England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		St. Dunstan's House Fetter Lane, London
		23 January 2003

 


Subject Matter

Interim injunction application to restrain beneficiary from making a threatened call on a bond - principles applicable when application made by a party to the underlying contract against the other party to that contract who is, additionally, the beneficiary of the guarantee provided by the bond - Cargill International SA v Bangladesh Sugar and Food Industries Corp applied - application refused - threatened call not restrained

JUDGMENT 1. Background to the dispute
1. This claim seeks to restrain a threatened call on a bond which was provided by the bank of the claimant, a specialist supplier of software. The bond was ancillary to the provision of software services to, and under an agreement with, the defendant, a provider of services to mobile telephone users.
2. The background to the dispute is the development in the United Kingdom of Third Generation or 3G mobile telephone licences and services. The defendant, Hutchison 3G UK Limited ("H3G"), is a wholly owned subsidiary of Hutchison 3G UK Holdings Limited, the majority of whose shares are owned by Hutchison Whampoa Limited which is registered in Hong Kong and whose other shares are owned by NTT DoCoMo registered in Japan and KPN Mobile registered in the Netherlands. The object of H3G is to market the UMTS licence it acquired in 2000 to operate Third Generation mobile services in the United Kingdom. These services include the delivery of voice, data and other services to mobile users. For this purpose, H3G has had to procure complex hardware and software whose purpose is to manage and monitor the 3G network and to provide operation support systems for the network's operation.
3. TTI Team Telecom International Ltd ("TTI"), a company registered in Israel and which has been in business since 1992, specialises in the provision of such services and, in particular, markets a system with the appropriate name of Manager of Managers which is minimalised to MOM. This is a customised software system which provides management functions that have been developed by TTI and which comprises a suite of management features such as inventory, fault, performance, configuration and service management.
4. The parties entered into an agreement which came into effect on 14 February 2002, the "Effective Date", and a contract price, the "Total Price", of £13,485,610. The price was payable against the achievement of defined milestones, being the staged delivery and the successful acceptance testing of a defined part of the overall functionality to be provided by the MOM. A first or Advance Payment of £1,059,305 had to be paid by H3G on the Effective Date before TTI had performed any services or delivered any of the software. The next five Milestones provided for the five stages of delivery of the MOM split into Functionality 1 - 5. The contract Programme Schedule identified the Milestone Dates for the completion of each milestone and the lump sum Milestone Payments to be paid on each of these dates. Each of the first four Functionality Milestone Payments was for the same lump sum of £1,588,957 and that for the fifth was for twice that sum, £3,177,914. The five Milestone Dates following the Effective Date were stated to be the last days of each month from March to June 2002 and 2 September 2002. The programme also provided for further Milestone Dates, 2 September 2003 and 2 September 2004, being the dates for the acceptance of upgraded MOM for 2003 and 2004.
5. The agreement also provided that TTI should procure a bond, described in the agreement as "an advance payment bond" in the form appended to the contract in respect of the Advance Payment. A bond in similar but not identical terms guaranteeing payment to H3G by TTI for the same sum as the Advance Payment, £1,059,305, was subsequently procured from Bank Leumi Le Israel with the same date, 14 February 2002, as the Effective Date. The current dispute arises because H3G gave notice of its intention to draw down the total amount guaranteed by the bond on 12 November 2002 in circumstances in which TTI disputes H3G's entitlement to do so. Thus, as TTI believed, H3G was threatening a breach of its obligations relating to that bond contained in its agreement with TTI. TTI seeks an interim injunction to prevent that draw down and consequent perceived breach of the agreement from occurring.
6. This injunction application was started by a without notice application for an interim injunction to restrain the threatened call on the bond which was heard by me during a telephone application on 18 November 2002. The application was granted. At a with notice hearing on 19 November 2002, the interim injunction was replaced by an undertaking given by H3G not to call the bond until the hearing of TTI's full application for an interim injunction. At the conclusion of that subsequent hearing on 9 December 2002, 1 reserved judgment. The bond was about to expire and, to avoid it being called pending the determination of TTI's application, TTI agreed to pay the sum bonded into court to abide court's decision on its application for an interim unction. If the injunction application succeeds, this sum will be repaid to TTI but if it is dismissed, the sum will be paid to H3G in obviate a call on the bond.
7. There are, of course, three parties and two separate contracts to consider. First, there are the two parties to the bond, being H3G and the bank. Any call on the bond would be made under this contract to which TTI is not a party. TTI is, however, vitally interested in any call since the bond was provided by TTI's bank under its contractual banking arrangements and, if the bond was to be called, that bank would immediately debit TTI with the sum it had paid pursuant to the call. In addition to having to fund the call, TTI's credit facilities and commercial standing might be affected although I should stress that there was no evidence that either of these would in fact be affected by H3G's threatened call.
8. TTI's only direct contractual interest in the bond arises out of its separate contract with H3G whereby TTI agreed to procure the bond and H3G agreed to the circumstances under which it could make a call on TTI's bank under the bond. TTI's application is based on H3G^'s threatened breach of contract in threatening a call in circumstances that are not provided for in the agreement with TTI.
9. The application is, therefore, one for interim relief pending the full trial of TTI's claim to restrain a threatened breach of contract and one of the questions I must decide is what test is applicable to the exercise of my discretion to grant interim relief. In particular I must decide whether the applicable test is the traditional American Cyanamide test (American Cyanamide Co v Ethicon Ltd [1975] AC 396, HL) so that TTI must show that there is a serious issue to be tried and that the balance of convenience favours the grant of an interim injunction in its favour. Alternatively, I must decide whether, since a call on a bond is in issue, TTI must overcome a higher hurdle and show that H3G's call, if made, would amount to fraud, dishonesty or bad faith on the part of H3G. In other words, I must decide whether the appropriate test in determining whether or not to grant TTI an interim injunction to restrain H3G from making a call on a bond is similar to the test that would be applicable if TTI was to seek to restrain the bank from paying that call.
2. The background facts
10. A significant volume of factual and documentary evidence was filed by both TTI and H3G to fill in the background to H3G's threatened call- on the bond. Essentially, there were significant delays in progress and in the provision, testing and bringing into service of the programmed functionality and the relevant milestone dates were not achieved as programmed. However, the reasons for and causes of these delays were and remain disputed.
11. TTI, in summary, alleged that a new Project Plan in the form of a series of revised Programme Schedule Milestone dates was agreed by the parties in late March or early April 2002, a change necessitated by H3G's inability to provide the information and data storage facilities required by TTI which H3G had a contractual obligation to supply timeously. Some of these essential matters were not provided at all and others were provided later than required. This would have inevitably delayed the projected launch date of the Third Generation network by at least six months. This led H3G to reduce the scope of the functionality required by Milestones 1 to 5 and to bring forward part of the functionality of Milestone 3 into Milestone 2. These changes were introduced so as to enable H3G to launch a reduced service following the achievement of Milestone 3. A further change was unilaterally imposed by H3G in late June 2002 whereby what amounted to a new Milestone was introduced requiring the MOM to satisfy a new test called the Business Readiness Test. Further changes were also instructed as to the content of Milestone 2. Finally, a new testing requirement was imported which involved a yet further test, a Production Readiness Test. All the required tests on Milestones 1 and 2 were successfully completed on 3 November 2002.
12. Soon afterwards, on 13 November 2002, TTI suggests that 03G cynically and without warning served a written notice terminating the agreement and informed TTI of its intention to draw down the full amount of the bond. The termination and draw down were, TTI speculated, intended to mask a change of plan by H3G to the effect that H3G was no longer wanting the remaining stages of the MOM that TTI had contracted to provide.
13. H3G sees the situation very differently. Its case is that initial delays did occur but these were caused by TTI's failure to mobilise sufficient resources or to plan the works properly. A revised Project Plan was then produced by TTI at H3G's request to reflect what was achievable in the new situation resulting exclusively from TTI's breaches of contract. These new Milestone dates were not contractually revised dates but were guideline dates that TTI was to work towards in an attempt to minimise the effects of its breaches of contract. Milestone 1 was still incomplete in mid-June, despite a "revision" of the completion date from 31 March 2002 to 3 May 2002. At that point, a Conditional Acceptance Certificate in respect of Milestone 1 was issued with the Barcode functionality still incomplete. This functionality was later supplied in an incomplete form by 19 July 2002 and, even now, that functionality remains incomplete. Milestone 2 had still to be completed when the notice terminating the agreement was served. The changes to functionality and the other testing changes were all introduced as a means of trying to alleviate delays and inconvenience that were being imposed on H3G by TTI's breaches of contract. H3G stressed that it had repeatedly brought its concerns to TTI's notice, most recently at a high level series of meetings in September 2002, but with little effect on overall progress.
14. I cannot attempt to resolve the disputes as to whether the effective causes of the changes to the functionality being provided in each Milestone, the delays and the failures to achieve the Milestone Dates that have occurred were breaches by TTI or H3G of their respective contractual obligations. The resolution of these disputes will require a detailed consideration of much factual, documentary and expert evidence and the cross-examination of various witnesses. What is clear is that each party's factual and technical cases raise serious issues to be tried and there is no obvious basis for concluding that the case of either- TTI or H3G has a real prospect of success.

