Doosan Babcock Ltd v Comercializadora De Equipos Y Materiales Mabe Limitada

This is an arbitration application by the Claimant for an interim injunction to restrain the Respondent/Defendant (“MABE”) from making demands for payment under two performance guarantees. These guarantees are “on demand” guarantees and so the banks concerned are required to pay on receipt of a demand by MABE that complies with the requirements of the guarantees.

The grounds for the application are that there is a strong claim that any demand under the performance guarantees would be in breach of the contract in respect of which the guarantees were provided because MABE has wrongfully failed to issue Taking-Over Certificates for plant that has been taken into use by MABE. The issue of those certificates would have resulted in the expiry of the guarantees.

The application arises out of a contract by which, essentially, the Claimant agreed to supply two boilers for a power plant in Brazil. The boilers have been referred to as Units 1 and 2. The performance guarantee in relation to each unit expires either on the issue of a Taking-Over Certificate for that unit or, under the current letters of guarantee, 31 December 2013, whichever is earlier. Accordingly, if MABE is correct in its assertion that it is entitled to make demands under the guarantees, the Claimant submits that MABE’s position would not be significantly prejudiced by the grant of an injunction for a short period since, if they are otherwise still valid, the guarantees do not become time expired until 31 December 2013. On the other hand, the Claimant says that the loss it would suffer if relief were not granted cannt be compensated in damages.

The Claimant’s case is that it is entitled to Taking-Over Certificates when the boilers are taken into use by MABE, which it says happened on 30 November 2012 for Unit 1 and on 10 May 2013 for Unit 2. However, its requests for the certificates, made by letters dated 10 July 2013, have been refused. MABE relies on a provision in the contract which, it says, permits it to withhold a Taking-Over Certificate where the unit has been used by the employer only as a temporary measure. In spite of the fact that the two units have, since they were taken into use, exported more than 7,500 hours of power at various loads to the local grid, MABE maintains that their current use is a temporary measure.

At the conclusion of the hearing I granted the Claimant interim relief. This judgment contains my reasons for doing so.

By letter dated 28 August 2013, MABE’s solicitors, CMS Cameron McKenna, wrote to the Claimant saying that they acted “for MABE”. The letter informed the Claimant that MABE had a claim for damages in respect of the Claimant’s delayed and defective performance of its contract to supply the boilers to the extent of R$128 million (about US$ 57 million). The letter invited the Claimant to “… direct all future correspondence on the matters referred to in this letter to us”.

Pinsent Masons were instructed by the Claimant. On 20 September 2013 they wrote to CMS Cameron McKenna notifying them that they were acting for the Claimant. The second paragraph of the letter was in the following terms:

“We note that you state that you act for ‘MABE’ but would you please provide the full name of the entity which you represent, together with an address for service of any future notices and/or proceedings.”

The letter went on to assert that the units had been taken over by MABE and that MABE was still in possession of the two performance guarantees. It suggested that the notification of MABE’s claim was simply a cloak to enable MABE to make a call on the guarantees. Pinsent Masons asked MABE to undertake not to make any demands on the performance guarantees without giving at least 7 days notice.

In their reply of 24 September 2013 CMS Cameron McKenna set out the full name of their clients and then wrote:

“We have already asked for all correspondence on this matter to be sent to us.”

The letter continued by saying that neither of the guarantees had expired since no Taking-Over Certificates had been issued. The solicitors said that their client declined to give any undertaking in relation to giving notice of any intention to make a demand on the guarantees.

Against this background the Claimant prepared its application for an interim injunction, which it issued on 4 October 2013. The court had already agreed to hear the application at 3pm on that day. CMS Cameron McKenna were notified of the hearing of the application at about 1:45pm on the same day. Mr. Rupert Choat, a solicitor/advocate and partner in CMS Cameron McKenna, attended the hearing on behalf of MABE. His instructions were to challenge the validity of the service of any proceedings on CMS Cameron McKenna and to challenge the jurisdiction of the court to entertain the application, on the grounds that MABE is a corporation with overseas domicile and that it was not a case of genuine urgency that justified the making of an application without notice.

However, Mr. Choat also made submissions to the effect that the basis of the application was misconceived, since there was no risk to the Taking-Over Certificates and so there was no asset that was in need of protection.

The contract is based on the FIDIC form of contract with some modifications. Clause 20.2 provides that disputes shall be adjudicated by a Dispute Adjudication Board (“DAB”). It provides also (by amendment) that the DAB was to be appointed by the parties within 42 days of the contract Commencement Date, but I was told that this had not happened.

