Court name
Court of Appeal of Turks and Caicos Islands
Case number
CL-AP 35 of 2012

British Caribbean Bank Ltd. v. Interhealth Canada Construction Services (TCI) Ltd. (CL-AP 35 of 2012) [2014] TCACA 1 (30 January 2014);

Law report citations
Media neutral citation
[2014] TCACA 1
Coram
Zacca, P
Mottley, JA
Ground, JA

IN THE COURT OF APPEAL OF TURKS & CAICOS ISLANDS

CIVIL APPEAL 35/2012

BETWEEN:

BRITISH CARIBBEAN BANK LIMITED                                                               Appellant

and

INTERHEALTH CANADA CONSTRUCTION

SERVICES (TCI) LIMITED                                                                                         Respondent

Before:

The Rt. Hon Mr. Justice Zacca - President

The Hon Mr. Justice Mottley                                 - Justice of Appeal

The Hon Mr. Justice Ground                                 - Justice of Appeal

Appearances:

Stephen Wilson, QC of Graham Thompson with Tony Gruchot for the Appellant Ariel Misick, QC of Misick & Stanbrook for the Respondent

Heard:             May 6, 2013

Delivered: January 30 2014, 2014

MOTTLEY, J.A.

[1]           At the conclusion of this appeal we dismissed the appeal with costs. At that time, we indicated that we would put our reasons for so doing into writing. These are those reasons.

[2]           Johnston International Limited (‘JIL’) was engaged by the Interhealth Construction Services (TCI) Limited (‘Interhealth’) the Respondent, to build two hospitals, one in Grand Turk and the other in Providenciales.

[3]           In the Contract it was provided under paragraph 14.3.6, Special Conditions, that JIL may at any time after taking over the Works or a Section provide a retention bond in relation to the completed Section or Sections and that the bond was to be in the form set out in Schedule     of the Contract and was to be held in place of Interhealth's right to retain half of the Retention Money in relation to each Section after taking over that Section.

[4]           Under the terms of the Contract, Interhealth was entitled to retain 2.5% of the construction sum until the end of the Defects Notification Period, which was 12 months after the issue of a Taking-Over Certificate.

[5]           In relation to the hospital in Grand Turk, the Taking Over Certificate was issued by the Respondent on or about 28 November 2009 with the Defect Notification Period ending 29 November 2010 in the absence of any extension.

[6]           In relation to the hospital in Providenciales, the Taking Over Certificate was issued by the Respondent on or about 20 December 2009 with the Defect Notification Period ending 20 December 2010 unless extended.

[7]           Pursuant to Clause 2.5 of the Contract, Interhealth gave notice of the extension of the Defects Liability Period for 1 year. The Engineer granted the extension until the 20th April 2012. Clause 3.5 under the Contract provided:

“Whenever these conditions provide that the Engineer shall proceed in accordance with this sub-clause (3.5) to agree or determine any matter. The Engineer should consult with each party in an endeavor to reach an agreement. If agreement is not achieved the Engineer should make a fair determination in accordance with the Contract, taking due regard to all relevant circumstances. The Engineer shall give notice to both parties of each agreement or determination with the supporting particulars. Each party shall give effect to each agreement or determination unless or until revised under clause 20 [Claim, Disputes and Resolutions].”

[8]           JIL entered into Bond Arrangements with the Appellant whereby the Appellant would provide Bonds to cover any defects, which may arise before the expiry of the Defects Notification Period. This allowed JIL to access the balance of the retention fee.

[9]           Interhealth under the terms of the Contract was entitled to retain 2.5% of the Contract price. JIL entered into a Bond Agreement with the Appellant which would allow the Interhealth to retain half of the retention fund in relation each section after the section had been completed (Retention Bond). On 3 December JIL and the Bank executed a retention bond in the amount of $480,000.00. It was not specific to any particular Section. On 17 December a further bond was executed in the amount of $630,000.00. This also was not referable to any particular Section. Each of the Bonds contained an expressed term in relation to the period of enforceability:

“3. Period of Enforceability

The obligations of the Bank [hereunder shall be continuing and shall remain in full force and effect until the earlier of:

i.              the expiry of the Defects Notification Period pursuant to the Contract in respect of the Section to which the Bond applies; or

ii.             satisfaction of demands up to the maximum aggregate sum of the Secured Amount.“

