CL-2022-000456 - [2025] EWHC 1938 (Comm)

The Claimants submitted that claims under the Bonds are not claims “in connection with” the Contracts, because of the autonomous nature of on-demand bonds. They relied on the summary of the law in Power Projects Sanayi Insaat Ticaret Limited Sirketi v Star Assurance Company Limited [2024] EWHC 2798 (Comm), per Mr Richard Millett KC at [31]:

“31.

The basic principles are well established, and I take them, with all due deference and some adjustment, from PP’s skeleton argument.

(i)

On-demand bonds (and similar instruments) are the “life-blood of international commerce” (Harbottle v NatWest [1978] QB 146 at 155); they are to be treated as “an autonomous contract, independent of disputes between the seller and the buyer as to their relative entitlements pursuant to the different contract between themselves” (Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2014] 1 All ER (Comm) 870 (CA) at [21].

(ii)

Liability under the bond is separate from liability under the underlying contract: Edward Owen v Barclays Bank [1978] Q.B. 159 at 171 (per Lord Denning MR):

“A bank which gives a performance guarantee … is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions.”

(iii)Any lack of correlation between payment made under an on-demand bond and liability in the underlying contractual relationship is a matter for resolution between the parties to that relationship, not for the bond issuer and beneficiary:

“By agreeing to provide a bond which is payable on demand, a party agrees that the bond may be called pending resolution of any dispute with the counterparty beneficiary. He thereby agrees to assume the risk of payment being made notwithstanding that he can subsequently establish in litigation or arbitration that the dispute is to be resolved in his favour”: Ouais Group v. Saipem [2013] EWHC 990 (Comm) at [45].

(iv)The only exception to the rule in Edward Owen in relation to contractual obligations as between the beneficiary and issuer of an on-demand bond is “when there is a clear fraud of which the bank has notice” (Lord Denning MR again, at 171). Accordingly:

a.

The issuer is required to plead and prove dishonesty on the part of the beneficiary, or absence of any good-faith belief that the relevant amount is due. An honest but mistaken belief will not suffice: see AES-3C v. Credit Agricole [2011] BLR 249 (TCC) at [48], nor will the fact that the underlying contractual claim is contested: see Wuhan Guoyu at [21].

b.

Fraud alone does not do; the bond issuer must have notice of the fraud at the time of the demand. As Tomlinson LJ said in Wuhan Guoyu at [22]:

“It is critical to the efficacy of these financial arrangements that as between beneficiary and bank the position crystallises as at presentation of documents or demand as the case may be, and that it is only in the case of fraudulent presentation or demand by the beneficiary that the bank can resist payment against an apparently conforming presentation or demand.”

(v)

The rule in Edward Owen and the status of the fraud exception as the sole defence as between issuer and beneficiary was reiterated by the Court of Appeal in National Infrastructure v. Banco Santander [2018] 1 All ER (Comm) 156 at [17] to [19]. In that case Longmore LJ made it plain that a defence will only exist where:

“‘the only realistic inference is that [the claimant] could not honestly have believed in the validity of its demands’ (the emphasis is mine but none the less crucial for that).”

(vi)

In the context of on-demand bonds, in applying the summary judgment test, “the Court must be mindful of the principle that banks … need particularly cogent evidence to establish the fraud exception”: Banco Santander, Longmore LJ at [22] quoting Teare J in Enka Insaat Ve Sanayi AS v Banca Popolare Dell’ Alto Adige SpA [2009] EWHC 2410 at [25].”

The dicta cited in this passage have all been cited and relied on in many other judgments, and the principles that they stand for are well-established.

The Banks submitted that it cannot be said that the Bonds are not connected with the Contracts. They referred me to a passage in the Claimants’ Reply, which (at paragraph 65(ii)(b)) denied that the claims under the Bonds fell within Article 11(1) of Regulation 833 and then said that they “at most are claims in connection with contracts (namely, the Contracts), which wrongfully have not been performed by the Third Parties…” This is an alternative plea and on no view a positive averment that the claims are “in connection with” the Contracts. I therefore reject the Banks’ pleading point.

More broadly, the Banks said that it was undeniable that the Bonds are connected to the Contracts, because they refer to the Contracts in their recitals. This is true. A further connection between the Bonds and the Contracts is that the Bonds were issued because the Contracts required this.

