On-Demand Bonds Reach a Peak: English Court of Appeal Challenges 'Paget's Presumption', English High Court Vetoes Emergency Arbitrator to Halt a 'Call', and Singapore Court of Appeal Endorses Exclusion of 'Unconscionability' Ground in Court Decisions
In a recent development, the Court of Appeal in the UK has granted an injunction to restrain an employer from calling on or receiving the proceeds under a bank guarantee, pending the commencement and disposal of a dispute by arbitration. This decision, made in the case of Maxwell Accent JV Sdn Bhd v Kuala Lumpur Aviation Fuelling System Sdn Bhd, underscores the court's willingness to intervene in such matters.
The court's stance is based on the principle that there is no reason to adopt a different course when a party seeks an injunction from the English courts but has chosen not to refer a dispute to arbitration and apply for interim measures. This principle is not exclusive to the UK, as similar cases have emerged in the Far East, where there has been a rise in the number of injunctions seeking to restrain a call on a performance bond based on unconscionability.
Unconscionability, as a ground to restrain a call on a bond, can be excluded by the parties using express terms in the underlying contract. However, in cases where unconscionability is not explicitly ruled out, the court may consider it unconscionable for a party to make a demand on a performance bond if the effect of doing so will negate an Adjudication Decision, as held in the Samsung C&T Corp v Soon Li Heng Engineering Pte Ltd case in Singapore.
The use of arbitration interim measures seeking to stop calls on autonomous bonds cannot be discounted. Emergency Arbitrators, in international arbitration, typically apply 'transnational concepts' when considering interim measures, focusing on the preservation of the status quo between the parties.
It is worth noting that the Singapore Court of Appeal decision in CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd is compelling, but it has not been tested in other jurisdictions. The decision held that a clause seeking to limit the right to an equitable remedy is not an ouster of the jurisdiction of the court.
In Malaysia, the Court of Appeal has also restrained an employer from calling on a bank guarantee on the basis that it was unconscionable to do so, as seen in the case of Dunggon Jaya Sdn Bhd v Aeropod Sdn Bhd. However, it is understood that the issue of the sum demanded by the beneficiary being more than the beneficiary's entitlement under the underlying contract is an issue for the beneficiary and principal rather than the guarantor.
Despite these cases, it is anticipated that express terms will be increasingly used across jurisdictions to exclude the discretion of the court to order an injunction in the context of an alleged unconscionable call. It is crucial to carefully review and understand the terms of the contract to determine the potential for such exclusions.
Finally, it's important to note that the matter of specific courts recognizing unfair actions as independent grounds to prevent calls on bonds or guarantees remains largely unexplored in the provided search results. The Shapoorji Pallonji case, which did not address the situation where an Emergency Arbitrator had been appointed before the call and Yumn had in turn applied to the English Courts, also highlights the need for further exploration in this area.
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