognition in Rock Advertising that party autonomy operates up to the conclusion of the contract and thereafter only to the extent that the contract allows to find that any conduct which would amount to a waiver of the original right also amounts to a waiver of the non-waiver clause. In my judgment there would have to be something which showed that there was not only a waiver but a waiver of the non-waiver clause. An analogy may be drawn which what was said by Lord Sumption JSC in Rock Advertising about estoppels at paragraph 16. Applying that reasoning and language to an alleged waiver, it appears to me that if it is said that waiver prevents reliance on a no waiver clause there would have to be something which indicated that the waiver was effective notwithstanding its noncompliance with the non-waiver clause and something more would be required for this purpose than what might otherwise simply constitute a waiver of the original right itself. In my judgment, applying that test here, the terms of the Notice of Assignment did not meet it.

In those circumstances, I consider that the alleged waiver was not effective. The effect of that conclusion is that there was not an effective assignment for the purposes of transferring the chose in action under the Performance Bond and SMBCE did not become a “permitted assignee” thereunder.

SMBCE's alternative case is that if there was no effective assignment then it was RRS which could make the claim on the Performance Bond, and that RRS had done just that, in that the demand of 19 July 2019 was signed by SMBCE as

In answer to this, Ms Doerries made a number of points. In the first place she submitted that the action was not properly constituted for such a claim. She submitted that as RRS was not a party to the action there could be no such claim. She said that, in the context of expedited hearing, that should be the end of the point. To that Mr Croall retorted that the first time that there had been any

I considered that Ms Doerries was right at least to say that there could not be an order in favour of SMBCE for the payment of money under the Performance Bond. But Mr Croall submitted that different considerations apply to the grant of a declaration. He submitted that what was sought was a declaration that there had been a valid claim under the Performance Bond and that the money under it should be paid to the specified account in RRS's name, and that there was no reason why the court could not make those declarations even though RRS retained the chose in action. I consider that he was correct in relation to that procedural point. I note further that there is no longer a rule to the effect that a non-party to a contract may not seek a declaration as to its terms and effect, and that a non-party may be entitled to seek such a declaration provided it has sufficient interest in the matter. I consider that SMBCE does have such a sufficient interest.

Mr Croall further submitted that no concerns arose from the fact that RRS had not been made a party to the action, not least because he said that RRS was aware of

Ms Doerries further submitted that the demands were not appositely worded to be effective demands by RRS. I do not consider that to be correct. The Performance Bond specified only that in the event of an Insolvency Default, "the Employer shall notify the Bondsman that there has been an Insolvency Default and the amount of its demand, which notice shall be signed by a director of the Employer." Putting on one side for the moment the issue of whether the notice was "signed by a director

The only remaining question, therefore, is whether the notice complies with the requirement that it should be signed by “a director of the Employer”. In this context it is of some note that the doctrine of strict compliance applicable to letters of credit is not necessarily applicable to bonds such as a performance bond: see IE Contractors Ltd v Lloyds Bank PLC [1990] 2 Lloyd's Rep 496 at 500-501 per Staughton LJ; Paget's Law of Banking (15th edition), paragraphs 35.10 and 38.3. The question as to whether there has been compliance is one of construction of the bond which will be subject to the ordinary principles, although these require regard to be had to the nature of the agreement and the extent to which it may have

In my judgment, the phrase "signed by a director of the Employer" is to be construed as covering a case where there is a signature by a director of a company which holds a valid power of attorney from the Employer where such power of attorney extends to the execution and delivery of the notice. In this regard, it is of some significance that the definition of "Employer" extends in the Performance

In relation to the Retention Bond the issues are somewhat different. In this case there was no comparable restriction on the effectiveness of the assignment. It is not in dispute that there has been an effective assignment so that the chose in action in relation to this Bond was passed to SMBCE. The issue in relation to this Bond arises because there is no express extended definition of "Employer" in the Retention Bond comparable to that in the Performance Bond. In other words, it does not have the words "which term shall include its successors in title and all

The question, therefore, arises as to whether, as a matter of construction of the Retention Bond, a notice signed by the officer of an assignee counts as the signature of a duly authorised officer of the Employer for the purposes of clause 3

In my judgment it does. The Retention Bond specifically contemplates that there may be an assignment of the deed to any party acquiring an interest in the Works or providing finance in respect of the Works or taking an assignment of the

I should add that even if that is wrong, the demand made in relation to the Retention Bond was signed by a director of SMBCE as attorney for RRS. I would consider that if there was a requirement, notwithstanding an assignment, for a signature by a duly authorised officer of RRS, that that signature satisfied that

For these reasons I am prepared to make a declaration to the effect that the demand on the Performance Bond by RRS through SMBCE as the holder of a power of attorney, was a valid demand; and also that the notice of demand on the Retention