Clause 11 of the Bonds provided for the Governing Law which was stated as:

“11. Governing Law

This Bond shall be governed by the laws of the Turks & Caicos Islands. Any action, suit proceedings or dispute in connection with this Bond shall be finally settled under the ICC Arbitration Rules by a 3 member tribunal panel, in accordance with ICC Arbitration Rules. The place of the arbitration shall be deemed to be Paris, notwithstanding that hearing may be conducted in TCI or other location in accordance with the ICC Arbitration Rules. The language of the arbitration shall be English.”

[10]         The Bonds expressly provided that upon service on the Bank of a written demand setting out certain particulars the Bank “shall without proof or further conditions or any set off, counter-claims or any other deductions and within 10 working days of receipt of such demand, pay the Employer (Interhealth) the sum claimed by the Employer” not exceeding the amount of the Bond.

[11]         On 29 May 2012 the JIL issued letters of demand under each Bonds, but the Bank failed to pay any sum. Interhealth issued proceedings against the Bank to recover the sum of $1,110,000.00 as claimed in the Re-Amended Statement of Claim together with interest.

[12]         On 20 August 2012 the Bank filed an application for, inter alia, an order that all further proceedings in the action be stayed pursuant to Section 5 of the Arbitration Ordinance Cap. 408.

[13]         Also on 20 August 2012, Interhealth filed an application seeking, inter alia, summary judgment under Order 14 of the Rule of the Supreme Court in the sum of $1,110,000.00.

[14]         It was the contention of the Bank that at the time when Interhelath served on the Bank a demand for payment, the Bonds were not still in effect in accordance with their terms. Whether this was so or not the Bank maintained should be referred to arbitration under the terms of the Arbitration Agreement as set out in clause 11 of each Bond.

[15]         In her judgment, Ramsay-Hale J. identified the issues before her in this way:

“12. At issue between the Bank and the Plaintiff is the question whether the Bank remained under an obligation to pay on May 2012. The Plaintiff asserted that the Defect Notification Period was extended under Clause 2.5 and 11.3 of the Contract and would not expire until November 29, 2012 in respect of Grand Turk’s Bond and December 20, 2012 in respect of the Providenciales’ Bond. The Bank’s contention is that the Bonds expired in 2010 as none of the condition precedent to a valid extension of the Deed of Notification Period were met.

13. At issue between the Bank and the Plaintiff at these interlocutory proceedings is whether the Bank has jurisdiction to grant the Plaintiffs application for summary judgment where the Plaintiffs claim is disputed by the Bank and the parties have agreed to refer their dispute to arbitration.”

[16]         These are the same issues that arise on appeal. Ramsay-Hale J. concluded in the judgment at paragraph 56:

“56. In the light of the authorities, and despite the reservation expressed in them about the Court assuming jurisdiction where the parties have agreed to refer their dispute to arbitration I conclude that:

(1)           it is open to a Plaintiff to bring order 14 proceedings to enforce a claim to which the Defendant “plainly has no defence’, where the claim arises under a Contract which contained a arbitration clause, as the Courts jurisdiction is not ousted by the presence of a arbitration clause;

(2)           or of the Court to grant Order 14 relief where there is a arbitration clause should be sparely exercised and 'only in the simplest and clearest case i.e. where it is readily and immediately demonstrable that the Defendant has no good ground at all for disputing the claim should the party be deprived of this contractual right to arbitrator. Per Saville J.”

[17]         In relation to the Summary Judgment Application the judge indicated at paragraph 58 of the judgment:

“58. The test to be applied is whether it is readily and immediately demonstrable that the defendant has no grounds at all for disputing the claim.”

The Judge took the view that “the Defendant (the Bank) had no good ground for disputing the claim and the Plaintiff would be entitled to summary judgment”.

