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Courts Examine Grounds for Calling On-Demand Performance Bonds

A recent UK Technology and Construction Court case challenges the view that the Courts will only in very limited circumstances interfere with irrevocable payment obligations contained within on-demand performance bonds.

Typically the UK and Irish Courts rarely interfere by way of injunction to restrain claimants exercising their rights under such bonds except where there is “a clear evidence of fraud”. This case clarified that fraud is not the only ground for granting injunctive relief. The Court went on to hold that it is entitled to restrain claimants from making calls on a bond when they have no contractual entitlement to make such claims.

The UK case involved a claim where the contractor was obliged to provide an on-demand performance bond in favour of the employer. The contract was also amended to provide that the bond became “null and void” (except in respect of pending or prior notified claims) when an acceptance certificate was issued.

Following issue of the acceptance certificate, the employer subsequently made claims in respect of the works and sought to call the bond.  The contractor then sought an injunction to make the employer withdraw its demand notice on the bond.

The Court found that the bond was null and void and granted the contractor its injunction. It held that there was no previous claim prior to the issue of the acceptance certificate. It would therefore appear that the underlying contract could effectively defeat the standalone provisions of the bond.

The lesson to be learned from this case is that while bonds are a valuable security, the ability to claim can be put at risk by the provisions of an underlying contract. Careful review of all contractual arrangements is required to protect entitlements to claim under a bond. It awaits to be seen how the Irish Courts interpret this persuasive authority when next reviewing these issues.

Contributed by Jarleth Heneghan, Cassandra Byrne.

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