Clause 20.6 provides that in the case of any dispute in respect of which the DAB’s decision had not become final and binding, the dispute was to be finally settled by international arbitration. The place of arbitration was stated to be London. By clause 20.8, if no DAB been has been appointed, the dispute can be referred directly to arbitration. That is the position here.

Clause 10 deals with Taking Over. Clause 10.2 includes the following provisions:

“The Engineer may, at the sole discretion of the Employer, issue a Taking-Over Certificate for any part of the Permanent Works.

The Employer shall not use any part of the Works (other than as a temporary measure which is either specified in the Contract or agreed by both Parties) unless and until the Engineer has issued a Taking-Over Certificate for this part. However, if the Employer does use any part of the Works before the Taking-Over Certificate is issued:

(a)

the part which is used shall be deemed to have been taken over as from the date on which it is used,

(b)

the Contractor shall cease to be liable for the care of such part as from this date, when responsibility shall pass to the Employer, and

(c)

if requested by the Contractor, the Engineer shall issue the Taking-Over Certificate for this part.”

It is relevant to note that the Engineer is stated to be the Employer, namely MABE.

Clause 4.2 concerns Performance Security. Here the entirety of the original wording of the FIDIC form has been deleted and new wording substituted. Under the wording of the standard form the Employer can only make the claim under the performance guarantees in certain specified situations. By the substituted wording these restrictions are removed and so the Employer has an unfettered right to make a demand under the performance guarantees subject only to their terms. The form of the performance guarantees was provided in a schedule to the contract. There was a separate performance guarantee for each of the two units.

By the terms of the guarantees the provider of the guarantee undertook to pay MABE:

“… on receipt of your first demand on us in writing stating that [the Claimant] has not performed its obligations in conformity with the terms of the Contract.”

This wording could hardly be wider. As Mr. Choat candidly accepted in his submissions, the bank giving the guarantee is concerned only with the terms of the demand, not with the question of whether or not it is justified.

Mr. Steven Walker QC, who appeared for the Claimant, submitted that the reference to “a temporary measure” in clause 10.2 applied only to the prohibition on use by the Employer referred to in the first sentence of the second paragraph of the clause and not to the second sentence and sub-paragraphs (a) - (c). I am not persuaded that he is necessarily right about this, but I do not need to decide that question because I am wholly satisfied on the material before the court about the use of the units, to which I have already referred, that the Claimant has established a strong case to the effect that the boilers have not been taken into use by MABE as a temporary measure. On the face of it, the units have been put into commercial operation as the contract contemplated. There was exhibited to the witness statement of Mr. Brundle, the Claimant’s project director, a press release containing a formal announcement by MABE that the National Energy Agency had authorised the commencement of commercial operation by Unit 1 on 1 December 2012. There was a similar announcement in respect of Unit 2 on 10 May 2013. But leaving this aside, MABE has given no indication of where or how the alleged “temporary measure” was specified in the contract or had been agreed by both parties, as clause 10.2 requires.

Mr. Walker submitted that MABE’s refusal to issue a Taking-Over Certificate amounts to a clear breach of contract. This, coupled with the fact that MABE’s solicitors have intimated a very substantial claim against the Claimant and have refused to give any undertaking not to make a call on the performance guarantees without giving seven days’ notice to the Claimant, Mr. Walker submitted, gives rise to a fair inference that MABE may well intend to make a demand on the performance guarantees without notice to the Claimant.

Mr. Choat submitted that this was not an application of sufficient urgency to justify a without notice application to the court. He says, correctly, that MABE has never mentioned that it intends to make a demand on the guarantees: the issue of the guarantees was raised by the Claimant’s solicitors, not by MABE. In addition, he submitted that if the situation was really urgent the Claimant would not have waited some ten days before making an application. I consider that there is some force in this latter point, but this is not a straightforward application and I accept that it would have taken a few days to prepare, not least because Mr. Brundle is currently living in India. In the circumstances, I do not consider that the ten-day delay in making the application undermines the justification for making the application on a without notice basis.

Mr. Choat submitted also that the form of interim relief sought did not fall within the scope of section 44(3) of the Arbitration Act 1996. I shall deal with this point later in this judgment.

In his witness statement Mr. Brundle said that he was very surprised to receive notification of such a substantial claim from MABE’s solicitors and that this appears to be nothing more than a precursor to the making of a demand on the performance guarantees. Mr. Mark Allen, the Legal and Commercial Director of the group of companies of which the Claimant is a member, said in his witness statement that he is convinced that MABE will make a demand on the guarantees if interim relief is not given by the court.

