We often come across the sentiment that ‘on demand’ bonds provide an absolute entitlement to security, no questions asked. It is becoming clearer and clearer that this is no longer the case.
Occasionally, a Beneficiary will attempt to place a call on the bond even though the Contractor is not strictly in default of the underlying construction contract. There are two ways that this can be prevented:
- If the bond call is fraudulent, a court can stop the bond being released. So, if the Beneficiary made a call despite having no honest belief that the Contractor was in default, the Contractor could obtain an injunction against the Beneficiary or even the bank holding the bond, to stop the money being released. Where the Beneficiary seeks to injunct a bank the court requires the bank to have notice of the fraud.
- As established more recently, courts may interfere where the terms of the underlying construction contract prevent the Beneficiary from making a call. This ‘softening’ of the rule has been criticised. Nonetheless, it is clear that courts are becoming increasingly reluctant to allow a party to call on a bond when expressly disentitled from doing so. However, the Contractor will need a strong case to convince the Court to come to its aid.