Key takeaways
Performance bonds
Unless material fraud is demonstrated, a bank will not be restrained from paying out under an on-demand bond where a valid demand has been made.
Autonomy principle
The bank or guarantor must pay on demand notwithstanding any disputes arising out of the underlying contract.
Adjudication
A contractor should not delay in commencing adjudication or other proceedings in relation to disputes under the construction contract.
CR Construction (UK) Company Ltd -v- Barclays Bank Plc [2026] EWHC 202 (TCC)
This was a construction dispute which is of general relevance because the Court addressed a number of issues relevant to financial instruments known as performance bonds.
In addition to being commonly used to manage risk in large-scale construction projects, including in shipbuilding, performance bonds are also used as a risk mitigant in commodity trading, protecting a buyer in the case of non-performance or defective performance by the seller.
In this case, in declining to grant an interim injunction to a contractor to restrain Barclays Bank from paying out to the employer under a construction contract, one of the relevant factors highlighted by the Court was the wider reputational damage to the performance bond market, particularly in the UK. The Bank was entitled to rely upon the autonomy principle, unless the fraud exception applied.
The background facts
Application for an injunction
CR Construction (UK) Company Limited (Contractor), sought an interim injunction against Barclays Bank plc (Bank), to restrain it from making any payment to the Intervener, Northern Gateway FEC (No 7) Limited (Employer), pursuant to a demand made on it by the Employer under a performance bond dated 29/3/22 (Bond) in the sum of £2,475,441.02 in respect of liquidated damages due to the Employer from the Contractor.
The Contractor also sought an interim injunction against the Bank which would require it to return the payment which it had received from Hongkong and Shanghai Banking Corporation Limited (HSBC) under the counter-guarantee given to it by HSBC in relation to the Bond.
The arguments
The Contractor argued that it was entitled to obtain an injunction because:
It was strongly arguable that the demand was not made in accordance with the requirements of the Bond.
It was strongly arguable that before the demand was served, it was already discharged due to the repudiatory breach of the underlying construction contract made between the Contractor and the Employer (Contract) which it had accepted.
It was strongly arguably that nothing was due under the Bond because the Contractor was entitled to dispute the quantum of the sum claimed under the demand.
The Bank defended the claim arguing principally that:
On the authorities, the only basis on which an injunction could be granted against it as the bank issuing the Bond would be a case of fraud of which it had notice, which was not argued by the Contractor.
Even if this was not correct, there was no merit in any of the grounds advanced by the Contractor.
The balance of convenience favoured refusing the injunction.
The Employer supported the Bank's objections to the grant of the injunction.
The relevant principles for granting the interim injunction
The Court’s general approach where an interim injunction is sought to provisionally restrain a party from calling on a performance bond or a surety from paying out under a bond is as follows:
Unless material fraud is established at a final trial or there is clear evidence of fraud at the without notice or interim injunction stage, the Court will not act to prevent a bank from paying out on an on-demand bond provided that the conditions of the bond itself have been complied with (such as formal notice in writing).
A beneficiary it is not permitted to make a call on the bond when it is expressly disentitled from doing so. If the underlying contract, in relation to which the bond has been provided by way of security, clearly and expressly prevents the beneficiary party to the contract from making a demand under the bond, it can be restrained by the Court from making a demand under the bond.
The Court when considering the case at a final trial will be able to determine finally what the underlying contract provides by way of restriction on the beneficiary party in calling on the bond. The position is necessarily different at the without notice or interim injunction stage because the Court can only very rarely form a final view as to what the contract means. It cannot be expected that the Court at that stage will make in effect what is a final ruling.
The Technology and Construction Court decision
The Court stated that whilst a beneficiary’s call on a bond can be restrained on a wider basis than fraud, there was no authority stating in clear terms that an injunction may be granted against a bank on grounds other than fraud.
In this case: (i) the Contractor did not and could not on the evidence make an allegation of fraud against the Bank; and (ii) the Contractor had chosen not to make the Employer a party to the claim or to its interim injunction application. Therefore, it was not enough for the injunction against the Bank to establish – even if that were the case – that the Employer was prevented under the underlying Contract from making a demand under the Bond.
Therefore, the application for an interim injunction against the Bank could not succeed. However, in case this was wrong and/or the Contractor subsequently sought an interim injunction against the Employer, the Court considered the provisions of the underlying Construction Contract as well as the Bond.
The Bond
The Court made the following relevant findings:
The Bank’s liability under the Bond was not affected by termination of the Construction Contract, whether contractual termination or termination at common law due to a party’s repudiatory breach.
The Bond amounted to a guarantee and not an indemnity. The Employer could not recover more under the Bond than it could recover from the Contractor, net of any set-off. The Contractor remained the primary obligor and the Bank’s liability was co-extensive with, and not greater than, the Contractor’s liability.
The Employer had to provide one or more of the required documents with its demand. These were: (i) a certified copy of a court judgment, arbitration award or adjudicator’s decision in favour of the Employer under the Construction Contract; or (ii) a certificate from the Employer, countersigned by its Agent, based on the Contractor’s non-performance, to confirm the Contractor’s breach. Such a document would be conclusive evidence of the Contractor’s breach, upon which the Bank could rely.
The demand sent to the Bank had been countersigned by the Employer’s Agent. A complaint was raised as to potential technical non-compliance in the form of the demand. This was, however, dismissed by the Court. The Court pointed out that the Bond itself required no particular form of demand and that any procedural defect was immaterial to the validity of the demand.
Whilst the Contractor had commenced an adjudication against the Employer, it had delayed in doing so and a decision remained outstanding. If the Contractor was entirely successful in the adjudication, it would prima facie be entitled to require the Employer to reimburse the amount of the liquidated damages the subject of the demand made against the Bond.
Ultimately, the balance of convenience favoured refusing the injunction. The injunction to require reimbursement of HSBC was also refused.
Comment
Given the importance of performance bonds in the commercial world, a party seeking an interim injunction against a bank or its counterparty will need to ensure it has a strong case. The Court will not conduct a mini trial.
