Court grants interim injunction under the English Arbitration Act 1996 to preserve the value of contractual rights

In Doosan Babcock Ltd v Commercializidora de Equipos y Materiales Mabe [2013] EWHC 3010 (TCC), the High Court considered the scope of section 44(3) of the Arbitration Act 1996 (the Act). Section 44(3) empowers the courts in cases of urgency to make an order for interim relief for the purpose of preserving evidence or assets.

The Claimant had made an application for an interim injunction restraining the Respondent (known as MABE) from making demands for payment under two "on demand" performance guarantees, on the ground that MABE had failed to issue Taking-Over Certificates (the Certificates) as required by a contract between the parties. The guarantees were stated to expire upon the issuance of the Certificates.

The Claimant was successful in its application for injunctive relief. The Court held that it could make an order for the purpose of the preservation of a contractual right if the effect of the order was to preserve the value of the right and the case was one of urgency. The case also suggests that the usual threshold test for obtaining interim relief of demonstrating "a serious question to be tried" is a more difficult one to overcome in practice where the relief pertains to "on demand" bonds or guarantees, as the applicant must establish that it has a "strong case".

Background

The Claimant and MABE had entered into a contract under which the Claimant agreed to supply two boilers for use in a power plant in Brazil. The performance guarantees in relation to the two boilers were expressed to expire on the earlier of the issuance of a Certificate and 31 December 2013. The Claimant argued that it was entitled to the Certificates at the time when the boilers were taken into use by MABE. On the Claimant's case, this occurred on 30 November 2012 for the first boiler and 10 May 2013 for the second boiler.

The guarantees were "on demand" guarantees, meaning that the banks acting as guarantors were required to pay out solely on receipt of a valid demand from MABE. Fearing that MABE intended to issue such demands, the Claimant applied to the High Court for an interim injunction restraining MABE from making any demands under the two guarantees for a short period of time.

The Claimant argued that it was entitled to interim relief on the grounds that:

• any demand under the performance guarantees would be in breach of the contract between it and MABE, as MABE had wrongfully failed to issue the Certificates. Had the Certificates been issued, the guarantees would have expired;
• if MABE was entitled to make demands under the guarantees, its position would not be significantly prejudiced by the grant of an injunction of a short duration, as there was some time left until the long-stop expiry date specified in the guarantees of 31 December 2013;
• on the other hand, the Claimant could not be adequately compensated in damages for the loss it would suffer if its application was dismissed.

The scope of section 44(3) of the Act

The Court had to consider whether the Claimant's application fell within the scope of section 44(3) of the Act.

Section 44(3) provides that: "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."

Applying Cetelem SA v Roust Holdings [2005] EWCA Civ 618, the Court held that section 44(3) could be used to preserve a contractual right if the effect of any order made pursuant to section 44(3) was to preserve the value of that right. Reasoning that a contractual right was not preserved if a failure to give effect to it would destroy much or all of its value (as would occur if the Respondent did not issue the Certificates and then demanded payment under the performance guarantees), the case was one where the Court was empowered to grant an injunction under section 44(3) provided that the requirements of urgency and necessity were also met. These requirements were met, as there was sufficient evidence to suggest that MABE intended to make demands under the performance guarantees.

The test for the grant of interim relief in relation to an "on demand" bond or guarantee

Under English law, a court will not take action to prevent a bank from paying out on an "on demand" bond or guarantee unless material fraud is established at a final trial or there is clear evidence of fraud at an interim stage in proceedings. However, a court can grant an interim injunction restraining a beneficiary from making a demand under such a bond or guarantee.

In deciding whether to grant interim relief, the court will consider the criteria established in the case of American Cyanamid Co v Ethicon Ltd [1975] AC 396; but the applicant must show that it has a "strong case" that, under the terms of the underlying contract to which the bond relates, the beneficiary is not entitled to make a demand on the bond.

The requirement of a "strong case" represents a threshold for the grant of interim relief that is in practice more difficult to overcome than the threshold of "a serious question to be tried" generally applied in cases that do not relate to "on demand" bonds or guarantees. However, there was no doubt that Claimant had shown that it had a "strong case". After consideration of the remaining American Cyanamid criteria, the Court made an order restraining MABE from making demands under the performance guarantees for a defined period of time.

Significance of the decision

This decision sheds light on the scope of section 44(3) of the Act. It confirms that the English courts are prepared to make orders pursuant to section 44(3) in relation to assets including contractual rights where the effect of such orders is to preserve the value of the rights.

The decision also indicates that the usual threshold test for interim relief of "a serious question to be tried" is more difficult to overcome in practice in cases where the relief pertains to "on demand" bonds or guarantees. In such cases, the applicant for relief must establish that it has a "strong case".

For further information, please contact Craig Tevendale, Partner, or Hannah Ambrose, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.