Performance Bonds and Guarantees: Construction Owners and Professions Beware

Performance bonds and guarantees have been the subject of considerable litigation in recent years in not only the United Kingdom but also some other common law jurisdictions. The aim of the research reported in this paper is to identify the issues most commonly in dispute and the legal principles governing their resolution. Possession of knowledge of the issues and principle should alert the construction and engineering industries and their legal advisers to the matters that need serious attention in the drafting and negotiation of these instruments. Clarity in the legal principles should also contribute to a reduction in litigation. The issues identified include: (1) whether an instrument is a conditional or an on-demand bond; (2) the effect of failure on the part of the beneficiary to give notices; (3) availability of an injunction to restrain the surety from paying after a call has been made by the beneficiary; (4) availability of an injunction to restrain a beneficiary from receiving payment after a demand has been made; (5) availability of an injunction to restrain a beneficiary from making claim; (6) availability of a Mareva injunction to freeze the fruits of a call; (7) meanings of certain phrases used in the instruments; and (8) a duty to account for proceeds of a call. The principles governing their resolution were also identified. Particular attention must be paid to (1) any ambiguity whether a surety is liable is always construed in the surety's favor; and (2) prejudicial conduct by the beneficiary releases the surety unless the instrument provides expressly to the contrary.