3. The relevant contractual terms

15. The agreement between TTI and H3G consisted of Terms and Conditions and Appendices, one of which, Appendix A, consisted of a Statement of Work in 9 Annexes which included a Specification, a Project Plan and a Facilities Requirement Document. The scope of work was defined in clause 2 as involving the development and supply of the MOM which had to conform with all the requirements of the Specification. This work was to be performed in accordance with and by the dates specified in the Programme Schedule which was contained in Appendix B.
16. The Total Price was £13,485,610 which was made up of items defined in clause 15. These consisted of a variety of product, library, miscellaneous and support services items. Within this overall Total Price, spread in an undefined way through these items and their constituent parts, was an amount of £900,000 for the required Hewlett-Packard Open View Licences. The Total Price was to be paid in the instalment payments that were linked to the Milestones. There was no defined or obvious linkage between the priced items in clause 15 and the amount of each lump sum stage payment provided for each Milestone in Appendix B. In other words, the agreement did not identify the relationship, if any, between the make up of the priced items listed in clause 15 and that of the lump sum Milestone Payment Amounts.
17. H3G was to pay the Total Price by making the lump sum Milestone Payments on the relevant Milestone Date or on such later date as that Functionality Set was Accepted. The agreement provided that any liquidated damages payable for delayed Acceptance under clause 13 could be deducted from a Milestone Payment. The agreement also provided for the payment of General Damages for additional costs incurred as a result of a Conditional Acceptance and any resulting delay in Acceptance of the relevant Milestone, for the provision of general warranties by TTI linked to a Limits of Liability provision limiting TTI's liability for loss and damage arising out of the agreement to a sum equal to the Total Price and for an accounting exercise to be carried out following a termination of the agreement by H3G to determine what final sum should be paid by TTI to H3G or vice versa taking into account the additional cost to H3G of completing the agreement and the value of any elements of the MOM supplied and retained by or paid for by H3G.
18. The agreement made no express provision for the repayment of the Advance Payment or any part of it. This notable omission occurred despite the fact that, for much of the period during which functionality was being prepared, delivered, installed and tested TTI would have received a total sum in excess of the value of the work provided. This situation would have arisen because the Advance Payment was so large and because the Total Price was being paid in a small number of relatively large payments that would not be directly linked to the value of the work that had been performed immediately prior to payment. This omission gave rise to a submission by TTI that no part of the sum paid as an Advance Payment was recoverable by or accountable to H3G even if H3G terminated the agreement and even if that termination left TTI in credit when all payments including the Advance Payment it had received were set against both its overall entitlement to payment and its liability in to pay damages. In consequence, H3G submitted, the agreement did not allow H3G to exercise or claim under the bond following its termination of the agreement since the agreement only allowed the bond to be exercised in relation to, and the bond only guaranteed, TTI's obligation to repay the Advance Payment but, on analysis, TTI had no such obligation.
19. The relevant terms of the agreement relating to the Advance Payment and the Advance Payment bond are as follows:

"4. ADVANCE PAYMENT BOND

4.1 TTI shall procure that Bank Leumi Le Israel shall enter into an advance payment bond in the form of Appendix H ("the Advance Payment Bond") in respect of the payment for Milestone UKO.

4.2 The Advance Payment Bond will only be exercised if this agreement is terminated in accordance with Clause 35.

4.3. The Advance Payment Bond will be effective until 31 December 2002 and will be extended as H3G may deem necessary at that time to cover any additional obligations of TTI under this agreement."

"16 INVOICING AND TERMS OF PAYMENT

16.1 Subject to and in accordance with the terms of this agreement, H3G shall pay the respective Milestone Payments to TTI in accordance with, and upon achievement of, the Milestone Dates set out in the Programme Schedule."

"24. LIMITS OF LIABILITY

24.1 TTI's liability in respect of any loss or damage suffered by H3G and arising out of or in connection with this agreement howsoever arising shall not exceed the Total Price except in respect of indemnity claims ... where TTI's liability shall be unlimited.

. . .

24.3 In no event shall either party be liable in contract, ... for:

24.3.1 any economic losses (including without limitation, loss or damages in respect of any such loss of revenue, anticipated or actual profit, failure to realise expected savings or loss of data); ...

24.8 The remedies set out in this agreement are the sole and exclusive remedies of each Party.

24.9 This Clause 24 shall survive termination of this agreement."

"35. H3G'S RIGHTS OF TERMINATION

. . .

35.2 Termination for Cause

35.2.1 H3G may terminate this agreement by written notice if TTI is in persistent breach of any term of this agreement (which for the purposes of this Clause shall mean any breach of the same or similar nature occurring at least three times in. any six month period) or is in material breach of this agreement, and fails (where the breach can be remedied) to start action to correct and to complete the correction of this breach within timescales stipulated by H3G in the written notice of termination ... Termination shall be effective from the date of the written notice, or where the breach can be remedied, upon the date of a subsequent written notice to be given by H3G to TTI to the effect that the correction of the breach has not been completed within timescales stipulated in the previous notice.

35.3.1 H3G may terminate this agreement immediately by written notice if TTI fails to obtain Acceptance of the MOM by a date falling 90 days after the time period specified in the Programme Schedule for Acceptance for reasons other than Force Majeure or the default and/or delay of H3G and/or its suppliers or contractors.

35.4 H3G's Costs Incurred Due to Termination: If H3G terminates this agreement pursuant to Clause ...35.2 ...:

35.4.1 H3G shall be entitled to complete the supply of the MOM itself in accordance with this agreement, or to enter into a contract with a third party to effect such completion, such third party being selected by H3G in accordance with H3G's procurement procedures; and

35.4.2 TTI shall pay to H3G the additional reasonable amount by which the cost to H3G of completion of this agreement pursuant to Clause 35.4.1 exceeds the Total Price, ...

35.4.4 H3G may deduce the said amount from such amounts (if any) as are due to TTI and if appropriate, recover any excess as a debt due from TTI, save that H3G shall take all reasonable measures to mitigate any additional costs; ...

35.9 Subject to Clause 35.4.1 H3G shall pay TTI for all elements of the MOM properly supplied to and Services properly performed for it under this agreement up to the date of termination to the extent that H3G has not already paid for them and provided that, in respect of such work:

35.9.1 payment shall only be made in respect of work which H3G wishes to retain and TTI shall deliver to H3G all the aforesaid which has not already been so delivered; and

35.9.2 in respect of any elements of the MOM not so retained and returned by H3G to TTI (if delivered) and paid for by H3G, H3G may recover an amount equal to such payment as a debt due from TTI."

"Appendix B Programme Schedule

(Milestone) UKMO

(Deliverables) Advance Payment

(Milestone Date) Effective Date

(Payment Amount) £l,059,305."

20. The parties agreed that there was no material difference between the wording of the draft bond Appended to the agreement and that of the bond provided by the Bank to H3G. The bond was in these terms:

"Our Guarantee No:

Valid until 15 February 2003

In consideration of the Purchase Order Contract dated 30 January 2002 which incorporated the terms of the agreement dated 30 January 2002 ("the Agreement") entered into between...TTI ( ... "Supplier") and H3G...("Buyer") ... for the supply of a Manager of Managers ("the System") and in further consideration of the agreement stipulating that TTI shall give Buyer a Performance bond under the fulfilment of the Supplier's obligations under the Agreement.

Now we the undersigned, Bank Leumi Le Israel B.M. hereby issue this irrevocable undertaking "Performance Bond") to guarantee such payment to Buyer by Supplier up to the amount set forth below, in the measure and to the extent that Supplier should fail to carry out its material obligations under the agreement, during the period starting after receipt of the down payment of E1,059,305 as per the Supplier's written advice to us and ending no later than 15 February 2003 (and that date may be extended in the manner stated below) ... provided however that the total responsibility under this performance bond is limited to the sum of £1,059,305 ... subject to the reduction clause stated below:

The Performance Bond will be automatically reduced by the value shown. on any reduction certificate (s) received by the Bank,- which has been issued and signed by Buyer and Supplier.

The Performance Bond will be automatically extended for one year if the Bank shall receive, prior to the expiry date, a written notice from Buyer stating that an automatic extension of the Performance Bond is required under clause 5 (sic) of the agreement, however not beyond 15 February 2005.

Claims against the Bank on account of this present Performance Bond shall be made on presentation of the following:

A. Buyer's certificate stating (I) that the Supplier is in breach of its obligations under the agreement (II) the respect(s) in which the Supplier is in breach, and (III) the amount claimed represents the extent of the Supplier's liability to repay the said Advance Payment.

B. A copy of the Buyer's written notice to Supplier of its intention to draw down the present Performance bond, such notice to be dated at least 5 days prior to the attempted draw down for a sun up to the amount defined above.

This Performance Bond is issued subject to the International Standby Practice I.C.C. Publication 590 ('ISP981) and any matter not addressed by ISP98 shall be governed by and construed in accordance with English Law and the parties submit to the exclusive jurisdiction of the Courts of England.

This Performance Bond is personal to the Buyer and is not transferable or assignable."