On this point, I unhesitatingly prefer the submissions of Mr. Walker. This is just the type of situation in which a demand on a performance bond is likely to be made. I can conceive of no reason why MABE should have refused to issue Taking-Over Certificates for the two units unless it is to extend the duration of the performance guarantees. I have already noted that under this contract the Engineer is the Employer.

In my judgment, on the material before the court the Claimant’s concern that MABE was likely to make demands on the guarantees is justified. The fact that MABE has not given any indication that it intends to make such demands is in my view not of any significance in the context of guarantees which can be called on demand. To give such an indication in circumstances where the legal basis for making the demand is highly questionable is to invite a pre-emptive application for interim relief from the other party.

Mr. Choat submitted also that his firm had not notified the Claimant’s solicitors that it had instructions to accept service of proceedings and that there was no good reason for the court ordering service in the alternative on MABE’s solicitors.

I consider that this is a point that is wholly without merit. Indeed, I am surprised that it was taken. CMS Cameron McKenna were asked quite specifically to provide an address for service of any “future notices and/or proceedings”. This could hardly be clearer. The somewhat terse response (“we have already asked for all correspondence on this matter to be sent to us”) can only, in my view, be reasonably read as an answer to the question asked by Pinsent Masons, namely the address for service of any proceedings. If a solicitor who is acting for a party says that any proceedings against his client should be served on his firm, I cannot see how that can be construed as anything other than a representation that he has instructions to accept service of proceedings on behalf of his client.

CPR 6.7(1)(b) provides that where a solicitor within the jurisdiction acting for a defendant has notified the claimant in writing that the solicitor is instructed by the defendant to accept service of the claim form on behalf of the defendant at a business address within the jurisdiction, the claim form must be served at the business address of that solicitor. Since I have concluded that the requirements of this provision are satisfied in this case, I consider that this application and the proceedings must be served on CMS Cameron McKenna.

However, if I am wrong about this, it is necessary to consider the basis on which the application is made. Mr. Walker submitted that the application has been correctly made under section 44(3) of the Arbitration Act 1996 because the order is necessary for the purpose of preserving assets. This is so, he submitted, because the Claimant has a contractual right to have the Taking-Over Certificates issued. An important aspect of that right is that issue of the Taking-Over Certificates will bring about the expiry of the performance guarantees.

Section 44 (3) of the Arbitration Act 1996 provides as follows:

“If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets.”

In Cetelem SA v Roust Holdings [2005] EWCA Civ 618, Clarke LJ said, at paragraph 57:

“It seems to me that, once it is accepted that ‘assets’ includes ‘choses in action’ there is no reason to limit them to particular types of choses in action. There may be some other reason for limiting the operation of section 44(3) but I do not see any reason why a contractual right should not be an ‘asset’ within the meaning of the subsection. Further, given the fact that the purpose of section 44(3) is to permit orders for the preservation of assets, and given the limitations on the operation of the subsection, namely that it can only be invoked (a) when ‘the case is one of urgency’ and (b) when the judge thinks that it is ‘necessary’ to make the order, it seems to me that in this context there is no good reason for construing the meaning of ‘assets’ narrowly.”

I see no reason why an order should not be made for the purpose of the preservation of a right if its effect is to preserve the value of that right: see also the observations of Clarke LJ in Cetelem at paragraph 65. A contractual right is not preserved if a failure to give effect to it would destroy much or all of its value.

So, if the requirements of urgency and necessity are met, this is a case where in my judgment the court has the power to grant an injunction under section 44(3). I do not accept Mr. Choat’s submission that because the Taking-Over Certificates, once issued, will still have many consequences apart from causing the guarantees to expire, there is no need for any steps to protect the Claimant’s right to have the certificates issued.

Mr. Choat submitted that the question of urgency had been conflated with those of service and jurisdiction. He relied on the fact that the contract is based on the FIDIC form of contract, save for certain amendments - the most significant of which for present purposes is the amendment of clause 4.2, to which I have already referred. Whilst I accept that the substituted wording removes any limitations on MABE’s ability to make a demand on the guarantees, I cannot see how this point can be deployed to justify the making of a call on the guarantees if those guarantees only remain in force by virtue of a continuing breach of contract by MABE. To permit that would be to allow MABE to receive a significant benefit solely by virtue of its own breach of contract, a state of affairs that English law does not condone: see Alghussein Establishment v Eton College [1988] 1 WLR 587.

