Location, location, location: the place of performance under on-demand guarantees

In Central Térmica de Temane SA v Banco Santander SA [2026] EWHC 2587 (Comm), the Commercial Court has considered the application of the Ralli Brothers principle to on-demand bonds, confirming that the place of performance of the bank’s payment obligation is the place where payment is contractually required to be made, rather than where the demand is delivered.

The judgment provides a useful reminder of the Ralli Brothers principle, under which the English courts will not enforce a contractual obligation where performance is required in a foreign country and would be unlawful under the law of that country. Importantly, the Court also considered that the principle is capable of applying where the relevant illegality arises from a foreign court order, rather than from legislation or regulation.

In the context of on-demand guarantees, however, the key issue is identifying the relevant place of performance.The Court confirmed that, where the obligation being enforced is an obligation to pay, the place of performance is the contractual place of payment, rather than, for example, the place where the demand is required to be delivered or where preparatory steps are taken to process it. The judgment also confirms the importance of a party seeking to rely on Ralli Brothers taking reasonable steps to overcome the relevant illegality. 

Background

Central Térmica de Temane SA (the Employer) was the employer on a project for the design, construction and operation of a 450 MW combined-cycle gas-fired power plant in Mozambique. Banco Santander S.A. (the Bank) issued an advance payment bond and a performance bond in the Employer's favour in connection with the EPC obligations of the contractors, entities within TSK Group (TSK). The bonds were autonomous on-demand instruments governed by English law and subject to the exclusive jurisdiction of the English courts.

The dispute arose after TSK purported to terminate the underlying EPC contract on 3 April 2025 on the basis of a prolonged force majeure event. The Employer disputed that termination and, the following day, presented demands under the bonds to the Bank for approximately US$90.8 million in total. The Bank accepted that the demands complied with the terms of the Bonds.

TSK, however, maintained that the EPC contract had been validly terminated and sought to prevent the Employer from receiving payment under the bonds while that underlying dispute was resolved. On 7 April 2025, TSK applied ex parte to the Spanish court for an interim injunction restraining the Bank from making payment and requiring the Employer to withdraw its demands. The Spanish court granted the injunction on 10 April 2025. It considered that TSK had established a prima facie case that it had lawfully terminated the EPC contract and that there was a risk of harm if payment were made under the bonds but the subsequent arbitration ultimately determined that TSK’s termination had been valid. In particular, the Spanish court was concerned that the Employer might then be unable to return the sums paid under the bonds.

The timing was significant. Under the bonds, the Bank was required to pay within five business days of receiving a compliant demand, meaning payment fell due on 11 April 2025, the day after the Spanish injunction was granted. The Bank therefore declined to pay, notwithstanding the otherwise valid demands, on the basis that payment was prohibited by the Spanish injunction. It subsequently relied on the Ralli Brothers principle in the English proceedings, arguing that the Spanish injunction rendered performance of its payment obligation unlawful.

The Ralli Brothers principle

The starting point is that foreign illegality does not generally relieve a party from performing a contract governed by English law. The rule derived from Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287 is a narrow exception to that general position. As Calver J explained, where the exception applies, an obligation under an English law contract may be unenforceable, or in the case of a payment obligation suspended, where the contract requires performance in a place in which that performance is unlawful.

Ralli Brothers concerned a contract for the carriage of goods to Barcelona under which freight was payable in Spain. After the contract had been entered into, Spanish law imposed a maximum freight rate below the contractual rate. The English courts refused to enforce payment of the excess because doing so would require payment in Spain in breach of Spanish law. In explaining the principle, Scrutton LJ regarded the contractual obligation as effectively subject to the condition “I will do it provided I can legally do so”, reflecting the broader principle that the English courts should not assist or sanction a breach of the laws of another state.

The principle is founded on international comity. The English courts will not require a party to perform an act in another country where doing so would breach the law of that country. However, its application is deliberately narrow. It is not enough that foreign law makes performance more difficult, or that an unlawful act must be undertaken somewhere in the course of preparing to perform. The contractual performance itself must necessarily involve an unlawful act in the place where that performance is required to occur. The courts therefore distinguish between performance itself and acts which merely enable or equip a party to perform.

There is also an important qualification. A party will not generally be able to rely on Ralli Brothers where it could reasonably have taken steps to avoid the illegality and failed to do so. The burden rests on the party seeking to rely on the defence to show that it took reasonable steps to bring about lawful performance, or that any such steps would have been unsuccessful.

Where is an on-demand guarantee performed?

The first issue for the Court in determining whether the Ralli Brothers principle could apply was to identify whether the place of performance of the Bank’s contractual obligation was Spain of Mozambique. The principle only applies where the relevant contractual performance is unlawful under the law of the country in which that performance is required to take place. Accordingly, if the Bank’s payment obligation did not require performance in Spain, any purported illegality affecting performance in Spain could not provide a Ralli Brothers defence to an obligation required to be performed in another jurisdiction.