21. All testing of Milestones 1 and 2, including the Production Readiness Test introduced at a late stage during the course of TTI's work on Milestone 2, was successfully completed on 3 November 2002 and successfully installed into H3G's system on 6 November 2002. Milestone 2 was still subject to a Conditional Acceptance Certificate. TTI contends that there had by then been little progress on Milestones 3, 4 and 5 since H3G had indicated that it was not prepared to discuss or provide the necessary date for these Milestones, an indication and lack of provision which H3G strenuously refutes.
22. On 12 November 2002, with little or no warning, H3G served two notices on TTI. The first terminated the agreement and the second gave notice of 113GIs intention to draw down the total amount guaranteed by the Advance Payment bond. The termination notice stated:

"We refer to the agreement. There have been a number of significant problems with your supply of the system and services under the agreement and it is now clear to H3G that you are unable to complete the supply of the MOM as envisaged under the agreement. H3G is therefore terminating the agreement forthwith and this letter is formal written notice, under the terms of the agreement that the agreement is terminated as of today's date.

H3G is exercising its right of termination under clause 35 of the agreement in particular clause 35.3.1 ("termination for delayed acceptance") which provides that H3G may terminate the agreement immediately by written notice if TTI fails to obtain acceptance of MOM by a date falling 90 days after the time period specified in the Programme Schedule (for reasons other than force majeure or the default and/or delay of H3G and/or its suppliers or contractors). As you are aware, TTI has not met any of the Milestone Dates in the Programme Schedule to the agreement, and in particular H3G will rely on TTI's failure to meet the following:

(a) Acceptance of Functionality^, 1 - Effective Date 31 March 2002;

(b) Acceptance of Functionality 2 - Effective Date 30 April 2002;

(c) Acceptance of Functionality 3 - Effective Date 30 May 2002;

(d) Acceptance of Functionality 4 - Effective Date 28 June 2002;

(e) Acceptance of Functionality 5 - Effective Date 2 September 2002.

In the alternative, and without prejudice to the above, H3G relies on its right of termination under clause 35.2.1 of the agreement ("termination for breach") in that the above failures to achieve acceptance comprise both persistent and material breaches of the Agreement, and are not capable of being remedied. H3G reserves the right to rely on other persistent and/or material breaches of the Agreement either in its original form or in the event (which H3G denies) that it has been amended since execution.

In the alternative, and without prejudice to the above, TTI's failures to achieve acceptance comprise repudiatory breaches of the agreement, which repudiatory breaches H3G now accepts.

... H3G reserves its rights generally under the agreement or otherwise including its rights to claim liquidated damages under the agreement and recover all payments made to TTI in accordance with clause 35.4.9.2 of the Agreement."

23. The second notice stated:

"We hereby give notice that H3G intends to draw down the total amount guaranteed by the Advance Payment bond in relation to the Agreement.''

4. The parties' contentions

24. TTI contends that the effect of clause 4 of the agreement is that H3G may not threaten or actually make a call to draw down the bond save in strict compliance with the terms of both clause 4 and the bond itself. A threat has been made, following the receipt by TTI of its entitled five clear days warning of a proposed draw down, of a draw down to which H3G is not entitled. TTI is therefore entitled to injunctive relief to prevent the threatened call in support its rights under the agreement and so as to prevent the threatened breach of contract. TTI essentially makes the following discrete allegations as to why the threatened draw down would be unlawful:

1. On the true construction of both the agreement and the bond, a valid call must relate to H3G^'s entitlement to be repaid the Advance Payment. It is therefore a condition precedent to a call that the Advance Payment is repayable when the call is made. The Advance Payment is not repayable at all or, alternatively, is only repayable where there has been a total failure of consideration or the agreement is capable of being rescinded. Thus, the necessary condition precedent for a valid call is absent and any call would be unlawful.

2. The call can only be made if the agreement was terminated lawfully. Thus, unless and until the parties agree, or a court has determined, that the agreement was lawfully terminated under clause 34, no call can be made.

3. The Milestone Dates were varied by agreement yet the contract Milestone Dates relied on by H3G to contend that the Milestone Dates were not achieved were the unvaried dates. Thus, the purported entitlement to terminate based on the original dates is clearly erroneous. Any call would therefore be in breach of faith.

4. There were no substantial breaches of the agreement. Thus the agreement could not be terminated, in particular, on the grounds that any or all of Milestones 1 to 5 had not been completed or Accepted timeously. Thus, although a valid termination is a precondition to a call, the purported termination was invalid.

5. The termination notice did not comply with the terms of clause 34. Moreover, any breach of the agreement capable of being relied on had been waived or not acted upon by H3G promptly enough. Thus, although a valid termination is a precondition to a call, the purported termination was clearly invalid since the required procedure for termination was not followed.

6. Overall, the termination notice and call were not issued by H3G with a genuine intention of relying on a contractual entitlement to terminate or to call but with an ulterior motive, namely to provide a means for unjustifiably reducing the scope of the agreement and the MOM being supplied. Thus, the threatened call was not genuine and was made in breach of faith.

25. On each of these grounds, TTI contends that it can show, at the very least, real prospects of success and the balance of convenience favours restraining H3G's threatened breach of the agreement in threatening an unjustified call until the trial of all disputes arising out of the threatened call and of the termination of the agreement.
26. H3G takes issue with every one of these propositions. However, its starting point is to take what might shortly be described as a minimal jurisdiction approach to TTI's application. This approach is that I should not embark on a detailed consideration of any of TTI's suggested grounds entitling it to interim relief since a court will only consider restraining a call by someone in H3G's position if there are similar circumstances to those needed before Bank Leumi Le Israel could be restrained from meeting a call by H3G, namely fraud, dishonesty or, possibly, seriously inequitable conduct. No such serious circumstances are alleged in this case. Thus, it is not open to TTI to seek an injunction and one should not be considered, irrespective of the merits of the grounds relied on by TTI.
27. However, H3G also challenges each of the six grounds contended for by TTI as founding an entitlement to relief so that, as it sees the situation, there are no serious issues to be tried. In any case, the balance of convenience is overwhelmingly against the grant of injunctive relief since, on any view, damages are and should be an adequate remedy.
28. I was provided with a clear and detailed review of the relevant authorities concerning the circumstances in which a court may grant quia timet relief to a party by restraining another party with whom it is in contract from making a call on a bond that has been provided in relation to that contract. That review showed that H3G^'s minimal jurisdiction approach is not necessarily applicable when the call is still threatened and it is the potential caller and not a bank that is being proceeded against. It will therefore be necessary for me to consider both H3G^'s minimal jurisdiction approach and TTI's serious issue to be tried approach and also to consider an intermediate approach to the effect that a court should be chary of intervening but, if there are strong grounds for doing so based on the overriding justice and equity of the situation, a court can nonetheless intervene to restrain a threatened call and so as not to leave a party in TTI's position to a remedy in damages.

5. The law

5.1. Introduction

29. Although this case is concerned with a contract describing itself as a performance bond, the principles governing the court's supervisory jurisdiction in relation to a beneficiary's threatened call are not limited to bonds. This bond is subject to ISP98 which governs International Standby Practices which are stated in Rule 1 to include documentary standby letters of credit. Such documents include performance, financial and direct pay standby letters of credit and any similar undertaking which is independent, irrevocable and documentary in nature. Thus many other performance, bank and retention bonds and guarantees are subject to the same considerations.
30. All these cases are concerned with situations where an issuer, whether bank, financial institution or other independent party, agrees irrevocably two make a payment to a beneficiary against the presentation of documents without any consideration of the ^-underlying transaction or the validity of the grounds for, or the merits of, that payment to the beneficiary. The issuer has a sole overriding obligation before making payment which is to ensure that the documents that are presented conform strictly and in all respects with the requirements for presented documents that govern the documentary credit in question. These credits are used to finance, secure or assist an underlying commercial transaction whether of sale, services or the provision of work and materials and to give comfort to one party to that transaction that the other party will honour or discharge a payment obligation to which that underlying transaction subjects it to.
31. This faith in and reliance upon the integrity of standby payments is vital for international and, indeed much national, commercial activity. It is for this reason that English courts have developed a clear non interventionalist approach when an issuer making payment to a beneficiary is asked to desist by a third party, usually the other party to the underlying transaction who will also be the customer of the issuer and who will have to reimburse the issuer when the issuer claims reimbursement for its payment under the documentary demand. Only if the issuer is about to make payment to the beneficiary in circumstances where fraud, dishonesty or bad faith in relation to the demand is shown to exist or where the original issue of the documentary credit was procured by fraud or, possibly, where the underlying transaction was itself procured by fraud will a court intervene to restrain payment by the issuer to a beneficiary. This approach conforms to the principles governing documents to which ISP98 applies since Rule 1.05 provides that it is only defences raised by an issuer to a payment demand that are based on fraud, abuse or similar matters that are to be left to the applicable law.
32. However, the third party potentially interested in the payment, who is both a party to the underlying transaction and who procured the credit and stands to loose out if the standby credit is called upon and paid out by the issuer, will always have a vital concern if the issuer is about to make a payment in circumstances where the beneficiary has no ground to make a documentary^, demand or is doing _so in contravention of its agreement with the third party contained in the underlying transaction.
33. Notwithstanding the third party's concern to prevent a wrongful payment by the issuer to the beneficiary, the English courts are reluctant to intervene on its behalf, albeit that the good standing of the issuer will not usually be affected since any intervention would stop a demand before it is made. The current approach of English courts to third party applications to restrain calls by beneficiaries on issuers under documentary credits was clearly and authoritatively stated by Morison J in Cargill International SA and another v Bangladesh Sugar and Food Industries Corp [1996] 4 All ER 563. This summary of the applicable approach was approved by the Court of Appeal in approving his decision (see [1998] 2 All ER 406). The judge stated:

"I start with the commercial purpose of a performance bond.