However, the question here is not whether there is a connection of some kind between (i) the Bonds and (ii) the Contracts. It is whether there is a connection between (i) the claims under the Bonds and (ii) the Contracts.

As the Claimants rightly say, the entitlement to bring claims under the Bonds depends solely on valid demands having been made. Such demands have to refer to the Contracts, but their validity does not depend on the factual accuracy of anything they say, as was made clear by the dicta cited in Power Projects Sanayi Insaat Ticaret Limited Sirketi v Star Assurance Company Limited. Furthermore, fraud is not alleged in this case, so that exception to the general position in respect of on-demands does not apply.

It follows that, in the context of the claims under the Bonds, the Banks are (in Lord Denning MR’s words in Edward Owen) “not concerned in the least with the relations between the supplier and the customer”. The relations between Tecnimont and EuroChem NW2 are embodied in the Contracts – with which, as Lord Denning MR observed, the Banks are not in the least concerned.

The Claimants summarised their argument as follows:

“Put differently: could the performance of the Banks’ obligations to pay under the Bonds be affected by non-performance under the Contracts, whether on the basis of sanctions compliance or not? The answer is ‘no’. That is the nature of on-demand bonds: it goes to their basic function of security unconnected to the performance of the underlying contract; and it is what distinguishes them from a guarantee.”

There is much force in this. However, it is, once again, an approach which does not take sufficient account of the purpose of the relevant instrument – on this occasion, Regulation 833.

A similar issue arose in Celestial Aviation Services Ltd v Unicredit Bank AG [2024] EWCA Civ 628, which concerned the Russia (Sanctions) (EU Exit) Regulations 2019 Pt 5(2) reg. 28(3), which prohibits the provision of financial services or funds "in connection with" arrangements to supply aircraft for use in Russia. The case concerned claims under letters of credit that supported aircraft finance leases which the claimants entered into with a Russian airline.

Falk LJ, giving the lead judgment with which the others agreed, noted at [52]-[53] the importance of the statutory purpose, which was “to put pressure on Russia”. The purpose of Regulation 833 was the same, and (as already noted) the purpose of the instrument is, if anything, even more significant for the interpretation of EU instruments than it is for domestic legislation (Falk LJ did not rely on the EU origins of the Russia (Sanctions) (EU Exit) Regulations 2019 in reaching her conclusion).

Falk LJ then said, at [55]:

“[55] The words “in connection with” are broad. As Rix LJ said in Campbell v Conoco (UK) Ltd [2003] 1 All ER (Comm) 35 at para 19, the words in connection with “… are widely regarded as being as wide a connecting link as one can commonly come across”. Their use in conjunction with “in pursuance of” indicates a clear intention to cast the net more broadly than financial services or funds provided under or in accordance with the terms of the relevant arrangements (which would be covered by the natural sense of “in pursuance of”). I would also agree with UniCredit that the words “in connection with” do not require any form of legal dependence, for example by reference to principles of causation. Rather, the question is one of factual connection.”

A little later, at [60], Falk LJ referred to the autonomy principle – essentially, the point raised by the Claimants in this case. She then said at [61]:

“[61] However, it is important to understand what the scope of the principle is. Obligations under letters of credit are autonomous in the sense that they do not depend on whether the beneficiary has a claim on the underlying contract financed by the credit, or (for a confirming bank) on the position of the issuing bank. So in this case, for example, payment under the LCs depended on an asserted default under the leases and not on whether there was in fact a relevant default. But that does not mean that the factual reality of a connection with the leases can be ignored. That connection undoubtedly exists, and indeed is recognised in the reference in article 4(a) to the “contract on which [the letter of credit] may be based” (Footnote: ⁸). The LCs were issued only because of, and no doubt in amounts determined by reference to, the leases and they were triggered by an assertion of default under them.”

Falk LJ concluded by rejecting the claimants’ argument that the claims were not in connection with arrangements to supply aircraft. It is right to note that the provision in that case, and the facts, raised a number of features that Falk LJ relied on, in addition to her observations about the words “in connection with”. Nevertheless, I do not consider her reasoning at [53], [55] and [61] to be properly distinguishable. I therefore accept the Banks’ case on Regulation 833.