The Bank argued that Spain was the relevant place of performance because the demands had to be delivered to its Madrid office and the steps necessary to process those demands would take place there. The Court rejected that argument. The Court determined that the relevant contractual place of performance was the location of Bank’s obligation to pay. Delivery of a conforming demand triggered that obligation but did not determine where the obligation was to be performed.

Critically, the bonds required the Bank to make payment to the bank account specified by the Employer in its demand. Because the Employer had nominated an account Bank in Mozambique, Mozambique was the contractual place of payment and therefore the place of performance. Spain was not additionally a place of performance simply because the Bank might undertake steps there to process the demand or prepare for payment. Those steps were merely preparatory to, rather than part of, the contractual performance itself.

The Court distinguished the recent decision in LLC EuroChem v Société Générale SA [2025] EWHC 1938 (Comm). Calver J accepted the proposition from EuroChem that, for an on-demand instrument which does not specify a place for payment, the place at which the demand must be made may ordinarily indicate the place of payment. But that is only the position absent contractual wording to the contrary. Here, the express requirement to pay into the account nominated in the demand supplied that contrary indication.  

This is an important practical point when drafting demand guarantees. The location at which a demand is served does not necessarily determine the place of performance. Where the instrument requires payment into a specified or nominated account, the location of that account will determine the place of performance for the purposes of Ralli Brothers. 

Can a foreign court order engage Ralli Brothers?

Having concluded that the place of performance was Mozambique rather than Spain, the Court had already determined that the Ralli Brothers principle did not apply. Nevertheless, Calver J went on to consider, on an obiter basis, whether the Spanish injunction was capable of giving rise to the relevant illegality.

The Court concluded that a foreign court order is, in principle, capable of engaging Ralli Brothers, just as illegality arising from legislation or regulation may do so. In reaching that conclusion, Calver J disagreed with the approach taken in Litasco SA v Banque El Amana SA [2025] EWHC 312 (Comm) and subsequently followed, also obiter, in Beneathco DMCC v RJ O'Brien Ltd [2025] EWHC 3079 (Comm).

The rationale underlying Ralli Brothers is international comity and respect for the territorial sovereignty of foreign states. Calver J considered there to be no principled reason, in that context, to distinguish between illegality arising from a foreign court order and illegality arising from legislative or executive action. Accordingly, a foreign court order may, in principle, engage Ralli Brothers where it renders the relevant contractual performance unlawful in the country in which that performance is required to take place.

That conclusion did not assist the Bank here because payment was required to take place in Mozambique, not Spain.

What steps must a party take to overcome the illegality?

The Court went on, again on an obiter basis, to consider whether the Bank could have relied on Ralli Brothers had Spain been the place of performance. It concluded that the Bank would have been unable to do so for a separate reason.

A party seeking to rely on Ralli Brothers must show that it took reasonable steps to bring about lawful performance or avoid the relevant illegality. If no such steps were taken, the burden remains on that party to establish that, had they been taken, they would have been unsuccessful.

The Bank had taken no steps itself to seek the discharge of the Spanish injunction. Although the Employer had pursued its own challenge before the Spanish courts, the Bank could have intervened in support of that application and adduced evidence and submissions of its own. The Court found that the Bank had produced no evidence to establish that such intervention would have made no difference to the outcome. It had therefore failed to show either that it had taken reasonable steps to overcome the purported illegality or that taking those steps would not have resulted in the injunction being discharged.

The decision therefore provides a useful reminder that the existence of a foreign prohibition may not, by itself, be sufficient to establish a Ralli Brothers defence. A party seeking to rely on the principle should be prepared to demonstrate the reasonable steps it has taken to overcome the impediment to performance, or why such steps would have been unsuccessful.

Getting the drafting right

The decision reinforces the importance of careful drafting around the mechanics of payment under on-demand guarantees.

Location matters

Parties should be clear where payment is contractually required to be made, rather than assuming that an English governing law and jurisdiction clause will determine the place of performance. 

The mechanics matter too

First, the case illustrates the potential for uncertainty where the benefit of a bond has been assigned by way of security. The Employer had granted security in favour of Citibank as offshore security trustee, but subsequent amendments to the Bonds incorrectly identified Citibank as the beneficiary, despite the Employer remaining the beneficiary. The Bank ultimately accepted the Employer’s position, but the history created unnecessary complexity around the demands. Parties should therefore ensure that the identity of the beneficiary, and the effect of any assignment on the entitlement to make demands and receive payment, remain clear throughout the life of the instrument, including following any amendment or extension.

Second, the bonds gave the Bank five business days following receipt of a demand in which to pay. The Employer’s demands were made on 4 April 2025, the Spanish injunction was granted on 10 April and payment was not contractually due until 11 April. The Court rejected the argument that the Bank should have paid sooner: it was entitled to the full contractual payment period and was not in default when the injunction was granted.

That nevertheless raises a practical drafting question for beneficiaries. A longer payment window provides greater opportunity for a counterparty to seek interim relief before payment falls due. Where commercially and operationally practicable, beneficiaries may therefore wish to consider whether a shorter payment period would reduce the risk of intervening injunctive relief being obtained.

Central Térmica de Temane SA v Banco Santander SA [2026] EWHC 2587 (Comm)