There is a wealth of authority concerned with the question whether and in what circumstances an interlocutory injunction may be granted (1) against the bank which issued the bond to restrain it from paying in accordance with its terms, and (2) against the beneficiary of the bond to prevent it from calling the bond.

The court will not grant an injunction in either case unless there has been a lack of good faith. The justification for this lies in the commercial purpose of the bond. Such a bond is, effectively, as valuable as a promissory note and is intended to effect the 'tempo^' of parties^' obligations, in the sense that when an allegation of breach of contract is made (in good faith) , the beneficiary can call the bond and receive its value pending resolution of the contractual disputes. He does not have to await the final determination of his rights before he receives some moneys. On an application for an injunction, it is, therefore, not pertinent that the beneficiary may be wrong to have called the bond because, after a trial or arbitration, the breach of contract may not be established; otherwise the court would be frustrating the commercial purpose of the bond. The concept that money must be paid without question, and the rights and wrongs argued about later, is a familiar one in international trade, and substantial building contracts. A performance bond may assume the characteristics of a guarantee, especially, if not exclusively, in building contracts, where the beneficiary must show, as a prerequisite for calling on the bond, that by reason of the contractor's non-performance he has sustained damage (see Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1995] 3 All ER 737, [1996] AC 199).

However, it seems to me implicit in the nature of a bond, and in the approach of the court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an 'accounting' between the parties in the sense that their rights and obligations will be finally determined at some future date. ... As far as I am aware, and no case was cited to me to suggest otherwise, the performance bond is not intended to supplant the right to sue for damages. Indeed such a contention would conflict with what I believe to be the commercial purpose of these instruments. ...

Therefore, the question arises as to why, if the beneficiary can sue to recover what he has actually lost, the seller (in this case) [ie the party in the analogous situation to TTI] should not be able to recover any overpayment. It would seem in principle, correct that if a performance bond does not exhaust one party's rights, it should not exhaust the rights of the other party." (pp 568 - 569)

5.2 Lack of good faith

34. A lack of good faith has for a long time provided a basis to restrain a beneficiary from calling a bond or guarantee. In Elian and Rabbath v Matsas [1966] 2 Ll R 495, the Court of Appeal intervened on the application of cargo owners to stop shipowners enforcing a guarantee which had been given by the cargo owners in favour of the shipowners to obtain the discharge of a lien over its goods that the shipowners were exercising in respect of demurrage. The shipowners then imposed a further lien over the goods for a different purpose. This involved further delay and a further sum had to be put up to release that second lien. Subsequently, the shipowners sought to enforce the guarantee in relation to the first demurrage claim. This threat was restrained since the shipowners had acted in bad faith in imposing a second lien as soon as the guarantee had been given for the purpose of obtaining from the shipowners a lifting of the first lien. Danckwerts LJ stated at page 498:

"It seems to me that if the shipowners were entitled immediately after obtaining the undertaking to claim a fresh lien and use it for the purpose of the undertaking, it would amount at least to a breach of faith in regard to the arrangement between the parties. Whatever may be the final result of the case, it seems to me this is an instance where the court should interfere and prevent what might be an irretrievable injustice being done to the plaintiffs in the circumstances."

35. The Singapore courts have developed this ground for intervention. In an appropriate case, the Singapore courts will restrain a call by a beneficiary where it appears that the call is being made without good faith. The courts will, however, only intervene where the beneficiary has acted so unfairly or with conduct that is so reprehensible or lacking in good faith that a Court of conscience would either restrain or refuse to assist the party in question.
36. Two recent cases illustrate this principle, both now reported in England in the Building Law Reports, the McConnell Dowell and Samwoh Ashpalt Premix PTE cases. The Samwoh case provides a good illustration of the operation of this ground of intervention. The judgment of the Judge-Advocate, LP Thean JA, illustrates this clearly:

". . . a demand under the performance guarantee can only be made when "the seller has failed or refused to fulfil his obligations under the contract". The seller's failure or refusal is a condition precedent to the buyer making a demand. An assertion to that effect is implied in a demand made by the buyer. In circumstances where it can be said that the buyer has no honest belief that the seller has failed or refused to perform its obligation, a demand by the buyers in my view is a dishonest act which would justify a restraint order. On the facts of this case, the demand made by the buyer was utterly lacking in bona fides."

Indeed, the evidence showed that the call or demand had been made by the beneficiary main contractor for payment under a performance guarantee provided by a piling subcontractor merely as a bargaining chip to compel the third party subcontractor to agree terms favourable to the main contractor on which the subcontractor would return to site to undertake further work.

37. The decision in this case largely accords with the decision in the Elian and Rabbath case and the dicta of Morison J in the Cargill International case since the main contractor in this case was, as described by the Judge-Advocate, "utterly lacking in bona fides". If a similarly clearcut case came before an English court, it would, in the light of these cases, grant restraining relief. However, the bad faith needed to found a restraining application must be both significant and clearly established.

5.2. Exceptions to the general principle

5.2.1. Introduction

38. TTI suggested that this approach to third party applications against beneficiaries to prevent calls on bonds adumbrated in the Cargill International case was not a general statement of the applicable principles governing English courts that I should follow even though it had received the approval of the Court of Appeal in that very case. However, a consideration of cases decided both before and since Morison J's decision and its confirmation on appeal that were cited in argument and have been decided in England, Australia, Singapore and Malaysia shows that there are three limited exceptions to this general non-interventionist approach.
39. The relevant cases are Elian and Rabbah v Matsas [1966] 2 Ll _R 495, CA; Wood Hall Ltd v The Pipeline Authority .and another (1979) 141 CLR 443, High Court of Australia; Potton Homes Ltd v Coleman Contractors Ltd (1984) 28 BLR 19, CA; Trafalgar House Construction Ltd v General Surety and Guarantee Co Ltd [1996] 1 AC 199, HL; Lorne Steward plc v Hermes Kreditversicherungs AG and another, unreported, 22 October 2001, Garland J; Gold Coast Ltd v Caja de Ahorros Del Mediterraneo and others [2002] 1 Lloyd's Rep 617, CA; Samwoh Asphalt Premix PTE Ltd v Sum Cheong Piling PTE Ltd [2002] BLR 459, Court of Appeal Singapore; McConnell Ltd v Sembcorp Ltd [2002] BLR 450, Woo Bih Li JC, High Court of Singapore.

5.2.2. No consideration or performance provided in underlying contract

40. The starting point in England is Eveleigh LJ's judgment in the Potton Homes case in 1984. His judgment was obiter, extempore, given in an interlocutory appeal and as part of a two-judge Court of Appeal. He stated, at page 29:

"For a large construction project the employer may agree to provide finance (perhaps by way of advance payments) to enable the contractor to undertake the works. The contractor will almost certainly be asked to provide a performance bond. If the contractor was unable to perform because the employer failed to provide the finance, it would seem wrong to me if the court was not entitled to have regard to the terms of the underlying contract and could be prevented from considering the question whether or not to restrain the employer from the mere assertion that a performance bond is like a letter of credit."

41. This dicta has been followed in the High Court of Singapore in Kvaerner Singapore Pte Ltd v UDL Shipbuilding (Singapore) Pte Ltd (1993) 3 SLR 350, GP Selvan JC, where the buyers had failed to open a letter of credit as required by^, the underlying contract of sale and were restrained from demanding payment under a performance guarantee. This case was also decided on the basis of the bad faith of the buyers in failing to open the letter of credit yet attempting to call the related performance guarantee.

5.2.3. ^"See to it" or precondition of loss

42. The next potential exception first arose in the decision of the High Court of Australia in the Wood Hall Ltd case in 1979. This was a case where a contractor provided two guarantees, one a performance guarantee and the second a bank guarantee in lieu of the employer retaining 10 per cent retention. The contractor sought to prevent the employer calling these guarantees on the grounds that there had been no want of due and faithful performance of the work. The High Court held in favour of the employer. The guarantees, in their true construction, were demand guarantees. They were unqualified in their language. Had the guarantees been qualified and "see to it" in form, relief by way of declaration would have been granted to the contractor to obviate a call on demand without proof of entitlement by the employer.
43. This case has led to a line of authority in both the Federal and state courts in Australia. where bonds and guarantees provided by contractors in support of retention or advance payments have been construed with the aim of distinguishing those that are performance guarantees from those which are dependent on, or have as a precondition, the need by the caller to establish loss or an entitlement under the underlying contract to recovery or damages. These cases include Pearson Bridge (NSW) PTY Ltd v The State Rail Authority of New South Wales (1982) 1 ACLR 81, Supreme Court of New South Wales, Yeldham J, where the judge construed a bond to be arguably subject to a precondition of proof of an entitlement to exercise the underlying contractual remedy. He therefore granted an interim injunction restraining the employer from calling the bond pending the trial of the question of whether the employer had been entitled to determine the contract.
44. In England, there has built up a similar line of authority where the courts have had to distinguish performance or on demand bonds or guarantees which may be called without proof of loss from "see to it guarantees" which require such proof as a precondition of call. These authorities include the Trafalgar House case (a "see to it" bond) and the Gold Coast case (a performance bond). Had it been in issue in the Trafalgar House case, there seems little doubt that the court would have restrained the employer from calling the bond since there had been no prior proof of loss. The case in fact concerned a claim against the bondsman who, in the light of the ultimate decision of the House of Lords, successfully defended a call made by on the bond on the grounds that the demand was subject to prior proof of loss.