CPR 62.5(1)(b) provides that permission may be given to serve an arbitration claim out of the jurisdiction if the claim is for an order under section 44 of the 1996 Act. Mr. Walker referred me to an observation of Tomlinson J in Kyrgyz Republic v Finrep GmbH [2006] 2 CLC 402, at [29], where he said:

“… in relation to arbitration applications concerning arbitrations which have their seat within the jurisdiction it is the almost invariable practice of the court to permit service upon a party’s solicitor who has acted for the party in the arbitration, provided that that solicitor does not appear to have been disinstructed or absent other special circumstances.”

CPR 6.15(1) provides that:

“Where it appears to the court that there is a good reason to authorise service by a method or at a place not otherwise permitted by this Part, the court may make an order permitting serviced by an alternative method or at an alternative place.”

This is the rule that permits the course to which Tomlinson J was referring in the passage quoted above.

In my opinion, the exchange of correspondence about service to which I have already referred provides a very good reason to authorise service on CMS Cameron McKenna. Further, the delay that would result if the Claimant is compelled to serve the order out of the jurisdiction, even by fax, could well enable MABE to make a call on the guarantees before service could be effective.

I should mention for the sake of completeness that Mr. Choat mentioned during the hearing that he thought that the law of Chile did not permit any form of alternative service. Understandably there was no evidence about this before the court, but I would be very surprised if that prevented a national of Chile from instructing London solicitors to accept service of proceedings.

Accordingly, whether or not I am correct in concluding that CMS Cameron McKenna has represented that they are authorised to accept service of proceedings, I will order service of the proceedings on CMS Cameron McKenna.

For the reasons that I have given in paragraphs 28-32 above, I consider that this is a case where the court has jurisdiction to grant the interim relief sought under section 44(3) of the 1996 Act. Accordingly, the next question is how strong must the Claimant’s case be in order for the court to grant such relief.

In Simon Carves v Ensus UK [2011] BLR 340, Akenhead J had to consider the extent to which, if at all, a party may be prevented from seeking payment under a bond by the terms of the very contract in respect of which the bond is provided by way of security. It is not necessary to say anything more about the facts of that case, so I can go straight to Akenhead J’s summary of the relevant principles at paragraph 33 of his judgment. He said this:

“(a)

Unless material fraud is established at a final trial or there is clear evidence of fraud at the without notice or interim injunction stage, the Court will not act to prevent a bank from paying out on an on demand bond provided that the conditions of the bond itself have been complied with (such as formal notice in writing). However, fraud is not the only ground upon which a call on the bond can be restrained by injunction.

(b)

The same applies in relation to a beneficiary seeking payment under the bond.

(c)

There is no legal authority which permits the beneficiary to make a call on the bond when it is expressly disentitled from doing so.

(d)

In principle, if the underlying contract, in relation to which the bond has been provided by way of security, clearly and expressly prevents the beneficiary party to the contract from making a demand under the bond, it can be restrained by the court from making a demand under the bond.

(e)

The court when considering the case at a final trial will be able to determine finally what the underlying contract provides by way of restriction on the beneficiary party in calling on the bond. The position is necessarily different at the without notice or interim injunction stage because the Court can only very rarely form a final view as to what the contract means. However, given the importance of bonds and letters of credit in the commercial world, it would be necessary at this early stage for the Court to be satisfied on the arguments and evidence put before it that the party seeking an injunction against the beneficiary had a strong case. It can not be expected that the court at that stage will make in effect what is a final ruling.”

In relation to the application of the well-known test for granting interim relief established by the decision in American Cyanamid Co v Ethicon Ltd [1975] AC 396, to cases involving the bonds and guarantees, Akenhead J said this at paragraph 36:

“Finally, as to the issue in relation to the applicability of Cyanamid, I follow the view adopted by Lord Justice Staughton in Group Josi v Walbrook Insurance Co Ltd [1996] 1 WLR 1152 (at page 1161F-H) following that expressed by Lloyd LJ in Dong Jin Metal Co Ltd v Raymet Ltd (CA) (13 July 1993-unreported):

‘I do not think it makes much difference whether one says that letter of credit cases are special cases within the American Cyanamid guidelines, because of the special factors which apply in such cases (see American Cyanamid Co v Ethicon Ltd [1975] AC 396, 409C-D, per Lord Diplock) or whether one says that such cases fall outside the guidelines altogether. I prefer the former view.’

I also prefer and follow this view simply as a matter of pragmatic practicality that it is not sensible to have more than one set of rules in relation to interim injunctions. In bond and letter of credit cases, the ‘serious issue to be tried’ threshold is in practice a more difficult one to overcome.”