[18]         The judge went on at paragraph 62 to hold that relying on Sztejn v J. Henry Schroder Banking Corporation (1941) 31 NYS 2nd Ed 631 also sited in Edward Owen Engineering Ltd v Barclays Bank International Limited [1978] QB 159 the Court said:

“It is well established that a letter of credit is independent of the primary contract of sale between the buyer and seller………”

[19]         The Judge continued at paragraph 63:

“This principal of independence, or autonomy as it is also known, which applies to the Retention Bond as it does to Letters of Credit, means that the payment undertaking contained in the Bond is separate from, and independent of, the underlying contract that gives rise to it.

The Bank’s proper………concern is whether the demand complies with the terms and conditions of the undertaking and not with any dispute arising from the underlying contract. As a mater of principal it is clear why this should be so. One must accept that disputes arising from the underlying contract are common place. If the Bank’s were free to use these disputes to stop payment the confidence of those who give up their rights to retain cash in exchange for Bonds would be severally undermined, would the result that such Bonds would become unacceptable in the trade. Having indicated that the Bank “does not dispute that it was notified of the extension of the Defects Notification Period by Interhealth nor does it dispute that the written demand for payment was made in accordance with the Bond”.

[20]         Ramsay-Hale J. also relied on the statement by Lord Roskill L.J. in Howe Richardson Scale Co Ltd v Polimex-Cekop and National Westminister Bank Limited cited in Barclays Bank page 171:

“Whether the obligation arises under a letter of credit or under a guarantee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the sufficiency of performance by the seller to the buyer or by the buyer to the seller.”

The Judge concluded that “it was apparent that the Bank’s claim is unsustainable as a matter of proper construction of the agreement in light of the facts that are not in dispute”. She went on to grant the Plaintiff's application for summary judgment and refused the Defendant’s application for a stay.

[21]         The issues that therefore arise in this appeal are as follows:

1.             Does the Court have jurisdiction to grant summary judgment on a claim which is not admitted in circumstances where the parties have agreed that the dispute are to be resolved by arbitration and where the defendant has applied for a stay.

2.             If the jurisdiction does exist are there limits to that jurisdiction.

3.             If the jurisdiction does in fact exist did the judge correctly exercise her discretion in granting the summary judgment and refusing to grant a stay under Section 5 of the Arbitration Act.

[22]         It is the contention of the Bank that there is a dispute between the Bank and Interhealth as to the validity of the purported extension of the Defects Notification Period. The Bank is asserting that it has no liability under the Bonds as they both expired in 2010 and were not extended in accordance with the terms relating to the extension of the Contract between JIL and Interhealth. Wilson QC in his written submission stated that “the Arbitration Agreement is drafted in the broadest possible terms, encompassing all actions, suits, proceeding or disputes arising out of or in connection with the Bonds”. Mr. Wilson contends that the court proceedings ought to be stayed so that the matter may be dealt with by the Arbitrators.

[23] Section 5 of the Arbitration Ordinance provides as follows:

“5. If any party to a arbitration agreement, or any person claiming through or under him, commences any proceedings in any court against any other party to the agreement, or any person claiming through or under him, in respect of any matter agreed to be referred, any party to those legal proceedings may at any time after appearance, and before delivering any pleadings or taking any other step in the proceedings, apply to that court to stay the proceeding and the court, if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the agreement and that the applicant was, at the time when the proceedings were commenced and still remains ready and willing to do all things necessary to the proper conduct of the arbitration, may make an order staying the proceedings.”

Clearly the use of the word may in these circumstances indicate that the Court has the discretion whether to make an order staying the proceedings. At paragraph 34 of her judgment Ramsay-Hale J. held “as a matter of law the presence of an arbitration clause does not deprive the Court of jurisdiction over a dispute arising under the contract. The grant or refusal of an application for a stay of proceedings pending reference of the matter to arbitration is entirely at the discretion of the Court”. This Court agrees with this conclusion by the judge.

[24]         In Mustill & Boyd: Commercial Arbitration Second edition at page 124 it is stated:

“The first of the questions listed above is whether the arbitrator has jurisdiction over a claim which there is no defence....for if there is no sufficient dispute to justify a stay, there can be no dispute empowering the arbitrator to enter upon a reference and make a valid award. The result makes commercial nonsense, and so far as we are aware, no court has ever suggested that it is correct.