5.2.4. Incorrect documentation supporting the demand

45. This exception is most clearly illustrated in the as yet unreported decision of Garland if in the Lorne Stewart case decided in October 2001. There the bond required a payment demand to be made before the termination date as defined in the underlying contract but the demand was dated one day after that date. The judge granted interim relief pending trial restraining the bondsman from paying and the beneficiary from receiving payment because the demand was invalid. He concluded that a demand which could be seen from its face to have been invalid because it was made out of time was not a demand at all.

5.3. Summary of law

46. In the light of these authorities, the law may be summarised in this way:

1. A third party seeking to restrain a beneficiary from calling a bond must initially show that such an application is supporting an underlying entitlement or claim based on a breach by the beneficiary of the underlying contract or on some other cause of action or basis for injunctive relief such as fraud, restitution or a -breach of faith.

2. When a third party seeks to restrain a beneficiary from calling a bond, or from receiving the product of a call, the court's starting point is that a call will ordinarily only be restrained where there has been fraud in setting up or calling the bond or where there is a lack of a breach of faith by the beneficiary in threatening a call.

3. The basis for a contention of a breach of faith must be established by clear evidence even for the purposes of interim relief. A breach of faith can arise in such situations as: a failure by the beneficiary to provide an essential element of the underlying contract on which the bond depends; a misuse by the beneficiary of the guarantee by failing to act in accordance with the purpose for which it. was given; a total failure of consideration in the underlying contract; a threatened call by the beneficiary for an unconscionable ulterior motive; or a lack of an honest or bona fide belief by the beneficiary that the circumstances, such as poor performance, against which a performance bond has been provided, actually exist.

4. In addition, where it appears that the call would be a nullity, a court will intervene to restrain that invalid call. Examples are where a condition precedent to a call has not yet been fulfilled; where the bond is a "see to it" bond necessitating prior proof of loss by the beneficiary or poor performance by the third party which has not yet been established; or where the demand or the supporting documents show that the demand does not conform to the requirements imposed by the bond for a valid demand.

5. Otherwise, a threatened call will not be restrained. In particular an allegedly incorrect calling of a performance bond will not be restrained merely because the factual basis of the call arising out of the underlying contract is disputed. Thus disputes as to whether a breach of contract, a determination of a contract for cause, a repudiation of a contract or the incurring of loss have occurred, where these are events covered by the performance guarantee, will not be allowed to found an application to restrain a call unless these disputes reveal a breach of faith by the beneficiary. Any consequent payment under the bond to the beneficiary which over-compensates the beneficiary may be recouped in the "accounting" exercise that the third party may claim in subsequent litigation against the beneficiary under the underlying contract.

6. If interim relief is being sought, a court will not intervene unless a third party has a real prospect of succeeding in both the entitlement to restrain the call and in its underlying claim which ought to be tried out before a call is made. This conforms to the overriding objective of proportionality required by the CPR.

7. Where these principles point to the grant of interim injunctive relief, it will also be necessary to consider and apply the balance of convenience.

6. TTI's grounds for seeking relief

6.1. General introduction

47. When the grounds on which TTI relies are considered, they fall into three separate categories:

A. The call was made in bad faith. This permeates all the grounds relied on.

B(1). The threatened call was subject to an unfulfilled condition precedent (grounds 1 and 2).

B(2). The call was based on a termination of the agreement which is in turn based on a termination notice which is bad on its face. The resulting threatened call is therefore subject to an unfulfilled condition precedent that the agreement has been terminated under clause 35 (grounds 4 and 5).

C. The call was based on breaches of the underlying contract which did not exist (ground 3).

6.2. H3G^'s call is subject to an unfulfilled condition precedent

6.2.1. Introduction

48. TTI's submits that, for the bond to be called and for a draw down to occur, H3G must serve a demand and that demand must be accompanied by a certificate in the form required by the bond. The bond requires that certificate to state three matters, the third of which is: "the amount claimed represents the extent of the supplier's liability^, to repay the advance payment". Moreover, the purpose of the bond is solely to guarantee repayment of the Advance Payment when such is lawfully required by the agreement. However, the agreement does not provide for the repayment of the Advance Payment. Moreover, any claim for a repayment by H3G is not possible where there has been a termination of the agreement under clause 34 since H3G's sole remedies following a clause 34 termination are those provided for by that clause and clause 34 is silent as to repayment of the Advance Payment. Thus, H3G will be unable to state that the amount to be claimed, namely the full amount guaranteed, represents TTI's liability to repay the advance payment since it has and will have no liability to repay all or any part of that advance payment. It follows that no valid call can be made in the circumstances threatened by H3G's two notices dated 12 November 2002.

6.2.2 TTI's Advance Payment repayment obligations

49. It is first necessary to analyse the relevant terms of the agreement and the bond to see what the bond was guaranteeing and what guarantee the agreement required TTI to procure. The starting point is H3G's obligation to make an Advance Payment. The only provision for the payment of an Advance Payment was in the Programme Schedule in Appendix B to the agreement which provided that the first Milestone was a Deliverable described as an Advance Payment, which was to be paid on the Effective Date, being the date the last signature was placed on the agreement. By virtue of clause 3.1, this payment and all subsequent Milestone payments were to be paid in accordance with the Milestone Dates set out in this Programme Schedule.
50. Clause 4 required TTI to "enter into an Advance Payment bond" in the form of Appendix H which would only be exercised "if this agreement is terminated in accordance with Clause 35" . That draft stated on its face that the bond was issued by the Bank "in further consideration of the agreement stipulating that [TTI] shall give [H3G] a Performance bond for the fulfilment of [TTI's] obligations under the agreement". The guarantee was for "such payment to [H3G] by [TTI] up to [£l,059,305] in the measure and to the extent that [TTI] should fail to carry out its material obligations under the agreement ... provided however, that the total responsibility under this Performance bond is limited to the sum of the [£1,059,305]. . .".
51. It is to be noted that the draft bond does not, in terms, limit H3G's exercise of the guarantee or the making of a call to situations following a clause 35 termination of the agreement by H3G whereas, in clause 4 of the agreement, H3G agreed not to exercise the bond save in such circumstances. However, both the appended draft bond and the bond as actually provided stated on their face that the bond was issued in consideration of the agreement and for the fulfilment of TTI's obligations under the agreement. It must follow, therefore, that that limitation is clearly implied into the bond or is to be inferred.
52. It is also to be noted that the bond was entered into "in respect of" the Advance Payment, it was not "guaranteeing" that Payment. What the agreement required TTI to guarantee in the bond was whatever was provided by way of guarantee in the draft of the bond appended to the agreement. In other words, the guarantee was to be provided in relation to whatever sum up to a limit set by the size of the Advance Payment that represented "the measure and ... extent" of TTI's failure to carry out its material obligations following a clause 35 determination.
53. This analysis is in conformity with the obvious commercial purpose of the bond which is to guarantee H3G's potential loss that could arise if it had to terminate the agreement following default by TTI as a result of its obligation to make a large advance payment to TTI. Under the agreement, TTI was to be paid in instalments by stage payments which would not correspond precisely to the value of the work and services that had been performed by the date of that payment. This is because the elements of the Total Price defined in clause 15 were not directly or even indirectly linked to the stage Milestone Payments that had to be made by virtue of clause 16. This lack of synchronisation between the value of work performed and the size of individual stage payments was particularly acute given the large Advance Payment that H3G was to provide at the outset. It followed that, at any time during the work, TTI would have received in stage payments a significantly greater sum than the value of the MOM elements that it had provided. This imbalance would correct itself as work proceeded but if the agreement was terminated before the Scope of Work had been completed, H3G would be likely to have incurred loss, by way of payments that exceeded the value of work performed, of a sum that could be large but which would not exceed the size of that Advance Payment. The actual loss would only be capable of being identified once the clause 35 accounting machinery had been worked through.
54. It is therefore obvious that the parties intended that the bond should guarantee TTI's performance following a clause 35 termination by H3G so as to provide for any potential loss to H3G represented by an imbalance in TTI's favour between payments made and the value of work actually performed.
55. This commercial intention is given effect to by the wording of the bond. A draw down would not necessarily be for the sum bonded, which is for a sum equal to the size of the Advance Payment. Instead, the call would be for an amount which "represents the extent of [TTI's] obligation to repay the said Advance Payment" - This could clearly be any sum up to £l,059, 305. Thus, H3G would have to decide what loss had resulted from the termination and call for a draw down for that sum. Only one draw down following a termination is provided for since the accompanying certificate has to certify the extent of TTI's liability to repay the Advance Payment.
56. It is true that the bond provides for the sum guaranteed to be reduced but that reduction has to have been agreed to by both H3G and TTI and the provision for the reduction of the sum guaranteed by the bond is clearly linked to the provision in the agreement and the bond allowing H3G unilaterally to extend the lifetime of the bond on no more than three occasions at the expiry of the life of the bond for one year at a time. Since the overall loss that H3G might anticipate incurring following a determination in these later years might well be less than £1,059,305, it is understandable that the bond would provide a mechanism for extending its lifetime linked to one reducing the sum guaranteed. However, the bond can only be drawn down once and that following a clause 35 termination.
57. Notwithstanding these considerations, TTI contended. that the bond could not be drawn down in practice since this was only possible when H3G could certify that TTI was under an immediate liability to repay the Advance Payment following a termination. That could not occur after a termination since TTI's exclusive liabilities were to pay whatever sum, if any, arose from an application of the accounting provisions of clause 35. Thus, there never could be a liability to repay, or at best such a liability was confined to the unlikely situation that might arise if there was a total failure of consideration or a rescission of the agreement accompanied by TTI's restitutionary obligation to repay the Advance Payment in full.
58. It is intrinsically unlikely that commercial parties would go to the trouble and expense of arranging for a bond in a substantial sum from an international bank if that bond could either never or only in extremely unlikely circumstances be called. Such a construction is only possible if clear words achieve that result. However, a careful consideration of the accounting provisions of clause 35 shows that that result does not arise since TTI will have an obligation to repay the Advance Payment after any termination under that clause.
59. Clause 35.4.9.2 provides that "in respect of any elements of the MOM not so retained and returned by H3G to TTI (if delivered) and paid for by H3G, H3G may recover an amount equal to such payments as a debt due from TTI." Before this recovery entitlement has crystallised, the parties must ascertain what "payment shall be made in respect of work which H3G wishes to retain" (clause 35.4.9.1) . That valuation must be one that takes as its starting point the contract value of MOM elements contained in the prices of the deliverable items listed in clause 15 since it is those, and not the Milestone Payment Amounts, that define the contract value of component parts of the MOM. Those prices are subject to both abatement and to diminution provided for by the general law and by the Sale of Goods Act to account for any claim for breaches of the general warranties provided for in clause 23 and any surviving implied warranties as to quality and description. They are also subject to a contractual set off for liquidated damages for delay that H3G is entitled to provided for in clause 13.2.2 and for general damages for delay that H3G is entitled to "in lieu of liquidated damages" provided for in clause 13.3.2.
60. Against the value of TTI's work that H3G decides to retain must be set the sum paid by H3G for any elements of the MOM including any payment for MOM elements not yet delivered to H3G. Such payments would include the Advance Payment since that represented a payment made in advance of any delivery of MOM elements generally on account of the Contract Price. It follows that the net sum derived from this accounting exercise is reasonably to be described as: "the amount [that] represents the extent of [TTI's] liability to repay the said advance payment" since TTI's liability to pay H3G as a debt the sum derived from clause 35.4.9.2 is on analysis a liability to repay whatever part of the advance payment and the other Milestone Payments have been overpaid to TTI. In so far as that meaning of those words is not expressed, it is permissible to ascribe that meaning to them in their commercial context since any other meaning would defy commercial commonsense. Moreover, that meaning is one that is both permissible given the commercial context of those words, and is one which gives effect to the obvious intentions of the parties to both the agreement and the bond.

