UK: The Latest On Bonds And Guarantees

Last Updated: 7 July 2014
Article by Lisa Kingston

We last looked at bonds and guarantees in the 20th issue of Insight in February 2013 ( pdf)

But three recent decisions in this area, Liberty Mercian Ltd v (1) Cuddy Civil Engineering Ltd (2) Cuddy Demolition and Dismantling Ltd EWHC 411 (TCC), Wuhan Gouyu Logistics Group C Ltd and another v Emporiki Bank of Greece SA [2013] EWCA Civ 1679 and Doosan Babcock Ltd v Comercializadora de Eqipos y Materiales Mabe Limitada [2013] EWHC 3010 (TCC), [2013] EWHC 3201 (TCC) warrant an update.

The first case, Cuddy, examines what happens in practice when a contractor fails to provide the bonds and warranties required of it by the contract. The second, Wuhan, considers the approach of the Court of Appeal to a bank which attempted to circumvent its obligation to make payment once the bond had been called. The third case, Doosan, provides a possible exception to the general rule that ondemand bonds are payable on demand (save for a clear case of fraud by the beneficiary), provided that there is strong evidence that the terms of the underlying contract clearly and expressly prevent the beneficiary from a making a call.

Each decision and its practical implications are considered in detail.

Cuddy (TCC, 3 September 2013)

The facts

In October 2009, Liberty Mercian Limited ("Liberty") invited the Cuddy Group ("Cuddy") to tender for works relating to the construction of a new supermarket in Cardigan. The works were to be carried out under an amended NEC3 form, the terms of which required a parent company guarantee, performance bond and subcontractor warranties to be provided in favour of Liberty and also the contract administrator, Waterman Transport & Development Limited.

Following correspondence between Cuddy and two of its subsidiaries, Cuddy Civil Engineering Limited ("CCEL") and Cuddy Demolition and Dismantling Limited ("CDDL"), the works commenced towards the end of 2010. Liberty requested that CCEL provide the warranties on 6 June 2011 and the performance bond on 29 November 2011 but CCEL provided neither.

It was not clear whether a contract had been formed between Liberty and CCEL or Liberty and CDDL, and a dispute subsequently arose in relation to whether a valid contract had been formed, and if so, between whom.

Liberty issued a termination notice on 7 January 2012, and later, legal proceedings against Cuddy, CCEL and CDDL. The issue the court had to decide was (i) if a contract had been formed with CCEL, whether CCEL was obliged to procure the parent company guarantee, performance bond and warranties from its subcontractor, Quantum Limited ("Quantum") and (ii) whether specific performance should be ordered in relation to their provision.

CCEL sought to argue that (i) specific performance was inappropriate and that damages were an adequate remedy as the bond provided for a liquidated sum that was easy to express in terms of damages (ii) it had a £2m breach of contract claim against Liberty and (iii) it was not practically possible for it to procure a performance bond as CCEL's usual bond markets were unwilling to issue a performance bond for a contract that had been terminated.

As regards the warranties, CCEL maintained that (i) it was impossible for it to obtain warranties from its subcontractor Quantum as Quantum was in administration and the administrator refused to provide a warranty and (ii) specific performance was not appropriate in circumstances where the contract had been terminated as it would be difficult to fix a date for the expiry of the bond.

The decision

The court held on the facts that a contract did exist between Liberty and CCEL and CCEL's obligation to provide the bonds and warranties survived the termination of that contract. Because CCEL had no parent company however, judgment was reserved as to whether an order for specific performance would be appropriate in relation to CCEL's failure to provide the warranties and a parent company guarantee.

The court did not consider damages would be an appropriate remedy for CCEL's failure to provide a performance bond and warranties as CCEL did not have assets and it was questionable whether any judgment against it would be able to be satisfied.

Further, the fact that Liberty was in breach of contract was irrelevant to CCEL's obligation to provide the performance bond.

All things considered, the court did not consider CCEL's arguments that it could procure the bonds and warranties to be satisfactory. An order was therefore made that CCEL was to use its best endeavours to procure the warranties and performance bond and the matter was listed for a further hearing so that CCEL could return to court and demonstrate the efforts it had made.

Practice points – for contractors

  • You should use your best endeavours to procure performance bonds and warranties. The court did not give any specific guidance in Cuddy as to what best endeavours might mean1, but it is likely that your efforts would have to be wide ranging and convincing. If your best endeavours prove to be fruitless, and there is no evidence to the contrary, then the court would be unlikely to require you to provide the impossible.
  • Do not try and argue that it would be impossible for you to provide a performance bond on the basis that your financial position will not permit you to fund one unless you have provided full disclosure of your financial position. As a general rule, those who plead poverty must give full disclosure of their financial position in order to establish their lack of means beyond all doubt. If, for example, you fund the defence of litigation, it will be very difficult for you to simultaneously maintain a lack of means.
  • If you have access to funds from a third party on either a commercial or non-commercial basis, and there is an arrangement or agreement by conduct whereby that third party is to perform your contractual obligations, then the court may expect the third party to provide a performance bond on your behalf. Equally, if any such agreement or arrangement also includes an obligation to enforce the terms of any subcontract, then the third party might also be required to enforce the terms of the subcontract and procure any warranties on your behalf.

Practice points – for employers

  • If you are an employer and there is no expiry date in the draft form of bond, you should focus on obtaining evidence confirming it is possible for the contractor to procure a performance bond. Everything will depend on what the market is prepared to offer, and it would therefore be worthwhile approaching the market to find out (i) which banks or insurers are prepared to provide a bond and (i) what date they will accept for the expiry of the bond.
  • If you can identify a bank or insurer that will provide an acceptable bond and expiry date, then the court may require the contractor to procure the bond you have identified.

