Can you stop a call on a bond

Bonds are used in construction contracts to ensure that the contractor carries out and completes the works in accordance with the building contract.  If the contractor does not do so then the employer can simply call on the bond provider for the value of the bond.  Normally, an employer does not have to justify why the call has been made and the monies simply have to be paid out, this can have devastating financial and commercial consequences for a contractor.

Until recently, it was often thought that only fraud could be used as a ground for restraining a bond being called upon, however, a couple of cases over the last few years have confirmed that this is not the case.

It has been decided that if the underlying contract prevents the employer from calling on the bond then the court can restrain that payment.  A court only has to be satisfied that the contractor has a strong case as to why the employer should be stopped from calling upon the bond.

In the most recent case, the bonds were due to expire on the issuing of a Taking Over Certificate of the works or on 31 December 2013, whichever occurred earlier.  The engineer under the contract, who happened to be the employer, refused to issue Taking Over Certificates.  This was not withstanding the fact that they should have been issued because the employer had started to use the works. 

A call was threatened to be made on the bonds.  The contractor made an application to the court for an injunction to stop the call being made.  The court held that the contractor had a strong case that the Taking Over Certificate should have been issued.  The employer was in breach of contract by not issuing the Taking Over Certificates and should not be able to rely on that to be able to make a call on the bonds.  The bonds should have expired because the Taking Over Certificates should have been issued.

In this case, the court ordered an injunction to stop the call being made on the bond.  Clearly, it will not be the usual that a court will stop a call being made upon the bond, but here are circumstances when a court will stop a call being made and protect a contractor from the commercial and financial problems that that may lead to.  

Peter Allen
01245 453813
[email protected]