6.2.3. Conclusion - Advance Payment

61. It follows that TTI has no realistic prospect of showing that H3G is unable lawfully to provide the necessary certificate required by the bond as a precondition to H3G drawing down any or all of the sum guaranteed by the bond following a clause 35 termination. of the agreement. Moreover, although it is a condition of the bond that TTI has a liability to repay the Advance Payment, that. liability will arise under clause 35.4.9.2 whenever H3G has terminated the agreement under that clause since, on a true construction of the clause, the words "the extent of TTI's liability to repay the advance payment" means "the extent of TTI's liability to pay H3G as a debt under clause 35.4.9.2". In an extreme situation where nothing is payable, TTI still technically retains a liability to repay H3G but the extent of that liability would be nil.

6.3. Performance or "See To It" bond

6.3.1. Introduction

62. TTI contended that since a call can only be made if the agreement was terminated lawfully, no call can be made unless and until the parties have agreed or a court has determined that the agreement was lawfully terminated under clause 34. In other words, the bond is not a performance bond or a demand bond, despite it calling itself a performance bond. Instead, the guarantee that is provided for by the bond may, on strict analysis, only be called where H3G^'s loss has first been established. Such a bond is usually called a "see to it" bond.

6.3.2. The law

63. The distinction between a demand and a "see to it" obligation is that the former, unlike the latter, is one which must be honoured in accordance with its terms following a demand which is, on its face, regular and in conformity with the terms of the instrument. In such circumstances, unlike the latter type of obligation, the bank or other guarantor, is not concerned with relations between the supplier and the beneficiary or customer (ie those between TTI and H3G) nor with the question whether the supplier has performed his contractual obligations or not nor with the question of whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, without proof of conditions. The only exception is where there is a clear fraud of which the bank has notice (see Edward Owen Ltd v Barclays Bank [1978] 1QB 159, CA at page 171, per Lord Denning MR).
64. The nature of the guarantee must be determined from the words of the bond in its factual and contractual context having regard to its commercial purpose. The recent Gold Coast case provides guidance as to how to interpret a bond for this purpose. Tuckey LJ stated at pages 620 - 621:

"16. In Paget's Law of Banking (11th edition) under the heading "Contract of suretyship v demand guarantee" the authors say:

'Where an instrument (i) relates to an underlying transaction. between the parties in different jurisdictions; (ii) is issued by a bank; (iii) contains an undertaking to pay "on demand" (with or without the words "first" and/or "written") and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.'

. . .

17. There is a further feature which favours the buyer [contending for an old demand instrument] and that is that payment is to be made against a certificate. In IE Contractors Ltd v Lloyds Bank Plc [1990] 2 Lloyd's Rep 496 at p 500 Lord Justice Staunton observed:

'There is a bias or presumption in favour of the construction which holds a performance bond to be conditional upon documents rather than facts. But I would not hold the presumption to be irrebuttable, if the meaning is plain.'

18. In Paget there is a further passage under the same heading to which I have referred which says:

". . . In construing guarantees it must be remembered that a demand guarantee can hardly avoid making reference to the obligation for whose performance the guarantee is security. A bare promise to pay on demand without any reference to the principal's obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured.'

There is a passage to similar effect in Documentary Credits by Jack, Malek and Quest [2001] where the authors say at para 12(57):

'In particular ... a (demand) guarantee will not be construed only as payable only if a particular event has occurred simply because the guarantee sets out, without more, the event or events following the happening of which it is intended a demand may be made.'

What is said in these passages is illustrated by Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546 where the words of the instrument were:

'We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance.'

The court held that the bond was payable on demand despite the fact that it referred to the supplier's failure to perform the underlying contract about which there was a dispute. At p 549 Lord Justice Ackner (with whom the other members of the court agreed) observed:

"If the performance bond was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never safely be made by the bank except on a judgment of a court of competent jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely to enable the beneficiary to obtain prompt and certain payment.'"

6.3.3. Decision

65. Particular regard must be had to the fact that the bond was issued subject to ISP98. This document seeks to codify International Standby Practices and is applicable to standby instruments such as this bond. These instruments are subject to certain General Principles of which the most significant are:

"1.06 Nature of standbys

a. A standby is an irrevocable, independent, documentary and binding undertaking when issued and need not so state."

. . .

c. Because a standby is independent, the enforceability of an issuer's obligations under a standby does not depend on:

i the issuer's right or ability to obtain reimbursement from the applicant;

ii the beneficiary's right to obtain payment from the applicant;

iii a reference in the standby to any reimbursement agreement or underlying transaction."

"1.08 Limits to responsibilities

An issuer is not responsible for:

a. performance or breach of any underlying transaction;

b. accuracy, genuineness, or effect of any document presented under the standby; . . . "

66. These considerations suggest that the bond is a demand or performance instrument. This conclusion is reinforced by the following further considerations:

1. The language of the bond suggests that it is a demand bond. Thus, it states that claims should be made upon presentation^- of the defined buyer's certificate and a buyer's written notice to the supplier of its intention to draw down the bond without any additional qualification that the supplier should be, or be shown to be, in default or has been held liable to pay loss or damages.

2. The four criteria of a demand bond identified by Paget (see paragraph 63 above) are all present in this case. Thus, the bond: (i) relates to an underlying transaction between parties in different jurisdictions viz a buyer incorporated in England but whose shareholders are based in Hong Kong, Japan and the Netherlands and a seller incorporated in Israel; (ii) was issued by a bank; (iii) contained an undertaking which was the equivalent of an undertaking to pay "on demand"; (iv) contained no clauses excluding or limiting the defences available to the guarantor bank. This is in contradistinction to the guarantee in the Gold Coast case which, although ultimately held to be an on demand guarantee, stated that "any variation, amendment to or waiver given in respect of the [underlying agreements] will not limit, reduce or exonerate [the bank's] liability under this Guarantee ... ".