Doosan (TCC, 11 & 24 October 2013)

The facts

Doosan Babcock Limited ("Doosan") contracted to supply two boilers to Commericalizdora de Equipos y Materials Mabe Limitada ("Mabe") and procured performance guarantees in accordance with the contract. The guarantees were payable on demand and were due to expire upon the earlier of the issue of Take-Over Certificates ("TOCs") by Mabe, or 31 December 2013.

The provider of the guarantee undertook to make payment to Mabe:

on receipt of your first demand in writing stating that [the Claimant] has not performed its obligations in conformity with the terms of the Contract.

In July 2013, Doosan asked Mabe to issue the TOCs on the basis that the boilers had been taken into use but Mabe refused, arguing the boilers were only being used temporarily. Mabe subsequently notified a claim for delayed supply and defects in the boilers and Doosan sought confirmation from Mabe that it would provide 7 days advance notice of any call on the performance guarantees. Mabe refused and so Doosan applied for an interim injunction restraining a call on the basis that Mabe was (i) in breach of contract in refusing to issue the TOCs and (ii) was relying upon its own breach of contract to enable payment under the guarantees. The court granted the relief Mabe sought and listed the matter for a further hearing, asking the parties to prepare further evidence on whether the boilers were just being used on a temporary basis.

The decision

At the restored hearing, the judge found that the boilers were in commercial use and that the temporary use of the boilers was not in accordance with the terms of the parties' contract. The judge referred to the principles in the American Cynamid case and Simon Carves v Ensus UK2, where Mr Justice Akenhead said that a beneficiary could be restrained from making a call on the bond if the claimant has a strong case that the terms of the underlying contract clearly and expressly prevent the beneficiary from a making a call. Mr Justice Akenhead also made an alternative finding that interim relief could be granted on the basis that Mabe should not be permitted to benefit from its own wrong, applying the principle set out by the House of Lords in Alghussein Establishment v Eton College.

Practice point

If (i) the right to make a call under an ondemand bond is qualified by the terms of the underlying contract and (ii) you can advance strong evidence that the terms of the underlying contract clearly and expressly prevent the beneficiary from a making a call, then it would be worthwhile you seeking an interim injunction restraining a call.

Wuhan (Court of Appeal, 20 November 2013)

The facts

Arbitration proceedings were on foot between the buyer and seller in relation to the underlying ship building contract which was secured by a so-called 'payment guarantee'. The seller claimed that the second instalment under the contract was due to be paid and subsequently submitted a demand to the bank for payment under the terms of the payment guarantee.

The bank declined to make payment on the basis there was no final and binding arbitration award in relation to the second instalment and instead placed the amount due in escrow. When the Award was finalised, and there was confirmation that the second instalment was not in fact due, the bank issued an application for a declaration that a trust was created when the amount due was released from escrow on the basis that the sellers knew they were not entitled to the money that had been paid over.

The issue then was whether the bank was liable to make payment. Because of the unusual nature of the case, the matter was leapfrogged straight to the Court of Appeal.

The decision

The Court of Appeal held that in the case of on-demand bonds, the general principle is that the obligation to make payment crystallises immediately upon the on-demand bond being presented to the payer. The payer can only resist payment of a conforming bond if there is a clear case of fraud by the beneficiary.

The Court of Appeal went on to say that money paid out under an on-demand bond could never be subject to a trust in the manner argued for by the bank. The implication of a constructive trust whereby the bank sought to impose a fetter upon the seller's right to dispose of the moneys paid out under the payment guarantee would be completely contrary to the general principle that on-demand bonds are payable on demand (save for fraud).

The bank was accordingly ordered to release the money to the seller notwithstanding that it was common ground that no payment was due in relation to the Award.

Their Lordships emphasised that the payment guarantee was a completely separate contract to the underlying contract between the buyer and seller that contained entirely separate obligations that were entirely independent of the underlying contract. The liability to make payment crystallised on presentation of the payment guarantee and this was the case regardless of whether the person calling the bond was entitled to the money claimed or not.

Practice point

On-demand bonds are payable on demand, and unless there is a clear case of fraud by the beneficiary, payment must be made immediately a bond has been called.


The Wuhan and Cuddy decisions serve to reinforce the seriousness with which the courts treat the security that is afforded by bonds, guarantees and warranties which are all designed to protect against default or non-performance.

In Wuhan, the Court of Appeal emphasised that conforming on-demand bonds do what they say on the tin: (except in the case of fraud) they are payable on demand without reference to the underlying contract or any liability arising under that contract. There is, however, one possible exception. If there is strong evidence that the terms of the underlying contract clearly and expressly prevent the beneficiary from a making a call, then the court may be prepared to follow Doosan and restrain a call.

In Cuddy, the High Court expected the contractor to use its best endeavours to procure the security required by the contract but the court stopped short of saying it would order the contractor to procure the impossible.


1 As a general rule, best endeavours clauses impose an obligation to do what can reasonably be done in the circumstances, and the commercial context and intentions of the parties will also be important. Bar some qualifications, no stone should be left unturned in an attempt to comply (see Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451).

2 In the Simon Carves case, the parties had agreed expressly that the beneficiary's right to make a demand on the guarantee was either qualified or would be extinguished if certain events occurred.

Please click here to view previous issues of Insight

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Lisa Kingston
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.