Performance bonds under English law: A journey from a strictly ‘narrow’ fraud exception to an overly broad ‘breach of good faith’ exception

Chhina, Ramandeep Kaur

Abstract

This paper critically examines the approach in English law to the application of the fraud exception to the principle of the autonomy of performance bonds. It establishes that the failure of the English courts to clearly differentiate between commercial letters of credit and performance bonds – and their tendency to draw an analogy between these two undertakings in applying the fraud exception – has resulted in unsatisfactory, if not wholly inconsistent, precedents that may threaten the functioning of these instruments in the near future. From a strictly non-interventionist attitude on the part of the English courts to the tendency to apply the wider, but still delimited, ‘fraud as no bona fide belief’ exception to the later development of a new ‘breach of good faith’ exception for performance bonds, it is argued that a significant amount of uncertainty has resulted under English law as to the granting of an injunction under performance bonds.
The paper argues that the wider, but still delimited, ‘fraud as no bona fide belief’ test is more appropriate for performance bonds in contrast to the ‘fraud in the documents’ test, which is argued to be more appropriate for commercial letters of credit. The paper criticises the recently developed tendency in the English courts to apply the ‘breach of good faith’ exception to performance bonds by heavily quoting and relying upon the Singapore jurisdiction cases. It establishes that such an exception not only lacks certain boundaries but also has no authoritative reasoning and rationale. It is established that what is termed ‘unconscionability’ in the Singapore jurisdiction cases (also relied upon by the English authorities) is not very different from the wider ‘fraud as no bona fide belief’ exception, as argued in this paper.
The paper concludes by arguing that it is now time for the English courts to clearly recognise and mark the parameters of the wider ‘fraud in the transaction’ defence for performance bonds to mean ‘fraud as no bona fide belief’ defence, for undefined boundaries of the fraud enquiry in English law may result in unprincipled wide-ranging enquiry into the underlying transaction to determine ‘what is fair to do’, thus rendering these instruments useless in international commerce.

Citation

Chhina, R. K. (2017, August). Performance bonds under English law: A journey from a strictly ‘narrow’ fraud exception to an overly broad ‘breach of good faith’ exception. Paper presented at 4th Annual International Conference on Law and policy

• Presentation Conference Type: Conference Paper (unpublished)
• Conference Name: 4th Annual International Conference on Law and policy
• Start Date: Aug 14, 2017
• End Date: Aug 16, 2017
• Deposit Date: Feb 13, 2018
• Keywords: Fraud, performance bonds, commercial letters of credit,
• Public URL: http://researchrepository.napier.ac.uk/Output/1038446