3. The sum guaranteed is made payable against documents and not against facts. The obligation being guaranteed, being the carrying out of material obligations under the agreement, was set out to identify the happening on which it was intended that the demand could be made.

67. On analysis, the only real basis that underlay TTI's contention that the bond was a "see to it" bond was this argument:

1. The agreement continued in force unless "terminated earlier in accordance with the provisions of the agreement" (clause 3.2).

2. The agreement could only be terminated earlier than the contracted for date by H3G if it used clause 35. That clause specified a number of events that justified an early termination by H3G, one of which was the presentation of a winding up petition against TTI. Clearly there had actually to be in existence a winding up petition before that ground for termination existed. Thus, a termination would not be lawful unless a winding up petition had actually been served on TTI.

3. If an actual winding up petition had to precede a clause 35 termination, it ought to follow that, in relation to the other grounds for termination set out in clause 35, an actual termination, rather than a purported or potentially invalid termination based only on the say-so of H3G, had to precede a clause 35 termination. Thus, the grounds relied on had to be admitted by TTI or found to exist by a court or arbitrator before a valid termination on such grounds could proceed.

4. It followed that the words in clause-3.2 of the agreement: "termination in accordance with^,, meant: "terminated following admission or proof or the establishment by judgment or award of the underlying facts on which that termination is based".

5. The words: "terminated in accordance with clause 35" in clause 4.2 must mean the same as the words :"terminated in accordance with the provisions of this agreement" clause 3.2.

6. Thus, proof, admission or judgment in relation to the underlying default had to precede a termination since a valid termination depended on H3G having first established the default. It followed that no call could be made on the bond without there first having been a valid termination, namely an admission or finding of default by TTI.

68. This somewhat tortuous reasoning is unsustainable. First, any use by H3G of clause 35 must inevitably precede a finding of default by a court or arbitrator. The clause requires H3G to have an honest belief that the grounds for activating the termination provisions are present. Of course, following a termination which is valid on its face, a court might hold that the grounds relied on did not in fact exist. That would, subsequently, turn a valid termination into an invalid termination but, pending such a finding, the parties and third parties are entitled to proceed on the basis that the termination was lawful. Secondly, the suggested construction of the word "termination" so as to embrace, as a necessary precondition of that termination, a finding by a court that TTI was in default, flies in the face of the language and underlying commercial purpose of the bond. Lord Justice Ackner's words in the Essal (Commodities) Ltd case (see paragraph 63 above) are wholly apposite here to defeat such a construction.

6.3.4. Conclusion

69. The bond is a demand or performance bond, a draw down from which is wholly dependent on the presentation of valid documentation by H3G. The bond is not a "see to it" bond and no proof by H3G of the underlying facts or that the underlying termination was valid is required.

6.4. Varied Milestone Dates

6.4.1. Introduction

70. TTI alleges that the Milestone dates were varied by agreement so that the Milestone Dates set out in the Programme Schedule were or were to be treated as having been varied. If these dates had been varied as suggested, it would no longer be open to H3G to rely on the unvaried dates as founding allegations of delayed completion in breach of contract. Since the termination notice relied on the unvaried dates, that notice was invalid with the consequence that the agreement had not been validly terminated and the necessary precondition for calling the bond did not exist. Further, such a serious and obvious misstatement of the Milestone Dates in the termination notice showed that H3G was in breach of faith in seeking to terminate the agreement and call the bond.

6.4.2. The factual background

71. The principal evidence served by TTI as to the factual background consisted of three witness statements of Ronen Givon who managed the project in its early stages for TTI. The principal evidence served by H3G as to the factual background consisted of two witness statements of Paul Meredith who was H3G's Manager with day-to-day responsibility for H3G's dealings with TTI on the project.
72. The factual background arises out of the necessary contractual dealings and inter-relationship between TTI and H3G in the early stages of the project. The agreement contained a detailed Statement of work which contained both a detailed Specification and a Project Plan. The conditions contained provisions requiring H3G to perform its obligations as stated in the agreement (clause 2.2), to sign and issue Acceptance Certificates once all relevant Acceptance Procedures has been completed to H3G's satisfaction (clause 8.4), to use reasonable endeavours to ensure its obligations to be performed should be completed in accordance with the dates, time frames and other matters set out in the Project Plan (clause 11.4) and, most significantly, fully to co-operate with TTI in respect of TTI's implementation of the Project Plan, to undertake the activities specified to be performed by H3G and as TTI might reasonably request so as to enable TTI to fulfil its obligations under the agreement (clause 17).
73. The Project Plan detailed how the Milestones and Milestone Dates would be achieved. Both H3G and TTI set up project teams and a steering group consisting of representatives of each team was created and this met regularly to discuss and agree on what needed to be done and how it would be implemented so as to enable the respective teams to progress and implement the Project Plan. This committee was also responsible for agreeing any necessary variation to both the Project Plan and the Programme Schedule.
74. Amongst other facilities and data H3G had to provide were computer storage discs and storage subsystems and interface cards between the computers and the discs. According to TTI, these items should have been in place at an early stage but they were not. This led, at the initial steering group meeting and subsequent early meetings, to discussions as to how the Project Plan and the Programme Schedule could and should be varied. During these early discussions, H3G outlined variations to the Milestones that it would require. These included a launch of MOM soon after Milestone 2 had been completed instead of after the completion of Milestone 5. Soon afterwards, according to Mr Givon, detailed changes to the project were required by H3G, involving further changes to the launch programme, the insertion of a Business Readiness Test into the Acceptance procedures and the creation of a new Milestone. All these matters required much information, data and other assistance to be provided by H3G but much that was required was provided late and unsatisfactorily or not provided at all.
75. These events, requirements and lack of co-operation led, according to Mr Givon, to a new Programme Schedule of dates to be agreed. The means of discussing and agreeing these dates was through the medium of discussions about the final version of the Project Plan. Version 5.000 of this Plan was agreed on 12 March 2002 with further changes agreed on 22 March 2002. This Plan was then continually updated. However, no formal recorded agreement of the suggested variation to the Milestone Dates was produced and, indeed, TTI relied on internal documentation produced in April to seek to establish the terms of this variation.
76. H3G disputed that it had failed to provide in the early stages of the project the storage discs or interface cards. According to H3G, the project started badly because TTI lacked sufficient resources to get the project off to a satisfactory start and there were serious delays caused by TTI with respect to the initial project deliverables of plans, processes and a common document repository. The changed dates for completion of the various Milestones were ones that H3G was forced to accept as the only realistic timetable for the parties to work to given TTI I s defaults . Finally, the significant changes in Functionality 1 and 2 and in the testing regime were reasonable responses by H3G to mitigate the effects and consequences of the delays caused by TTI.
77. In considering these rival contentions, the relevant provisions in the agreement concerning amendments and variations to the Programme Schedule and the Project Plan need to be borne in mind. The agreement provided three separate ways in which a variation or amendment of the relevant dates for completion of Functionality could be considered or implemented. These were:

1. Delay Notices. Clause 12 provided a procedure whereby either party could notify the other that its progress was being delayed such that it would not be able to meet its obligations under the agreement. This procedure was intended to lead to written notification of obligations which would be delayed.

2. Extension of Time. Clause 13 provided that where delay was caused by H3G, it should amend the relevant Milestone and Project Plan dates pro-rata according to the extent of H3G's delay.

3. Variations sought by TTI (clause 28) or by H3G (clause 27). These clauses dealt with formal variations to the agreement sought by either party. These were to be preceded by a quotation to be provided by TTI specifying the reasonable changes that would be involved in the Project Plan and Programme Schedule and other relevant contract documents, a discussion between the parties and an election by H3G to accept the quotation or to withdraw or not accept it.

78. It must also be kept in mind that the agreement provided that the agreement could not be modified except by an instrument in writing signed by duly authorised representatives of the parties (clause 42).
79. It follows that any apparent agreement as to changed Milestone Dates could have been reached because the parties were formally varying those dates as a modification to the agreement, because the agreement was being varied, because an extension of time was being granted by H3G or because a delay notice had led to changes to the Project Plan needed to accommodate that delay without either party's obligations being amended or varied as a result. Any modification or variation had to conform to the procedures and formalities provided for by clauses 27 and 28 (for variations) or 42 (for modifications).
80. It is clear from the evidence that I have summarised that the causes of both the delays and the subsequent modifications to Functionality and Acceptance testing were complex and that, potentially, either TTI or H3G¹s explanations are correct or, possibly, both explanations are partially correct. It is also clear that since the agreement was not formally modified or varied that TTI must show that:

(1) H3G has waived its right to rely on such formalities so that the agreement should be treated as having been modified or varied despite that lack of the requisite formalities; or

(2) H3G has extended or should have extended the dates for Milestone completion; or

(3) the dates remained as originally provided for in the agreement and that any apparent agreed change to these dates was purely for the purpose of agreeing a realistic response to the delays caused by TTI thus leaving the original agreement dates unchanged for the purposes of establishing what delay had been caused by, and what damages would be recoverable from, TTI.