For practical reasons the law simply proceeds on the hypothesis that in cases where the defence is very weak both the Court and the Arbitrator can properly assume jurisdictions”

[25]         In Tradax International SA v Cerrahogullari TAS, The M. Eregli [1981] 3 All ER 344, at 351 Mr. Justice Kerr observed:

‘‘The fact that arbitration proceedings are pending between parties is clearly not in itself any ground from preventing the Courts from becoming seised of the same dispute in action. ”

Later Kerr J. went on to indicate:

“Claims which are covered by arbitration clause, but which are said to be indisputable, nowadays frequently put forward in an arbitration, but then also pursued concurrently by an attempt to obtain summary judgment in the Courts. In effect, a claimant can, and in my view should be able to, obtain an order for payment in such cases by either means, and the coexistence of both avenues towards a speedy payment of the amount which is indisputably due was recently referred to by this Court by Robert Goff J. in The Kostas Melas (1981) 1 Lloyd’s Rep 18) at 27 it was there held that, as an alternative to an application for summary judgment Order 14 in an action there was jurisdiction to make an interim award or an indisputable part of the claim in an arbitration: which also shows, incidentally, the misconception of the Plaintiffs’ first submission in the present case with which I have already dealt.”

[26]         Kerr J. in Tradex International SA v Cerrahogwullari TAS, The M Eregli [1981] 3 All ER 344, without doubts he then went out to cite with approval the stated quote above. In Ellerine Bros. (PTY) Limited & Another v Klinger (1982) 2ALL ER 237, Watkins LJ accepted “That an arbitration agreement notwithstanding, there can be such a remedy available either in the Court or in arbitration proceedings, on the authority of________

[27]         Referring to the provisions of Section 4(1) of the Arbitration Act of 1950, Lord Mustill in the case of Channel Tunnel Group Ltd. & Another v Balfour Beatty Construction Ltd. (1993) AC 334 observed at page 363:

“First, there is the situation where a contract entirely English in all its aspects is subject to an agreement for arbitration in London. This agreement, being a domestic arbitration agreement, may be enforced by a discretionary stay under section 4(1) of the Act of 1950. Here, it is quite clear that the presence of the clause does not deprive the court of jurisdiction over a dispute arising under the contract. If an action is brought to enforce the contract, and either the defendant does not apply for a stay, or the court decides in its discretion not to grant one, the action proceeds in exactly the same way as if the arbitration clause did not exist. Moreover even if the court does choose to grant a stay the court retains its jurisdiction over the dispute. If all goes well this jurisdiction will never be exercised, but if the arbitration breaks down the court is entitled to resume seizing of the dispute and carry it forward to judgment.“

[28]         It is clear that acting under Section 5 of the Arbitration Ordinance the Judge has discretion to exercise.

[29]         In Taunton-Collins v Cromie [1964] 2A11 ER 352, Pearson L.J. stated:

“. ...this court or the court below has or had to be satisfied that there was no sufficient reason why the matter should not be referred in accordance with the agreement, and, even if so satisfied, the court still has a discretionary power, as indicated by the word “may”. ”

[30]         In Hayter v Nelson Home Insurance Co. (1992) Lloyds Rep., Saville J. in considering the provisions of Section 1 of the Arbitration Act 1975 which gave the Court the impression not to stay proceedings if satisfied “that there is not in fact any dispute between the parties with regard to the matter agreed to be referred to held that only in the simplest and clearest cases, i.e., where it is rarely and immediately demonstrable that the respondent has no good ground at all for disputing the claim should that party be deprived of his contractual right to arbitration.”

[31]         Section 1 of the Arbitration Act 1975 provided:

“Staying court proceedings where party proves arbitration agreement-

(1)           If any party to an arbitration agreement to which this section applies……….commences any legal proceedings in any court against any other party to the agreement……….in respect of any matter agreed to be referred, any party to the proceedings may……….apply to the court to stay the proceedings; and the court, unless satisfied that …………there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings.

[32]         Lord Mustill observed in Channel Tunnel case at page 357:

“In recent times, this exception to the mandatory stay has been regarded as the opposite side of the coin to the jurisdiction of the court under R.S.C., Ord. 14, to give summary judgment in favour of the plaintiff where the defendant has no arguable defence. If the plaintiff to an action which the defendant has applied to stay can show that there is no defence to the claim, the court is enabled at one and the same time to refuse the defendant a stay and to give final judgment for the plaintiff.”

