2 September, 2019
Sumitomo Mitsui Banking Corporation Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm)
The UK High Court (“Court”) had to decide on the validity of demands that were served by a bank pursuant to two bonds that were assigned to the bank as security for a loan. The Court had to consider issues relating to assignability, pre-conditions to assignment, waivers of pre-conditions to assignment and demands made by way of a power of attorney.
Facts
Resource Recovery Solutions Derbyshire Ltd (“RRS”) was the beneficiary of a performance bond (“Performance Bond”) and retention bond (“Retention Bond”) provided by Euler Hermes Europe SA (NV) (“Euler”). RRS assigned by way of a debenture (“Debenture”) the Performance Bond and Retention Bond to Sumitomo Mitsui Banking Corporation Europe Ltd (“Bank”) as security for banking facilities. Subsequently, the Bank served a demand on Euler for payments under both the Performance Bond and Retention Bond. Euler refused payments.
Decision
The Performance Bond
(a) Pre-conditions to Assignment
There was a pre-condition for assignment prescribed under clause 9 of the Performance Bond. Euler argued that the pre-condition for assignment was not met or waived. Clause 9 of the Performance Bond stipulates that:
“Subject to the assignee confirming to the Bondsman in writing its acceptance of the Employer’s repayment obligation pursuant to clause 8, the Employer may assign the benefit of this Bond to any party (or trustee or agent thereof) acquiring an interest in the Works…” [emphasis added]
There was no such confirmation given by the Bank as assignee. Accordingly, the Court held that there was no valid assignment vis-à-vis Euler. Although a notice of assignment of the Performance Bond was served on and acknowledged by Euler, it did not by itself amount to waiver of the pre-condition to assignment. In this regard, the waiver clause in the Performance Bond required any sought waiver to be expressly stated. There was no express mention of the waiver in the notice of assignment.
(b) Power of Attorney
In the alternative, the Bank argued that even if there was no effective assignment, the demand on the Performance Bond was still valid since it was signed by the Bank as attorney for RRS pursuant to its power of attorney under the Debenture. The Court agreed and noted that the demand on the Performance Bond was valid as it was appositely worded to be an effective demand, and had been signed by a director of the Bank as the attorney of RRS.
As such, a valid and properly exercised power of attorney can be useful when making a demand under a bond. However, it is important to remember that a power of attorney by itself is not a security interest and its effectiveness may be compromised, if the borrower is insolvent or undergoing insolvency proceedings.
The Retention Bond
Euler contended that the Retention Bond only defined the term the “Employer” to mean RRS. It had no provision that the term was to include successors or assignees. As such, the Bank was precluded from making a demand under the Retention Bond. The Court disagreed and held that the demand was validly served by the Bank as an assignee. This was because an assignment was within the contemplation of the parties as there was a specific clause in the Retention Bond that provided for assignment.
It is important to note that the position may be different if there were no references to successors or assignees and also no express provisions permitting an assignment. In such a case, it may be prudent to obtain the express consent of the bond provider for the assignment.
Conclusion
This case is a timely reminder for banks taking security over financial instruments to be mindful of the underlying terms, such as clauses permitting an assignment and specific pre-conditions to an assignment. Having a valid power of attorney could also be an additional practical safeguard when making a demand on such financial instruments.
