Performance bonds


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In Enka Insaat v Banca Populaire Dell’Alto and Enka Insaat v Cassa DDI Risparmio DDI Bolzano [2009] EWHC 2410 (Comm) the applicant applied for summary judgment against two banks pursuant to performance guarantees that they had issued.

The applicant had entered into a contract with a Russian owner for the design and construction of its building. The applicant signed a subcontract with a Russian company to design and install the external façade for a fixed price. The subcontract required the applicant to make advanced payments and also required the subcontractor to put in place certain guarantees by its banks. One of the defendant banks provided an advance payment guarantee and the other provided a performance guarantee.

The guarantees provided that a demand was merely to state that the subcontractor had failed to fulfil its obligations under the subcontract, and that "accordingly" the applicant was entitled to receive payment. In due course, the applicant made such demands under the guarantees, but the banks argued that the applicant did not honestly believe that there was any liability by the subcontractor and that the demands were therefore fraudulent.

The court had to consider whether there was any real prospect that the banks would establish at trial that the only realistic inference was that the applicant could not honestly have believed in the validity of the demands. The court held that the words which obliged the applicant to state "accordingly [the applicant] is entitled to receive payment" did not impose on the applicant an obligation either to state expressly or by implication, or to have any reason to believe, that it had suffered damage in the amount claimed or that it was entitled to repayment from the subcontractor for the price paid in advance. The "accordingly" related to the effect of the demand and the statement (rather than the fact) that the subcontractor had failed to fulfil its obligations under the subcontract.

There was no realistic prospect that the banks would establish that the applicant could not honestly have believed in the validity of the demands.

Paul Howcroft, Partner, Fladgate LLP (phowcroft@fladgate.com)

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