Resistance is futile? Performance bonds and how payments under them can be stopped

Thomas Crangle

March 2013

A paper presented to a meeting of the Society of Construction Law in Leeds on 13th November 2012

Calls on performance bonds can have a catastrophic effect on a contractor's cash flow. When a demand under a performance bond is threatened or has been made, the contractor will usually have to act extremely quickly in order to have any chance of preventing payment being made by the issuing bank. This paper looks at the legal and practical steps that a contractor can take to resist payment, analysing the remedies that are available and the criteria that must be satisfied. The paper also looks at ways in which those drafting contracts on behalf of contractors can obtain maximum protection against unjustified demands being made by employers.

Types of bond used in the construction industry (Retention bonds - Bid or tender bonds - Performance bonds - Ascertaining the relevant type of performance bond - Accounting) - On what grounds can a call on an on demand bond be defeated? (Fraud - Failure to comply with the requirements of the demand - The use of foreign courts in cases with an international dimension) - Remedies and procedural issues (Where the bank refuses to satisfy the demand - Injunction against the bank - Injunction against the beneficiary - Bases for granting an injunction other than fraud) - Methods of protecting the contractor at the drafting stage.

The author: Thomas Crangle is a barrister practising at 4 Pump Court, London.

Text 14 pages