[33]         Having regard to the above authorities, I am satisfied that the Court has jurisdiction to entertain final judgment for a Plaintiff on an application for summary judgment notwithstanding that there is an arbitration clause, the question remains how is the discretion is to be exercised.

It is accepted that Lord Mustill was speaking of the power to grant a mandatory stay under the Arbitration Act lof 1975 of England, which did not apply to domestic arbitration.

[34]         In Home & Overseas Insurance Co. Ltd. v Mentor Insurance Co. (UK) Ltd. (in liq.) 3 ALL ER Lord Justice Parker observed that:

‘"The purpose of Ord 14 is to enable a plaintiff to obtain a quick judgment where there is plainly no defence to a claim. If the defendant’s only suggested defence is a point of law and the court can see at once that the point is misconceived the plaintiff is entitled to judgment. If at first sight the point appears to be arguable but with a relatively short argument can be shown to be plainly unsustainable the plaintiff is also entitled to judgment. But Order 14 proceedings should not in my view be allowed to become a means of obtaining, in effect, an immediate trial of an action, which will be the case if the Court lends itself to determining on Ord 14 applications points of law which make take hours even days and the citation of many authorities before the Court is in a position to arrive at the final decision.

In cases where there is an arbitration clause it is my judgment the more necessary full- scale argument should not be permitted. The parties have agreed on the chosen tribunal and the plaintiff is entitled prima facie to have the dispute decided by that tribunal in the first instance, to be free from the intervention of the Courts until it has been so decided and thereafter, if it is in his favor, to hold it unless the plaintiff obtains leave to appeal and successfully appeals.

In the case of Commercial Arbitration the above remarks apply with even greater force, perhaps especially when the dispute turns in construction, or the implications of terms or trade practice. Arbitrators and Umpires in the same business or trade as the parties are certainly as well or better able than the Court so to judge what the parties must be taken to have meant or intended by the words or phases that they have used, to judge what the parties would at once have replied if an innocent by stander had asked what was to happen in certain events not dealt with by the contract and to know what were the practices of the trade.

Not only is the defendant entitled to have the dispute decided in the first instance by such persons but the court should not in my view, save in the clearest of cases, decide the question without the benefit of their views.”

[35]         Parker L.J. went on to say:

"In very clear cases a plaintiff is no doubt entitled to his summary judgment notwithstanding the clause, but, when the plaintiff seeks immediate judgment in other than a clear case and resists the submission of dispute to tribunal on which he has agreed, one is bound to wonder whether the course which he has taken is prompt by the knowledge that the chosen tribunal with more intermit knowledge of the trade may reach a conclusion adverse to him in respect to which he might either fail to obtain leave to appeal or if he did obtain leave fail to demonstrate any error.”

[36]         In Hayter v Nelson [1990] 2 Lloyds Rep. 265, in the decision of Home and Overseas Insurance was applied by Saville J. who did not doubt that the Court had jurisdiction to grant summary judgment under the provisions of Section 4 of the 1950 Act. However Saville J. cautioned:

‘It seems to me to be clear from the passage quoted from Lord Justice Parker’s judgment, that when considering an application for summary judgment a factor to be taken into account in the existence of an arbitration agreement between the parties: so that only in the simplest and clearest cases where it is readily and immediately demonstrable that the respondent has no good ground at all for disputing the claim should that party be deprived of his contractual right to arbitrate. In the context of the 1975Act, this means that only in such cases can the Court be satisfied that there is not in fact any dispute between the parties with regard to the matter agreed to be referred”

[37]         It should be noted that the House of Lords has held that, in so far an application for a stay is concerned there is no material difference between the provisions of Section 1(1) of the Arbitration Act 1975 and Section 4(2) of the Arbitration Act 1950. See observation of Lord Wilberforce in Nova (Jersey) Knit Limited v Kammgarn Spinnerei GmbH (1977) 2ALL ER 463.

‘‘The application for a stay is based on section 1 (1) of the Arbitration Act 1975.

(There is an alternative contention based on section 4 (2) of the Arbitration Act 1950, repealed by the Act of 1975, but there is no material difference between the provisions and it is not necessary to decide which applies.”

