RESISTING BOND CALLS IN THE ENGLISH COURTS – DO RECENT DEVELOPMENTS PROVIDE HOPE FOR CONTRACTORS?
It is standard practice in international construction projects for a contractor to provide its employer with an on-demand guarantee (also known as an on-demand bond) issued by its bank as security for performance of its contractual obligations. On-demand bonds are typically for 10 percent of a contract value and provide powerful leverage for an employer. The ability for it to make a call on the bond without having to prove that it has an entitlement to monies under the underlying contract between the parties provides the employer with security that the contractor will perform its contractual obligations and not, for example, abandon its works in the event of a dispute. A call on the bond will enable the employer to recover monies from the contractor without the delays and legal costs that it would otherwise incur recovering the amounts through arbitration proceedings under their contract.
For the contractor, the potential threat of a call being made on the bond will be a great concern. A call on the bond will result in the issuing bank making a call against the contractor’s counter indemnity provided to the bank, depriving the contractor of credit. The contractor’s reputation will also be damaged, even if the contractor can later establish by bringing arbitration proceedings against its employer that the employer had no entitlement to the bond monies, such that the call on the bond was wrongful, the contractor will likely be required to disclose the fact of the bond call on bids for future projects, potentially jeopardising its prospects of winning future contracts.
Jul-Sep 2021 issue
Fenwick Elliott LLP