Additional requirements The underlying construction contract may seek to impose limits around when the bond can be called by the employer . It may also oblige the employer to take certain steps prior to making the demand , for example , giving notice or starting the contractually agreed dispute resolution process . The purpose of such provisions is to protect the contractor against wrongful calls and , in the case of notice provisions , to give the contractor time to take preventative action . Such provisions do not directly affect the obligation of the issuing bank or financial institution to pay on receipt of a valid demand , as the performance bond is autonomous from the underlying contract , but it may provide the contractor with grounds to claim that the employer has breached the provisions of the construction contract . It may also allow it to prevent the call being made or to prevent the issuer making payment under the bond .
Where the project in question is being financed , the employer should check the finance documents to establish whether the lender consent is required prior to making the call . The finance documents may also impose limits on what the employer can do with the proceeds of the bond , which may impact the employer ’ s decision to call the bond .
The best time to call the bond Because calling a bond is likely to have a negative impact on the commercial relationship , many employers wish to delay making the demand as long as possible . However , it is not uncommon for the value of the bond to step down over time as the project progresses . That being so , if an employer is entitled to make a call it will be in its interests to do so at a point in time when it will obtain maximum value .
Performance bonds are also usually time limited , with a specified expiry date . Employers should be aware of the relevant expiry dates and be ready to enforce them prior to expiry if they will not be renewed . Most construction contracts will expressly permit this , although conditions may be imposed around the employer ’ s use of the bond proceeds .
It should be remembered that it may take several days or weeks to prepare for and properly call a bond . In one recent example , the original wetink demand had to be served on the issuing bank which required the document to be flown around the world so that it could be signed by the relevant individuals and then delivered . The decision to make the call should not be left to the last minute .
Contractor challenge It is not unusual for demands on performance bonds to be challenged by contractors , either by seeking to prevent the issue of the demand itself or to prevent payment on the demand . In fact , the contractor often has little to lose by making the challenge , as the associated legal fees will likely be significantly less than the amount to be paid out under the bond . The potential for such a challenge , and related proceedings , should be a key consideration for any employer considering a demand .
Employers should , in particular , consider the most likely forum ( s ) for challenge and prepare accordingly . If the contractor seeks to prevent issue of the demand , it will need to consider what jurisdiction is provided for in the underlying construction agreement and , in particular , whether it is required to seek redress through arbitration or via a particular national court . Alternatively , if the contractor seeks to prevent payment by the issuing bank , it will be more likely to seek an injunction from the courts of the jurisdiction where the issuer is located . The position is often complicated by multiple bonds being issued by issuing banks or financial institutions in different jurisdictions .
The grounds on which a court or tribunal may intervene to prevent a call may differ from jurisdiction to jurisdiction , hence the need to seek local advice . In England , the general principle is that the court will be very reluctant to interfere in the process of a bond call . This is because the bond is recognised as an independent contract , separate from the disputes between employer and contractor . As a matter of English law an injunction would traditionally only be granted where the demand is obviously fraudulent and that is known to the bank . The court must be satisfied that the employer had no honest belief that it was entitled to make a demand . In more recent times , there has been movement towards granting an injunction in situations where it has been established that the employer is precluded from making the demand by the terms of the underlying contract .
Such considerations are not straightforward . The employer should seek advice in advance of a bond call as to the likely approach of the relevant court or tribunal and the grounds upon which they may restrain a call . The need to seek and obtain this advice should be built into the bond call timeline .
In all cases , employers should identify and collate evidence of a contractor ’ s breaches in order to be able to demonstrate to a court or arbitral tribunal that a demand is justified and properly made . Making time to consider the justification for a call , and gathering the relevant evidence , will be key not just to defending the call initially , but also to any subsequent dispute between the employer and contractor .
Wrong call If the demand is satisfied , but calling the bond is later determined to be wrongful – for example , because it is ultimately decided that the contractor was not at fault and that the employer was not , therefore , entitled to call the bond – the employer will be required to repay the proceeds from the bond with interest . The employer may also have to compensate the contractor in damages for any other loss that it has suffered .
For this reason , calling an on-demand performance bond should not be seen as free money . However , it may be seen as money now , which could provide a significant benefit in the short term , even in the face of long-term risk . •
50 Project Finance International January 11 2023