6.4.3. Conclusion

81. There was no obvious or clear modification or variation of the agreement or extension of time granted by H3G and no obvious basis for TTI ' s contention that H3G was responsible for all delay and variations to functionality and testing. Indeed, either party's case is, on the basis of the evidence that I have summarised, tenable. It follows that TTI cannot show that H3G was not entitled to rely on, or was in breach of faith in relying on, the original agreement Milestone Dates as opposed to those revised dates allegedly agreed at the meeting on 22 March. The contractual basis of that suggested agreement remains wholly unclear and any reliance on these original dates in the Termination Notice cannot be shown to be erroneous and, indeed, might well have been wholly justified.

6.5. No substantial breach - no non-completion of the MOM

6.5.1. Introduction

82. TTI relies on the provisions of clause 35.3.1 which provides that:

"H3G may terminate this agreement immediately by written notice if TTI fails to obtain Acceptance of the MOM by a date falling 90 days after the time period specified in the Programme Schedule for Acceptance for reasons other than Force Majeure or the default and/or delay of H3G and/or its suppliers or contractors."

TTI alleges that the agreement does not provide a date for the Acceptance of MOM in 2002 but only dates for the acceptance of Functionalities 1 to 5 inclusive. This absence of a contractual Acceptance date for MOM is shown by two features of the Programme Schedule: (1) the Milestones omitted UKM6 and jumped from UKM5, being the Acceptance of the last of the Functionalities, Functionality 5 to UKM7, being the Acceptance of MOM for 2003 and, secondly, there is no reference to the Acceptance of MOM for 2002 but there are two for the acceptance of MOM for 2003 and 2004. These omissions show that UKM6, being the Acceptance of MOM for 2002, would have been the Acceptance of the MOM Milestone but was omitted altogether. TTI alleges, alternatively, that Acceptance of MOM only occurred when the last of the five Functionalities provided for, being Milestone 5, was Accepted.

83. If these contentions are correct, it would follow that a valid termination notice could not have been served since this had to be served at least 90 days after the relevant Acceptance which could not occur or could only occur 90 days after the relevant date for Milestone 5. That unamended date was 2 September 2002 and, by 12 November 2002 less than 90 days had elapsed.

6.5.2. One or More MOMS

84. TTI's contentions are dependent on its construction of the agreement to the effect that there is only one MOM, being the Accepted system following completion of testing of the last of the five Functionalities 1 - 5. This is because the agreement provides that the Scope of Work was the "supply of the MOM" (clause 2.2), for the "delivery of the MOM" (clause 7) and in other references in the agreement to "the MOM". However, it is clear from the Statement of Work that the MOM is built up of building blocks or MOM elements, functionality features (core or optional), functionality sets of features and functionality. Many of the functionality features and any functionality sets can stand alone and operate alone. This is reflected by the definition of MOM provided for in the agreement. This provides that:

"MOM means the manager of managers as described in the Specification and to be purchased by H3G from TTI, and each MOM shall be comprised of MOM Elements.''

MOM Elements are themselves described as:

"any building block used to build the MOM".

85. These definitions, and the inherent characteristics of Mom allowing it to stand alone and to have additional functionality to be built onto it successively to provide for more extensive stand alone systems, show that "MOM" is used in two senses, namely to describe the ultimate system to be supplied and also to describe any set of functions supplied to the system as a whole which can, if required provide a Manager of Manager service if allowed to stand on their own. In other words, "MOM" when used in the agreement can mean, in context, each Functionality supplied under a. different Milestone since a Functionality consists of a set or sets of functions which are capable of being tested, Accepted and standing on their own. In the context of clause 35.3.1 and the Programme Schedule, therefore, an "IDIOM" includes a reference to a discrete MOM comprising a Functionality or Milestone.
86. TTI suggests that the phrase "each MOM" found in the definition clause in defining MOM s a reference to the separate MOM to be supplied in 2002 and the further MOM to be supplied in both 2003 and 2004 since "MOM", when used in the agreement, can only be referring to the whole system with all five Functionalities being supplied under the agreement. That construction is not tenable since TTI was merely supplying updated MOM in the second and third years. Moreover, the definition of MOM as being something comprising MOM elements, which are the building blocks of the MOM, is defining something smaller than the system as a whole and something smaller than the system comprising five Functionalities to be supplied in 2002.

6.5.3. Conclusion

87. A termination notice served under clause 35.3.1 must rely, if the termination is to be on the basis of delayed acceptance, on a failure to achieve Acceptance for 90 days after the time specified in the Programme Schedule for Acceptance of the MOM. Each of the Functionalities 1 - 5 is, for this purpose, a different MOM giving rise to a different potential basis for termination for delayed acceptance.

6.6. Non-compliance of the termination with requirements of clause 34

6.6.1. Introduction

88. TTI alleged that a termination notice served on the basis of delayed acceptance for 90 days after the time specified most be served immediately following that 90-day period or within a reasonable time thereafter. This contention is based on the wording of clause 35.3.1, which provides for termination "immediately" following a failure to obtain Acceptance for 90 days after the time specified in the Programme Schedule.
89. TTI also alleged that the relevant breach was capable of being remedied by TTI if it was allowed to continue to attempt to achieve Acceptance after the expiry of the 90-day period. If H3G stood back and allowed TTI to continue to work towards an Acceptance, it is to be taken to have waived the right to terminate for breach by analogy with Landlord and Tenant cases concerned with a waiver from forfeiture following a remediable breach of covenant.
90. TTI's termination notice was served at least 17 weeks after the Acceptance Date for Milestone 1; at least 13 weeks after that for Milestone 2; at least nine weeks after that for Milestone 3 and 2½ weeks after that for Milestone 4. These dates are not, as TTI sees the situation, immediately after or within a reasonable time from the contractual Acceptance Dates.

6.6.2. Decision

91. There are three reasons why TTI's submissions cannot be accepted. First, H3G seeks to rely not only on clause 35.3.1 but also on 35.2.1. This latter clause allows H3G to terminate where TTI is in persistent breach of any term of the agreement which is defined to mean the same or a similar breach occurring at least three times in any six month period. This provision can be relied on where the relevant breaches have been waived in the sense that they can no longer support a termination for delayed acceptance since, notwithstanding any waiver by H3G of the right to terminate, TTI remains in breach. There were at least three similar breaches being relied on that occurred within a six-month period. Secondly, whether a termination notice has been served immediately or within a reasonable time is a question involving a consideration of both the facts of the particular situation and questions of degree. The available evidence does not enable either TTI's contention that the notice was served too late or H3G's contention that the notice was served timeously to be determined and neither contention is either clearly right or clearly wrong.
92. The third reason for rejecting TTI's submissions is that the submissions are fact based and relate to the merits of the termination and not to the procedural validity of the termination or the conformity of the written notice with the requirements of clause 35. TTI's submissions are not, therefore, capable of supporting an application to restrain a call on a bond.

6.6.3. Conclusion

93. H3G is not precluded from calling the bond by reference to any delay in the timing of the termination notice relative to the dates by which each Milestone should have been achieved.

6.7. Lack of faith

94. TTI sought to show that H3G had threatened to call the bond in bad faith. It first relied on an alleged erroneous reliance on the Unamended Milestone Dates but H3G's reliance on these dates was not, as I have shown, unjustified or capable of being criticised for the purposes of this injunction application.
95. TTI also asserted that H3G was seeking to use the bond for ulterior purposes, namely to draw attention away from the fact that it wanted a premature let out from the agreement and to reduce the scope of the MOM to be supplied. These changes were sought for extraneous commercial or other purposes. The basis of TTI's belief was explained by Mr Givon as follows:

"It might be that [H3G] have decided that they no longer want the extra elements of functionality provided by achievement of Milestones 3, 4 and 5 at this point in time. ... [Milestones 3, 4 and 5^'s] functionalities are superfluous at this stage."

This assertion was elaborated in H3G's submissions as follows:

"The timing of the intended call, following hard on the heels of TTI's completion of the work that H3G required in respect of the proposed reduced launch speaks volumes as to the cynical nature of the exercise that H3G is here involved in."

96. These assertions are mere speculation without any factual basis. They are firmly denied by H3G's witnesses and, on the basis of the currently available evidence, a case of want of faith has no factual basis to support it and must be rejected.

7. Overall conclusion

97. TTI has put forward six bases for challenging and seeking to preclude H3G's threatened call on the bond. One, (ground 6) was based on H3G's lack of faith and has no factual basis. Two, (grounds 1 and 2) were based on assertions that a precondition to call had not been met and that the bond was a "see to it" bond which were incorrect given the terms of the agreement. Two, (grounds 4 and 5) were based on alleged failures to terminate the agreement correctly on procedural grounds which failed since the suggested grounds of non-conformity with the contractual procedure for termination were not made out. Moreover, these grounds of challenge are, on analysis, not open to TTI since they are neither allegations of want of good faith nor allegations of want of a jurisdictional basis to call the bond. The final basis of challenge (ground 3) was a factual merits-based ground not open to TTI. This ground alleged that the Milestone Dates set out in the agreement had been varied. Moreover, it, too, had not been made out.
98. It follows that TTI's application for an interim injunction has failed and must be dismissed. I will hear the parties as to whether any declarations should be made to reflect the decisions of law contained in this judgment and as to whether the action should be dismissed or be the subject of a trial of any dispute as to the validity of the termination or as to H3G' s entitlement to call the bond and, if so, what directions for trial should be given.