I agree with these observations of Akenhead J. In American Cyanamid Lord Diplock used the expression “a serious question to be tried” in contrast to claims that were frivolous or vexatious: he indicated also that the case should have a real prospect of success in order to justify the grant of interim relief. In doing so he rejected the submission that a claimant had to show a prima facie case. However, having regard to the commercial importance of bonds and letters of credit I agree, as Akenhead J said, that a claimant who wishes to restrain a beneficiary from making a demand under a bond must show that it has a strong case. That is to say, a strong case that under the terms of the underlying contract for the performance of which the bond has been provided the beneficiary is not entitled to make a demand on the bond. However, it must be emphasised that in concluding that a claimant has a strong case at the application stage the court is not making any determination in relation to the ultimate outcome of the dispute.

Applying this test to this case, at this stage I have no doubt whatever that the Claimant has shown that it has a strong case. The central issue on this application is whether or not MABE’s refusal to issue the Taking-Over Certificates in relation to Units 1 and 2 was and is a breach of contract.

It seems to me, whether viewed as a matter of construction of the contract or the operation of an implied term, self-evident that a beneficiary should not be permitted to make a demand on a bond if it is only able to do so by virtue of its own breach of contract. For the reasons that I have already given, the suggestion that Units 1 and 2 are only in operation as a temporary measure is, on the material before the court, little short of ludicrous. It is telling that in the correspondence neither MABE nor its solicitors have attempted to identify the provision of the contract pursuant to which the temporary measure has been taken.

Accordingly, I consider that in this case the Claimant comfortably passes the threshold test for an interim injunction. However, I must make it clear that this is a conclusion reached on a without notice application. It is not and cannot be binding on any tribunal that has to determine the issues at a final hearing or at a further interim hearing at which MABE has had an opportunity to put its own evidence before that tribunal.

Mr. Walker submits that damages would not be an adequate remedy for the Claimant. In his witness statement Mr. Allen says that a call on the guarantees, even one that is capricious and resulted in the proceeds being returned to the Claimant, would have an adverse effect on the cost to the Claimant of future bonds because the banks’ perception of the risk would rise. In addition, Mr. Allen says that it would reduce the scope of the bonds available to the Claimant and result in severe curtailment of the terms on which it could offer bonds to potential customers. It would also limit the Claimant’s ability to pass the pre-qualification stages of many private and public sector projects.

There is nothing surprising about any of this evidence: in short, a call on a bond, even an unjustified one, is likely to damage the commercial and financial reputation of a contractor. Whilst there is nothing illusory about such damage, I accept that it is difficult to quantify in financial terms. I therefore agree with Mr. Walker that damages would not be an adequate remedy for the Claimant.

The next consideration is whether or not, if an injunction is granted but subsequently turns out to have been unjustified, MABE can be adequately compensated by the Claimant’s undertaking in damages. In my judgment, the answer to this question is clearly yes, provided either that the injunction is only in force for a short time (so that the expiry date of 31 December 2013 is not passed) or that the Claimant agrees to extend the period of validity of the guarantees. Although the Claimant has not given an undertaking to extend the validity of the guarantees if an injunction is granted, its counsel told the court at the hearing that it is likely that such an undertaking will be offered at a return date if fixed for, say, two weeks’ time. In these circumstances, the only loss to MABE would be the delay in receipt of the money payable under the guarantees (if due). That is a loss that appears to be readily compensable by an award of damages.

In these circumstances, it seems to me that it is not necessary to determine where the balance of convenience lies (see American Cyanamid, per Lord Diplock at 408E-F). However, if it were necessary to do so I would conclude that the balance of convenience comes down strongly in favour of the Claimant. On the material before the court the grant of interim relief would, in my view, result in little or no prejudice to MABE that cannot be compensated by an award of damages. No prejudice will be caused by preserving the status quo for the time being.

For the reasons that I have given I consider that the Claimant is entitled to interim relief, at least for a short period. Since the central issue is whether or not MABE should have issued Taking-Over Certificates for the two units when requested to do so by the Claimant, which in turn raises the question of whether or not the units were taken into use as a temporary measure in accordance with clause 10.2, MABE must have a proper opportunity to put in evidence on this issue prior to the return date.

Subject to this, I will make an order in the form of the draft produced by the Claimant as amended during the course of the hearing. In addition to the usual undertakings, the Claimant has also undertaken to issue a request for arbitration under the ICC rules as soon as reasonably practicable.

The return date is to be 18 October 2013. Any further evidence is to be filed and served two clear days before the return date.