[38]         From these cases I deduce that if it is the Defendant’s suggested defence is a point of law and the Court is immediately satisfied that the point is misconceived the Plaintiff would be entitled to summary judgment. Similarly the issue turns on a point of law and the Court is able to form a distinct view as to the rights of the Plaintiff then summary judgment ought to have been entered..

[39]         The question for determination is whether in this case it can be said that it is a case where “it is readily and immediately demonstrable that the respondent has no good ground for disputing the claim………”. In order to do this it is necessary to examine the Bond signed between the Bank and Interhealth.

[40]         In Channel Tunnel’s case Lord Mustill speaking of the exception to the mandatory stay under the 1975 Act of England, indicated at page 356:

‘‘This jurisdiction, unique so far as I am aware to the law of England, has proved to be very useful in practice, especially in times when interest rates are high, for protecting creditors with valid claims from being forced into an unfavourable settlement by the prospect that they will have to wait until the end of an arbitration in order to collect their money.

His Lordship however went on to endorse the powerful warnings against encroachment on the parties agreement to have their commercial differences decided by their chosen tribunals.

[41]         Although speaking about the mandatory provisions under the 1975 Act, I am of the view that there is in fact no real difference between the mandatory provisions under the 1975 Act and when the exception is applied and the requirements of Section 4 of the 1950 Act. This must be understood for the purposes of the issue before this Court. It was significant that even though the parties had agreed to go to arbitration the legislature nonetheless intervened to provide that such provisions intervened to indicate that such agreement would be mandatory except in certain circumstances as set out in the Act.

[42]         The Arbitration Ordinance in the Turks & Caicos Islands was enacted in_____some over 50 years ago. The modern trend of arbitration is to ensure that because of the high interest rates that persons are not allowed to take advantage of the agreement which they enter to delay and keep persons out of the money to which they are undoubtedly entitled. The question which arises here is, does the Bank have any defence under the terms of the Bonds to insist on a stay and the matter be sent to arbitration.

[43]         As stated previously each of the Retention Bonds contained the following expressed terms:

“3. Period of Enforceability

The obligations of the Bank [hereunder shall be continuing and shall remain in full force and effect until the earlier of:

i.              the expiry of the Defects Notification Period pursuant to the Contract in respect of the Section to which the Bond applies; or

ii.             satisfaction of demands up to the maximum aggregate sum of the Secured Amount.“

In construing this provision of the Bonds it is necessary to have regard to the provisions of the Contract between JIL and Interhealth. These provisions are considered to be relevant:

i.              Clause 1.13:

“the employer shall be employed subject to clause 2.5 (Employers Claim) to an extension of the Defects Notification Period for the works or a section if and to the extent that the works section or major item of the Plant (as the case may be, and after taking over) cannot be used for the purpose for which they are intended by reason of the defects or damage. However, a Defect Notification Period shall not be extended by more than 2 years.

ii.             Clause 2.5:

“If the employer considers himself to be entitled to……..any extension of the Defects Notification Period, the employer or engineer shall give notice and particulars of the contractor…….”

iii.            Clause 3.5:

‘‘Whenever the Conditions provide that the engineer shall proceed in accordance with this sub-clause 3.5 to agree or determine any matter, the engineer shall consult each party in an endeavor to reach agreement. If agreement is not achieved, the engineer shall make a fair determination in accordance with the contract, taking due regard of all the relevant circumstances. The engineer shall five notice to both parties of each agreement or determination with supporting particulars. Each party shall give effect to each agreement or determination unless and until revised under Clause 20 [Claims, Disputes and Resolutions].”

[44]         It is common ground that Johnston International has not in any way challenged the determination of the engineer. It is also common ground that the Bank was notified of the extension of the Defects Notification Period by Interhealth. It does not dispute that the written demand for payment was made in accordance with the Bank. The Bonds expressly provided that upon service on the Bank of a written demand setting out certain particulars the Bank without any proof of further conditions, set off counter claims or other deductions within 10 working days of receipt of such demand pay the Respondent the sum claimed not exceeding the amount of the Bonds. The Bank now seeks to go behind the extension of the Defects Notification Period planted by the engineer. In so doing the Bank seeking to rely on an underlying dispute between Interhealth and JIL as to the validity of that extension in circumstances where JIL has not referred the dispute to adjudication or arbitration and has not shown any intention that it so intends.

