26/02/2021 Briefing

In Construgomes & Carlos Gomes SA v Dragados Ireland Limited, BAM Civil Engineering & Banco BPI SA, the first two-named defendants formed a joint venture (the “Contractor”) for the construction and operation of the New Ross Bypass.  Aspects of the works were sub-contracted to the plaintiff (the “Sub-Contractor”).

In accordance with the sub-contract, the Sub-Contractor provided an on demand bond in favour of the Contractor (issued by the third-named defendant, the “Bank”).  Under the bond, the Contractor was entitled to payment from the Bank (up to a guaranteed amount of €134,713.45) if the Bank received from the Contractor a request for payment and a declaration that the Sub-Contractor had violated the terms of the sub-contract and, having been requested to pay the above amount, had failed to so do.

A payment dispute arises

In February 2019, issues arose and the Contractor withheld payment.  As works were reaching a conclusion, the Sub-Contractor left the site in March 2019, acknowledging that there were some tasks left for it to complete.  The Contractor requested that the Sub-Contractor return to repair defects in the works but that did not occur. When the Sub-Contractor submitted its final account in April 2019, the Contractor refused to pay it.

The Sub-Contractor referred the dispute to adjudication under the Construction Contracts Act 2013, seeking payment of circa €1.1m.  The Contractor claimed by way of defence circa €1.5m under headings that included liquidated damages and the cost of repairs to defective works carried out by the Sub-Contractor.  In November 2019, the adjudicator found in favour of the Sub-Contractor, awarding it €388,274 (which was paid by the Contractor).  €1,275 only of the Contractor’s claim was allowed.

The Contractor indicates it will call on the bond

On the day of the adjudicator’s decision, the Contractor notified the Sub-Contractor that it was in violation of the terms of the sub-contract due to a persistent failure to carry out the works, as a result of which the Contractor requested payment of the guaranteed amount, failing which it would demand payment on foot of the bond.

The Sub-Contractor disputed liability for the defects.  It said that the defects had already been raised by the Contractor during the adjudication, that the adjudicator had not awarded any sums in respect of them, and that the Contractor could not now claim separately for matters already dealt with in the adjudication process.  The Sub-Contractor described the demand for payment as a collateral attack on the adjudicator’s decision and contended that it was “tantamount to fraud in respect of the performance (sic) bond”.

The Sub-Contractor seeks an injunction to restrain payment on foot of the bond

The Sub-Contractor applied to the High Court for an injunction to restrain payment by the Bank to the Contractor, on the ground that the call on the bond was fraudulent.

The Contractor’s position was that the claim it now made for defects was different to that made in the adjudication process; further, the amount it now claimed included liquidated damages for delay under the sub-contract.

Had the issues now in dispute already been dealt with by the adjudicator?

The Court was satisfied that the Contractor had provided sufficient evidence to show that the claim for liquidated damages was separate to the issues dealt with in the adjudication.  (The claim before the adjudicator related to alleged failure to comply with a “key performance indicator”; the claim now concerned liquidated damages for delay by reference to the contractual completion date.)  The Contractor had paid the full amount ordered by the adjudicator and was now separately seeking its contractual entitlement to liquidated damages due to an alleged breach of contract.

As for defects, the Contractor appeared to have expressly excluded the cost of repairing defects that were previously identified in the adjudication; if it was not entirely clear that all such costs had been excluded, oral and/or expert evidence would likely be required at the full trial.  The current claim certainly included defects which (timing wise) could not have been included in the adjudication.  Whilst elements of the claim for the cost of repairing defects might not succeed, it was not seriously arguable that the only inference to be drawn was one of fraud.

What did the Court say about the status of the adjudicator’s decision?

Significantly, the court did not agree with the proposition that the responding party is compelled to make the entire of any potential claim in the course of the adjudication process or lose the right to make the claim entirely.

As set out in the Construction Contracts Act 2013, an adjudicator’s decision is binding until the payment dispute is finally settled by the parties or a different decision is reached in arbitration or court proceedings.  It was clear that a contractor could not unilaterally set off against an adjudicator’s award and that it remained open to the parties to seek to enforce their contractual rights separately, outside the adjudication process.

Would a conditional bond suffice?

During the course of the proceedings, the Sub-Contractor had offered to replace the on demand bond with a conditional bond pending the outcome of an arbitration, arguing that this would provide the Contractor with appropriate security in the event that its claim for liquidated damages was valid.  The Court did not find this acceptable.  A conditional bond would not be equivalent to the on demand bond: payment on foot of an on demand bond is autonomous from the resolution of any dispute arising in relation to the underlying contract.

What was the test for granting the interlocutory injunction sought?

Ultimately the question for the Court was whether, by making a claim which was not advanced in the course of the adjudication process, the Contractor acted fraudulently.  The Court considered the legal test applicable to the granting of an injunction to restrain payment on foot of a demand bond to be well settled in Irish law.

“The initial criteria normally applicable to an interlocutory injunction, namely, whether there is a fair question to be tried, is not the appropriate test as that would undoubtedly lead to the grant of an injunction in many instances in circumstances which would undermine the fundamental character of the bond ….. Instead, a higher test of “seriously arguable” applies.  The courts have also expanded upon what is meant by “seriously arguable” …..  in the particular context this is actually a very high threshold.  As the only ground upon which such an injunction might be granted has been identified as fraud, the case law indicates that the fraud relied on must be clear, obvious or established.”

Could fraud be inferred?  Yes, but it must be “seriously arguable that the only realistic inference to be drawn is one of fraud”.

What did the Court decide?

The Sub-Contractor had not made out a seriously arguable case of fraud and the Court dismissed its application for an injunction.

Key Takeaways

 The judgment is a helpful authority for a number of principles.

  • The courts will not lightly grant interlocutory relief to restrain payment on foot of an on demand bond (even where there is an unresolved dispute between parties) save in cases of fraud.
  • It remains open to the parties to seek to enforce their contractual rights separately outside of an adjudication process.
  • An on demand bond is autonomous from the underlying contract in accordance with which it was issued. We note that this conclusion was also reached in a recent decision of the Supreme Court of Appeal of South Africa which confirmed that an Employer did not have to first establish entitlement under the terms of the underlying (FIDIC Red Book) contract before it could make a call on the on demand, unconditional performance guarantee. (Clause 4.2 of the contract prevented the Employer from making a claim under the performance security except for an amount to which it is entitled under the contract in the event of several triggers listed in the clause.)  The Contractor failed to show that the parties had intended anything other than that the Employer would be entitled to payment before any underlying dispute between them was determined.
  • This leads to our final takeaway point: no matter what the underlying construction contract says, a bond is a standalone agreement. Make sure the intentions of the parties are accurately and consistently reflected as between the two agreements!

The authors wish to thank Blánaid Corrigan for her contribution to this article.