Performance bonds and the difficulty of challenging payment

In the case of CR Construction (UK) Company Limited v Barclays Bank v Northern Gateway (FEC) No. 7 Limited, the Technology and Construction Court dismissed an application for an interim injunction to stop a bank paying out under an on demand performance bond, provides a timely reminder of just how hard it is to stop a call on a performance bond, even where the underlying liability is disputed.

Key takeaways and implications  

The message is clear: once a performance bond is issued, stopping payment under it is exceptionally difficult, particularly for on demand bonds. Disputes over the underlying liability will not prevent a bank from making payment under the bond where there is no fraud and the demand complies with the bond’s requirements. The commercial certainty of performance bonds is important, and arguments based on errors, unfairness, disputes, or alleged repudiation of the contract will not be enough to resist payment.

From a drafting perspective, understanding the nature of the bond and checking the wording and requirements is very important (especially as a risk management tool). The Courts will seek to interpret and apply the agreed wording, and this case highlights the risks inherent in the nature and wording of on demand bonds. While the appropriate security and documentation will depend on the specific project and parties, clear drafting around any precursors, conditions, or requirements for a claim may help manage those risks in practice.

The commercial and practical focus on live projects should be on acting early – reviewing and challenging notices and certificates promptly, and pursuing adjudication or other dispute resolution before a bond is called. Thought should also be given to the correct defendant in any injunction application: typically, if you want to restrain a call on a bond (rare as it is), that case is usually against the bond’s beneficiary rather than the bond issuer. Without evidence of fraud, injunctions against bond issuers are effectively a non‑starter.

Background facts

CR Construction (UK) Company Limited (the Contractor) was engaged on a c.£117m mixed-use development in Manchester under an amended JCT D&B contract under which it was required to provide a 10% performance bond in favour of Northern Gateway (FEC) No. 7 Limited (the Employer).

There were various delays on the project, including missed sectional completion dates. This, amongst other things, meant liquidated damages (LDs) were applied, the Contractor failed to pay them, and following termination of the D&B contract, the Employer made a c.£2.47m demand under the performance bond regarding the unpaid LDs.

The Contractor applied for an urgent interim injunction to stop Barclays (the bond issuer) from paying and to also claw back money that Barclays had received under a counter-guarantee in relation to the performance bond. The Employer was eventually permitted to join as an intervenor but was not joined as a defendant by the Contractor.

The performance bond

The bond was a tri-partite contract between Barclays, the Contractor and the Employer. It was described as a “performance bond”, with the Recitals referring to the D&B contract and to an agreement between the Contractor and Employer for the provision of a “guarantee”.

Clause 2.2 stated that termination of the D&B contract would not reduce the Surety’s (Barclays) liability under the bond. Further, Clause 5.3, central to some of the issues in dispute and arguments raised, provided that any demand under the bond must be accompanied by (and to be deemed as conclusive evidence) in the form of:

(a) a purported certified copy of (i) a court’s judgment; (ii) an arbitrator’s award; or (iii) an adjudicator’s decision, against the Contractor in the Employer’s favour under the D&B contract; or

(b) a certificate from the Employer purported to be countersigned by the Employer’s Agent, purportedly based on the Contractor’s non-performance (confirming the Contractor’s breach).

Clause 6 confirmed the bond was effective up until either 90 days after the issue of the practical completion certificate or until January 2026 (save in respect of demands received prior to that date).

The Contractor’s arguments

The Contractor pointed to a previous judgment which made clear that fraud is not the only ground on which a call on the bond can be restrained by an injunction. It therefore advanced three main points in support of the injunction:

1. The demand was invalid because it was not in accordance with the bond’s requirements.
2. The bond had been discharged because the Employer’s termination of the Contractor’s employment was itself a repudiatory breach of the underlying D&B contract.
3. No sums were due because the Contractor could either dispute the sums claimed under the bond and/or set off the retention monies withheld by the Employer which exceeded the amount of the LDs.

Barclays’ arguments

The Bank (supported by the Employer) argued that the Contractor’s claim was misconceived: (i) an injunction could only be granted in cases of fraud of which it had notice (and there was no such case); (ii) the Contractor’s other grounds of argument lacked merit; (iii) damages would be an adequate remedy for the Contractor but not for the Bank; and, (iv) there was no merit for an injunction relating to the counter-guarantee.

Decision

Ultimately, none of the Contractor’s arguments were successful and the Judge dismissed the application comprehensively on the basis that:

1. There was no fraud and so the claim was bound to fail. The Court reaffirmed the well-established principle that unless material fraud is established or there is clear evidence of fraud, the Courts will not stop a bank from paying out under an on-demand bond provided the conditions of the bond have been complied with. In this case, there was no allegation of fraud against the Bank. Although it was acknowledged that fraud is not the only ground on which a call on the bond can be restrained by injunction, the other option is where you can show a strong case that the Employer is prevented by the contract from making a demand under the bond. However, this type of injunction must be brought against the beneficiary of the bond (i.e. the Employer) and not the Bank. The Employer had not been joined as a defendant in the proceedings and so this type of injunction could not succeed.
2. Repudiation did not discharge the bond. The bond expressly survived “termination” of the underlying D&B contract, and the wording of the bond was wide enough to include termination following an alleged repudiatory breach.
3. Certification under the bond was “conclusive”. The bond allowed the Employer to demand payment if accompanied by a judgment, arbitrator’s award or adjudicator’s decision, or a certificate of breach countersigned by the Employer’s Agent. A countersigned certificate was provided and therefore the Judge held that such certification was conclusive for the purposes of the bond and the Bank was obliged to make payment, even though the underlying liability was disputed.
4. Technical non-compliance arguments regarding the demand failed. The Contractor argued the demand was defective because the letterheading and two-page certificate referred to “Far East Consortium” rather than the Employer’s precise company name and no company information appeared on either the letter or the certificate. However, the Court held that although these points may have introduced some initial element of doubt, by reading the demand sensibly and as a whole, it was clear who was making the claim and minor presentational issues were not enough to invalidate it.
5. Damages would be adequate for the Contractor and the balance of convenience favoured refusing the injunction. That is because: (i) there was no fraud; (ii) even if the Contractor had brought an injunction against the Employer (which it had not) it did not have a strong case given this was a fairly typical case of an employer under a construction contract having the benefit of a certificate entitling it to payment, which is the only pre-condition to it being able to make a claim on a bond freely given by the contractor; (iii) there was significant delay both in challenging the Employer’s conduct and the issue of certificates and also in relation to challenging the demand under the bond; and (iv) there was no credible evidence of any irreparable damage to the Contractor if an injunction was refused – the Court rejecting the Contractor’s argument that payment would significantly damage cashflow, creditworthiness and future work prospects.
6. Commercial certainty matters. The Judge made clear that routinely restraining banks from paying out under bonds would have wider reputational damage to the performance bond market, especially in the construction sector and the UK.

Beale & Co advise clients on a range of construction contracts and ancillary documents, as well as providing Contracts and Project Advisory support. If you wish to discuss the items covered in this article, or how the implications might impact your contracts or projects, please contact the authors, Andrew Croft or Nadir Hasan.

Article includes contributions from Andrew Croft