We look at the decision in Shapoorji Pallonji and Co Private Ltd v Yumn Ltd, where the English Courts refused to restrain a call on a bond, to allow an Emergency Arbitrator to consider the application. Given current economic uncertainties, calls on bonds are likely to increase, and so parties need to understand the process to be followed and the differences between arbitral tribunals and courts.

The case concerned a dispute in relation to the construction and commissioning of a power plant in Rwanda. Shapoorji Pallonji and Company Private Limited ("SPC") was appointed by Yumn Ltd ("Yumn") under FIDIC forms of contract, for the design, engineering, construction, and commissioning of the power plant. The contracts were subject to English law, but disputes were to be resolved by arbitration under the ICC Rules in Singapore.

SPC granted a performance bond under the contracts, but the bond (unlike the contract) was subject to the jurisdiction of the English courts, rather than arbitration.

Completion of the project was delayed and whilst SPC made applications for extensions of time, these were refused, and Yumn made a demand under the bond in relation to payment of liquidated damages.

SPC requested that Yumn withdraw the demand and commenced (1) an ICC Emergency Arbitration seeking orders looking to prevent the demand and (2) an action in the English Commercial Court seeking an order that Yumn must withdraw its demand, pending orders from the ICC Emergency Arbitrator.

The English court dismissed the application by SPC. The court concluded that, under English law, a party will only be prevented from making a call on a bond in limited and specific circumstances. The court took the view that English law was the governing law of the underlying contract and the bond, meaning the applicable principles of English law should be applied, even if a different test might be applied by the emergency arbitrator.

Part of the reasoning focused on the fact that it had been open to SPC to refer Yumn's failure to grant their applications for extensions of time to arbitration as soon as those applications had been refused, but they had not done so.

In the circumstances the court said that SPC had not made out any of the requirements under English law for an order preventing a beneficiary from making or enforcing a demand on a bond, and so the order was refused.

The decision shows a robust approach by the English courts and a refusal to grant orders on the basis that their merits would subsequently be examined by an emergency arbitrator. Had the court decided otherwise, parties would have been able to use this to gain tactical advantage. The case also underpins the position that, where the contract is subject to English law, it is the tests under English law which should be strictly applied, regardless of the arbitral seat.

From a practical perspective the case also serves as a potential warning to contractors of the need to issue early arbitration proceedings to determine the underlying dispute between parties, where there is a risk that a call on a bond may be made by the Employer as once that call is made, the ability to resist it pending an arbitral decision will be limited.


Keith Kilburn

Legal Director

Amy Pairman

Senior Associate