[45]         In Edward Owen v Barclays Bank (1978) QB 159, 170 Lord Denning in dealing with the law of performance bonds observed:

‘’A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. That was clearly stated in Hamzeh Malas & Sons v British Imex Industries [1958] 2 QB 127 Jenkins L.J., giving the judgment of this Court, said, at page 129…….”......it seems to be plain enough that the opening of a letter of credit constitutes a bargain between the banker and the vendor of goods, which imposes upon the banker an absolute obligation to pay, irrespective of any disputes there may be between the parties as to whether the goods are up to contact or not. An elaborate commercial system has been built up on the footing that bankers confirm credits are of the character, and, in my judgment, it would be wrong for this Court in the present case to interferer with the established practice.”

[46]         Lord Denning went on to cite the case of Sztejn v J. Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2D 631 which he considered as the most illuminating case and which was heard in New York Court of Appeal. The Master of the Roles indicated that after citing many cases, Shientag J. said at p 633:

‘’It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade.”

[47]         In Wuhan Guoyu Logistics Group Co. Ltd. & Another v. Emporiki Bank of Greece S.A. (2012) EWCA Civ. 1629, for the Court of Appeal was the issue whether a ‘payment guarantee’ is a guarantee, properly so called, or an ‘on demand bond’, as it is called in banking terminology. Lord Justice Longmore with whom Lord Justice Rimer and Lord Justice Tomlinson agreed made the following observations in respect of a demand guarantee:

“79. The words "will almost always be" amount to a presumption which was by then fully justified by the Court of Appeal authorities, Howe Richardson v Polimex [1978] 1 Lloyd's Rep 161, Owen v Barclays Bank [1978] QB 159 and Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546. It is enough to quote from the judgment of Lord Denning MR in Owen at page 170H- 171C:-

"So, as one takes instance after instance these performance guarantees are virtually promissory notes payable on demand. So long as the... customers make an honest demand, the banks are bound to pay: and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay. All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice.”

It is asserted on behalf of the Bank that it is open to the Bank to question the validity of the extension of the Defect Notification Period. I reject this submission. In so doing I am guided by the observation of Ackner L.J. in Esal Commodities Ltd. v. Oriental Credit Ltd. [1985] 2 Lloyds Rep. 596 and Hirst J. in Siporex Trade SA v. Banque Indosuze (1986) 2 Lloyds Rep. 146.

In Esal Commodities Ltd. v. Oriental Credit Ltd. [1985] 2 Lloyds Rep. 596 at 549, Ackner L.J. observed:

“A Bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence of fraud and of the bank’s knowledge pf that fraud.”

In Siporex Trade SA v. Banque Indosuze (1986) 2 Lloyds Rep. 146 at 148, Hirst J. stated:

“All three of the leading Court of Appeal cases are the strongest authority in favor of the proposition that the Bank’s guarantor is not and should not be concerned in any way with the rights and wrongs of the underlined transaction. This is also the case in relation to letters of credit, with which all the authorities draw on very close analogy……….

I, of course, accept Mr. Hallgartens submissions that every Bond has to be construed in accordance with its terms, and there can be no blind categorization of its character or blind assumption of the obligation with which it relates. However, I can see nothing whatsoever in the present performance Bond to differentiate it from the number of rules quoted in the authorities (particularly that in the Esal case) or to justify departure from the general principals laid down in those cases.

I consider it extremely important that, for such a frequently adopted commercial transaction, they should be consistency of the approach by the Court, so that all parties know where they stand.”

