Power Projects Sanayi Insaat Ticaret Ltd Sirketi v Star Assurance Company Ltd (Rev1)

[2024] EWHC 2798 (Comm)

PP were engaged to construct an electrical power generation plant in Ghana. Part of the work was subcontracted to Glotec Engineering Ltd. The parties entered into two subcontracts (offshore and onshore). Under sub-clause 8.5 of the subcontracts, Glotec were required to provide an on-demand performance bond in favour of PP to secure Glotec’s performance of their obligations under those subcontracts. 

Sub-clause 8.5 provided that :

“Failure and or omission of the Subcontractor to proceed in compliance with the present or to perform and or remedy any defects, perform the Subcontract Works and all obligations, commitments, guarantees and responsibilities under the present and the applicable Laws, entitles [the Claimant] to make a demand under performance [sic] bond irrespective of any possible objections the Subcontractor [sic]-who is expressly consenting to that, and his consensus is only proved by the signature of the present contract.”

Pursuant to clause 8.5 of the subcontracts, and upon Glotec’s request, Star provided the bond in favour of PP on 22 November 2018. Towards the end of the project, a number of disputes with PP alleged that Glotec had not completed their obligations under the subcontracts. Glotec disagreed and claimed they were entitled to payment of, not least, the final 2% of the contract price. PP then made a demand under the bond dated 9 November 2021. It was not honoured and, as the bond was governed by English law and subject to the jurisdiction of the English courts, PP issued a Part 8 Claim Form for the payment of US $6.3 million pursuant to that demand. Part 8 is the procedure used where a party seeks the decision of the court, on a question that is unlikely to involve a substantial dispute of fact. 

The bond was described by the Deputy High Court Judge Richard Millet KC as an irrevocable, unconditional on-demand payment instrument. The total amount of the bond was US$6,297,000 and it was valid until 21 November 2021.

Star said that the sums due under the bond were not due. It had a defence to the demand and these defences involve a substantial dispute of fact such as to make Part 8 inappropriate and to justify conversion of the claim into a Part 7 claim.

The judge disagreed saying that it was “far from obvious” that the facts put forward by Star provided a defence to PP’s claim that would require the court to investigate them at trial.

The starting point was the legal nature of the bond. The bond here was, in the words of the judge, “a classic performance bond” of the type considered in the cases such as Wuhan Guoyu Logistics Group Co Ltd and Anr v Emporiki Bank of Greece SA (See Dispatches 145, 150 and 164)

Clause 3 provided that:

“[Star’s] obligation to make payments under this Bond shall arise upon receipt of a demand made in accordance with provisions of this Bond, without any further proof or condition and without any right of set-off or counterclaim, and [Star] shall not be required or permitted to make any other investigation or enquiry.”

Therefore, as a matter of law, the only defence that Star could raise was that the demand was fraudulent. This meant that Star needed to show that PP knew that it had no right to make the claim, and that Star knew that it was fraudulent at the time when its obligation crystallised, namely on the making of the demand. It was not entitled to fail or refuse to pay pending investigation of the state of the underlying account or relationships relating to that account; for example, simply setting out allegations that there was a dispute between Glotec and PP about whether Glotec or PP was in breach of the subcontracts. Nor was it entitled simply to rely on Glotec’s case as against PP, however confident it was that Glotec's case was well-founded. The bond was an autonomous contract, independent of any disputes that may have arisen under the underlying subcontract. Liability under the bond was separate from liability pursuant to those underlying subcontracts.

Much of Star’s evidence was “largely opinion and hearsay” being based on what Star had been told by Glotec of its dispute with PP, and confirming that Star agreed with Glotec. That was no more than belief in the merits of Glotec’s case against PP, and the corresponding weakness of PP’s case against Glotec.

Whilst the evidence showed that there was clearly a burgeoning dispute between Glotec and PP which was beginning to take shape before the demand was made on 9 November 2021, there was nothing to suggest that PP had acknowledged or admitted any cross-claim, or that it knew that it had no right to any money under the subcontracts. What was needed was evidence that PP knew for a fact that Glotec's position was right, and that its own position in the dispute was wrong, and that it therefore had no right to make the demand. The fact that Glotec had a cross-claim of its own was legally irrelevant, in respect of the attempts to resist the call on the bond, unless Star knew that it was unanswerable and that PP had no right to make any claim for any amount.

Further, there was no evidence that Star knew at the time of the demand that PP’s claim was fraudulent. Had it done so, it would have said so. The terms of its letter of response of 23 November 2021 went nowhere near making such an assertion. On the contrary, Star merely stated that after “investigation”, its position was that the subcontracts had been “executed” (i.e. performed), expressing surprise that PP was making a claim on the bond when 2% of the final price had yet to be paid. These statements were inconsistent with any knowledge on the part of Star that the demand was fraudulent.