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Shapoorji Pallonji & Company Private Ltd v Yumn Ltd & Anor [2021] EWHC 862 (Comm)

05 May 2021

The English Commercial Court dismissed an application for injunctive relief to prevent a call on a performance bond, and concluded that an Emergency Arbitrator should not apply tests or standards different to those of the English Courts, as long as the instrument is subject to English law.

Factual Background

Yumn Ltd. ("Yumn") appointed Shapoorji Pallonji and Company Private Ltd. ("Shapoorji") (and associated group entities) to construct a power plant in Rwanda. The contract was based on a FIDIC standard form. Any disputes were to be resolved by Singapore-seated, ICC arbitration and the contract was subject to English law.

As is customary in such agreements, Shapoorji issued a performance bond in the same format as that annexed to the contract. The bond was subject to English law but, contrary to the contract, was subject to the jurisdiction of the English courts. For a valid demand to be made under the bond, the demand had to be made during business hours, in the prescribed form. In this instance the performance bond was worth approximately US$ 32m and was issued by Standard Chartered Bank.

The Project experienced delay and, on 24 February 2021, Yumn made a written demand under the contract for payment of delay liquidated damages ("LDs"). Since no extension of time was granted, the LDs had reached their maximum value under the contract. Shapoorji refused to pay LDs and, as a result, Yumn made a demand for the full value of the bond from Standard Chartered on 23 March 2021.

On 26 March 2021, Standard Chartered informed Shapoorji that a demand on the bond had been made. Shapoorji immediately requested Yumn to withdraw the demand on the basis that the claim was 'fabricated'. Shapoorji also commenced two sets of proceedings to prevent Standard Chartered from making payment pursuant to the bond:

  • ICC Emergency Arbitrator proceedings, seeking an order against Yumn, to suspend its demand to Standard Chartered and prevent any further demands; and
  • Application to the English Commercial Court under s. 44 of the English Arbitration Act ("EAA"), seeking an order against Yumn, that it withdraw its demand to Standard Chartered and refrain from making any further demands pending orders from the ICC Emergency Arbitrator.

Legal Background

Section 37 of the Senior Courts Act 1981 ("SCA")

The remedy of an injunction is a discretionary remedy available to the English court. It may be granted as an interim or final remedy. The jurisdiction to grant injunctive relief is statutory and is now set out at s. 37 of the SCA. This allows the High Court to grant an injunction "in all cases in which it appears to the Court to be just and convenient to do so".

Section 44 of the English Arbitration Act 1996

Under s. 44 of the EAA, unless the parties agree otherwise, the court may make orders in support of arbitration proceedings in relation to evidence, property and assets, grant injunctive relief and/or appoint a receiver provided that the an arbitral institution or tribunal "has no power or is unable for the time being to act effectively".

Arguments by the Parties

At the hearing of the s. 44 application, Shapoorji argued that:

  1. the question of whether it was appropriate to grant injunctive relief was one for the Emergency Arbitrator. Shapoorji's argument was that an Emergency Arbitrator would apply a different approach to the grant of an injunctive order than the Commercial Court. Accordingly, the orders sought from the Commercial Court should be granted without regard to the principles generally applied by the Court to applications to prevent a beneficiary recovering a bond. Shapoorji argued that the principles were, essentially, irrelevant and the Court should simply grant the injunction to preserve the status quo until the Emergency Arbitrator could adjudicate;
  2. the demand under the bond was fraudulent. This was because the delay in the Project that enabled Yumn to call the bond was due to Yumn's bad faith and/or dishonest refusal to accept Shapoorji's request for extensions of time; and
  3. if the Emergency Arbitrator subsequently found the bond had been incorrectly called, it would suffer loss incapable of being made good.

Yumn countered that there was no evidence of fraud. It had delivered a valid demand and was entitled to performance of the bond.  Yumn also argued that the Court should apply well-established principles applicable to attempts to prevent recovery of bonds. It made no difference that there was an arbitration clause in the contract.

There was no contention from the Parties that the demand under the bond was itself invalid.

Judgment

The Court dismissed the application by Shapoorji. Pelling J found that (unless, perhaps, where an injunction had been sought before any question of enforcement arose) an injunction restraining a beneficiary from enforcing payment under an on-demand bond should only be granted in two circumstances:

  1. the demand is in breach of an express condition precedent to the right to make such a demand or in breach of an implied obligation to similar effect (provided an implied term can be shown to exist); and/or
  2. it can be shown, to an enhanced evidential standard, that the demand is fraudulent.

Applying the legal position to the facts, the Court found that the propriety of Yumn's demand was caught by the arbitration agreement in the contract. However, it was arguable that disputes regarding Yumn's entitlement to make a demand under the bond might fall outside the contract, given the jurisdiction clause in the bond.

The Court noted that English law governed the contract and the bond. The fact that Singapore law was the curial law (which has a different approach to attempts to restrain enforcement of bonds) was immaterial.

The Court also stated that "[w]hilst it is realistically arguable that [an Emergency Arbitrator] will apply procedural rules and principles that are different from and independent of those applied by a state court, that does not lead necessarily to the conclusion that the emergency arbitrator will grant the order sought by [Shapoorji's] when a court in England would not."

Nonetheless, the Court found it would not grant relief under s. 44 of the EAA simply to preserve the status quo, pending the judgment of an Emergency Arbitrator. The Court also found that Shapoorji's delay in commencing proceedings was a factor, as Yumn had issued its demand for payment of LDs a month prior. The Court noted:

"It was open to [Shapoorji] to refer the failure of [Yumn] to grant any of its application for extensions in time to arbitration as soon as those applications had been refused and the contractual mechanisms for resolving such disputes had been exhausted and in that reference to seek an order from an EA from restraining YL from calling on the demand bond pending the resolution of that dispute. It chose not to do so".

The Court also considered whether English law entitled Shapoorji to have Yumn withdraw its demand under the bond. The Court found little prior authority on the topic; however, it found some relevant material in cases involving underwriters. Following these the Court held, in the absence of a dispute regarding the validity of the demand, it could only grant an injunction where it established that "the only realistic inference is that (a) the beneficiary could not honestly have believed that it was entitled to make a demand for payment and (b) the bank was aware that the demand was fraudulent".

As regards applications to restrain a beneficiary, the Court noted that an injunction would generally only be granted to restrain a beneficiary from breaching an express or implied restriction contained in an underlying contract. However, the bond contained no such restrictions. Absent breach of any restrictions there had to be evidence that the demand was fraudulent. The Court found that Shapoorji had not satisfied the fraud test. Shapoorji had no evidence to suggest that the underlying dispute was anything other than a dispute regarding delay to the contract.

Comment

This judgment is notable for the arguments made by Shapoorji regarding the relationship between the English Court and an Emergency Arbitrator, and, the firm rejection those arguments received. Had the English Court accepted Shapoorji's arguments, litigants would have been able to seek, and expect to receive, injunctions from the English Court, in the knowledge that the merits of the injunction application would only subsequently be considered by the Emergency Arbitrator. In effect, the English Court would serve as a 'stop-gap' to ease the process of arbitration. This prospect was clearly rejected by the English court. 

We also note the Court's view that principles of English law apply irrespective of whether the application was examined by it or an Emergency Arbitrator. The inference, therefore, is that an arbitrator has to apply the same English law test(s) that an English Court has to apply. It remains to be seen whether this judgment will be used by parties in arbitration to pressure arbitrators toward stricter 'black-letter' interpretations of English law and away from the 'fairer' or more 'commercial' approach they sometimes adopt in arbitration.

Further Reading