In my view, the Bank was required to pay the Bond upon service of a written demand setting out certain particulars agreed without any proof of further conditions set off counter claims or other deductions to pay within 10 working days. The Bonds contained “language which seems to me to make it absolutely clear that (these) are bond(s) intended to be met without the surety having either the right or duty to make any detail inquiry provided the demand letter conforms with the conditions of the bond(s)”. See observations by Walker L.J. in Balfour Beatty Civil Engineering et al v Technical & General Guarantee Co. Ltd. 68 Con LR. 180. The Bank was not concerned with the underlying transaction between Interhealth and JIL. In the absence of fraud which is not alleged it was not opened to the Bank to question the validity of the extension of the Defect Notification Period which had been extended by the Engineer acting pursuant to the Contract between JIL and Interhealth. The Bank agreed to pay the Bonds in the circumstances specified in the Bonds. Those circumstances having been observed by Interhealth the Bank was under a liability to pay in accordance with the Bonds.

[48]         This led Lord Denning to conclude at p. 171 that:

“All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice.”

[49]         Later in his judgment Lord Denning adopted what was said in principle by Kerr J. in RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146. Kerr J. said at p. 761:

‘‘It is only in exceptional cases that the court will interfere with the machinery of irrevocable obligations assumed by the bank...[E]xcept possibly in clear cases of fraud or which the banks have no notice, the courts will leave the merchants to settle their disputes under the contract by litigation or arbitration.”

Lord Denning also accepted what was said by Roskill L.J. in Howe Richardson Scale’s case as set out above.

[50]         Browne L.J. in agreeing with the judgment of Lord Denning in Edward Owen’s case had this to say at p.172:

“As Lord Denning MR has said, it is well established that in the case of a confirmed irrevocable credit in respect of a contract for the sale of goods the confirming bank is not in any way concerned with disputes between the buyers and the sellers under the contact of sale which underlies the credit. But I agree also that it is established that there is at any rate one exception to this rule. Lord Denning MR has already referred to the New York case of Sztejn v J Henry Schroder Banking Corpn (1941) 31 NY Supp 2d 631, and has quoted what I said in Bank Russo-Iran v Gordon Woodroffe & Co Ltd ((1972) Times, 4 October). That exception is that where the documents under the credit are presented by the beneficiary himself and the bank knows when the documents are presented that they are forged or fraudulent, the bank is entitled to refuse payment.”

[51]         Counsel for the appellant accepted that the Bonds were in the nature of on- demand bonds and that, only in exceptional circumstances, would the Court allow an obligor to go behind an on-demand bond and rely on the underlying contract. It was submitted by the appellant that this case comes within such exceptional circumstances. The appellant contended that the use of the expression “pursuant to the contract” in section 3.1 of the Bonds, imported the requirement that any extension of the Defects Notification Period must be a valid extension under the terms of the contract. Counsel argued that, since JIL disputing the validity of the extension, the Bank was under no liability to pay unless and until that dispute is resolved by arbitration. No evidence was presented to show that JIL which is in liquidation was disputing the extension of the Defect Notification Period. Counsel relied on Simon Carves Ltd. v Ensus U.K. Ltd [2011]EWHC 657 (TCC).

[52]         In the Simon Carves’ case, Akenhead J identified the issue as relating “to an ‘on demand’ performance band and raises issue, rarely addressed in the past, as to the extent to which, if at all, a party may be prevented from seeking payment under the bond by the terms of the very contract in respect of which the bond is provided by way of security.”

[53]         The judge observed at para 29 of the judgment:

“Whilst many of these cases involve attempts to enjoin the provider of the bond, usually banks, the same principles and practice broadly apply where an injunction is sought against the beneficiary under the bond from seeking to make a demand or call on the bond. It will not be enough to stop the beneficiary calling on the bond that its case or claim against the other contractual party is a weak one. However, almost all the decided cases have related to allegations of fraud. There has been little jurisprudence on the circumstance which arise in which there are contractual provisions between contractor and purchaser/ employer which impose restricts or which prevent calls being made on bonds or letters of credit.”

[54]         After reviewing a number of cases, Akenhead J concluded at para 32 of the judgment:

“In my judgment one can draw from the authorities the following:

(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 cab on the bond can be restrained by injunction.

(b)           The same applied 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.

[55]         Simon Carves’ case may be distinguished from the present appeal. In that case the underlying contract upon which the bonds were issued prevented the beneficiary of the bond contract from making a demand under the bond. The Bonds in this case contained no restrictions which would prevent the Respondent as the beneficiary from enforcing the Bonds in accordance with their terms.

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Zacca, P.

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Mottley, J.A.

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Ground, J.A.