Performance Bond call – too demanding for contractors

Performance bonds are frequently taken out by contractors on projects to provide employers with security. The bonds are issued by a bank or insurance company to provide security against a contractor’s insolvency or non performance, typically for 10% of the contract sum.

In most cases, the bonds expire on a particular date or event without the monies secured under the bond ever being called for under the bond provisions. Often, more thought is given by contractors into the pricing rather than the wording of the bond and what markup can be added to the contract sum as a result.

The recent case of CR Construction v Barclays Bank & Or indicates that careful scrutiny is required of the bond wording to manage these issues.

Background

CR Construction (“the Contractor”) was appointed main contractor by Northern Gateway (FEC) No 7 Limited (“the Employer”), on a £117m residential development in Manchester, let under an amended JCT 2016 design and build contract.  As part of the requirements, the Contractor took out a performance bond with Barclays Bank (“Barclays”), which was counter guaranteed by HSB Bank in Hong Kong. In February 2025, the bond was called to recover liquidated damages which the Employer was claiming against the Contractor for delays to the works. At the same time, the Employer issued a default notice and then a termination notice against the Contractor, which the Contractor accepted as a repudiatory breach of contract.

Thereafter, in early 2026, the Contractor sought an injunction against Barclays to restrain them from paying out monies secured by the bond to the Employer, and reverse the corresponding counter guarantee to Barclays from HSB Bank in Hong Kong.

Contractual provisions of the bond

Relevant provisions of the bond can be summarised as follows:

Clause 1 - “If the Contractor fails to pay any debt, damages or other sum of money which the Contractor is or becomes liable to pay to the Employer under or in connection with the Construction Contract (Due Amount), the Surety shall, subject to the terms of this Deed, and if required to do so by notice in writing given by the Employer and received by the Surety, pay the Due Amount to the Employer, up to a maximum aggregate amount of the Maximum Amount”.

Clause 2.2 - “No termination of the Construction Contract, and no termination of the Contractor’s employment under the Construction Contract, shall reduce the liability of the Surety under this Deed”.

Clause 5.1 - “This Deed creates a guarantee and not an indemnity, and accordingly the Employer shall be entitled to recover no more under this Deed in respect of any matter than the Employer would be entitled to recover from the Contractor in respect of that matter, net of any set-off.

Clause 5.3 - “Any demand made by the Employer under this Deed must be accompanied by either:

1. what purports to be a certified copy of (i) a judgment of a court; (ii) an arbitrator’s award; or (iii) a decision of an adjudicator, in each case against the Contractor in favour of the Employer under the Construction Contract; or
2. a certificate from the Employer that is purported to be counter signed by the Employer’s Agent, purportedly based on the non-performance of the Contractor, to confirm the Contractor’s breach,

and any one of which shall be conclusive evidence for the purposes of this Deed as to any liability of the Contractor to which such judgment, or award or decision or certification relates.”

Arguments

The contractor sought to restrain Barclays (and reverse the counter-guarantee payment) on the following basis:

1. The demand itself which said “Far East Consortium” on the letterhead rather than the Employer’s full name.
2. The bond had been discharged because the Employer’s repudiatory breach/termination had been accepted by the Contractor.
3. Nothing was due under the bond because the Contractor could dispute the quantum of the amount claimed and/or the set off being claimed by the Employer against monies otherwise due to the Contractor.  Additionally, the retention monies held by the Employer exceeded the liquidated damages being levied.
4. An injunction was suitable here because damages would not be an adequate remedy. Further, the Contractor would suffer irreparable harm if the bond was called (including loss of working capital, jeopardised projects and prejudice against them in future tendering opportunities).

Barclays (supported by the Employer) argued:

1. that the application was misconceived because an injunction against a bank issuing a performance bond will generally only be granted in cases of fraud, and no fraud was alleged here.
2. that the Contractor had no strong case on any of the grounds advanced.  Further, damages would be an adequate remedy, whereas restraining the Bank would expose it to legal and commercial risk, thus making an injunction inappropriate on the balance of convenience.
3. that there was no proper basis to order the return of monies already paid under the counter-guarantee.

Decision

The Technology and Construction Court held that the application, as framed against the bank, could not succeed: authorities distinguish between restraining a bank (generally only for fraud) and restraining a beneficiary (possible where there is a strong case that the underlying contract clearly prevents a calling of the bond). Here, there was no evidence of fraud, which was fatal to the claim.

The Court however went on to consider the Contractor’s other arguments:

• The alleged defects in the demand were considered minor and, when read as a whole, the documentation clearly amounted to a demand made by the Employer.
• The termination argument was not strong, as the bond wording of clause 2.2 was capable of covering termination following acceptance of a repudiatory breach.
• The set-off argument was also weak, particularly given the bond’s certification wording under 5.3(b), which made the certified sum conclusive for the purposes of the bank’s liability upon an appropriate certificate from the employer, countersigned by the Employer’s Agent.
• The Contractor’s assertion of irreparable harm was made without hard evidence and the Contractor had also failed to act promptly. It could have acted much sooner after the issues arose.
• The balance of convenience strongly favoured refusal, including the wider policy concern that restraining a bank from paying on a bond (outside fraud) would damage confidence in the performance bond market. Granting an injunction could also mean it could be in place for years if tied to the final resolution of the underlying disputes.
• There was also no sensible basis on which the payment made under the counter guarantee could be reversed. This was in any event not subject to English law and jurisdiction.

Comment

While fact dependent, this case does indicate that the courts may be reluctant to intervene in bond calls. We suggest that when the terms of a bond are being negotiated, care should be taken as to the circumstances under which the bond can be called and when the bond expires. For instance, contractors may wish to require a specific form of demand with an adjudicator’s award or court judgment to be appended as proof of default and of quantum, rather than self-certification from the employer and employer’s agent.  Also,  in the absence of prior calls, contractors may wish the bond to expire on the earlier of contract termination, practical completion, the end of the defects liability period  or on a specific longstop date.

Although bonds are not often called in the construction market, taking such measures when the contracts are being negotiated may provide some protection for contractors.