Following the demise of Carillion, the bond market has come under a lot of pressure. As one would expect, bond providers continue to insist on ‘secondary’ instruments rather than the more onerous ‘primary’ instrument. Bond providers are also keen to reject calls made on security instruments.
In the recent case of Tetronics v HSBC (2018), the court confirmed the importance of making a valid call and that the fraud exception would apply in extraordinary circumstances only. In Tetronics, HSBC rejected the first call made by Blue Oak because it was set out in a single document, rather than two separate documents. Blue Oak issued a second call. HSBC decided that the second call also failed to meet all the conditions set out in the security instrument: it was not particularised; it did not identify the signatory and it did not comply with the underlying contract. HSBC also claimed that the demand was fraudulent and relied on the ‘fraud exception’ to resist the call.
Blue Oak, argued that once a call had been made, even an invalid call, the bank was required to pay out. Tetronics argued that the bank’s obligation to pay crystallised upon receipt of a valid call. The judge considered both arguments and confirmed that following Alternative Power Solution Ltd v Central Electricity Bond  UKPC 31, a beneficiary is required to issue a ‘compliant presentation of documents’. An invalid call, therefore, would not trigger a bank’s obligation to pay out. The judge considered that Blue Oak’s second call was valid as the call correctly specified that Tetronics was in breach of the underlying contract and it identified the terms in respect of which those breaches were alleged. No further particularisation of the breaches was required. The judge also confirmed that the fraud exception would only apply in extraordinary circumstances. The fraud exception did not apply in this case and the judge discharged the injunction against HSBC.
The case serves as a reminder that if you wish to make a call on a security instrument, ensure that you comply fully with all conditions. If you make the ‘wrong call’, the bank may be entitled to reject the call and this is likely to delay receipt of payment.
The case: Tetronics (International) Limited v HSBC Bank Plc and Blue Oak Arkansas LLC (as intervener)  EWHC 201