In CR Construction (UK) Company Ltd v Barclays Bank Ltd & Northern Gateway (FEC) No 7 Ltd[1] (“CR Construction”), the TCC most recently considered the bases on which a call on a performance bond could be blocked by an injunction.
The facts were not unusual for a call on a performance bond. Northern Gateway (“FEC”) was the Employer in relation to a development in Manchester – Victoria Riverside. FEC engaged CR Construction (UK) Company Ltd (“CR”) as the Contractor on the development under a 2016 JCT Design and Build Contract (“the Contract”). As is usual, FEC sought and obtained a performance bond (“the Bond”) provided by Barclays Bank Ltd (“Barclays”) in respect of CR’s performance under the Contract.[2]
The Bond’s operative clause (clause 1) stated that Bond would respond to debt or damages unpaid by CR with Barclays making payment on receipt of the requisite notice. The notice was as stipulated at clause 5.3:
“Any demand made by the Employer under this Deed must be accompanied by either:
(a) what purports to be a certified copy of (i) a judgment of a court; (ii) an arbitrator’s award; or (iii) a decision of an adjudicator, in each case against the Contractor in favour of the Employer under the Construction Contract; or
(b) a certificate from the Employer that is purported to be counter signed by the Employer’s Agent, purportedly based on the non-performance of the Contractor, to confirm the Contractor’s breach, and any one of which shall be conclusive evidence for the purposes of this Deed as to any liability of the Contractor to which such judgment, or award or decision or certification relates.”
The Bond further provided that its operation (and therefore payment) was not impacted by termination of the Contract.
It was common ground that CR failed to meet Sectional Completion dates (though the causes of that failure were and are firmly in dispute). As a result, liquidated damages were certified by the Employer’s Agent – Arcadis. CR neither paid nor challenged the liquidated damages and eventually a call was made on the Bond. In the meantime, CR’s employment as Contractor under the Contract had been terminated. CR alleged that this termination of CR’s employment under the Contract was in fact a repudiatory breach which, after some delay, CR purported to accept.
As a result of the call, CR sought an injunction against Barclays. FEC was neither included in the application for an injunction nor was FEC served or provided with any papers. When FEC complained and sought copies of the papers and potentially to be joined to any application for an injunction, CR refused. Thus, an oddity was created; the party whose security was at issue and who actually knew about the development at issue was, if CR was to have its way, excluded from any application or hearing.
Unsurprisingly, FEC objected to that course of action and sought to be heard (a course of action that Barclays supported). After some considerable debate, CR consented to FEC being joined as an intervenor.
At the hearing, CR raised many and varied alleged bases for an injunction – so much so that some of the subsequent commentary has pointed out that the case could be an object lesson in the difficulties in obtaining an injunction. FEC and Barclays, unsurprisingly, focussed on the wording of the Bond and in particular clause 5.3. Clause 5.3, they said, once complied with,[3] operated as notice under clause 1 and the Bond responded as a “hybrid” on demand bond. That was and is an entirely orthodox position and one which the Court accepted. That on its own, as both Barclays and FEC submitted, was sufficient to defeat CR’s claim.[4] The injunction application therefore failed: none of the alleged bases for an injunction succeeded. All of that is as per the long-established authorities – Harbottle, Edward Owen, Bolivinter[5]– a bond in this format is to be treated as cash.
There are, however, two points about CR Construction that are unusual and require, I would suggest, some further expansion. The first is the role or otherwise of FEC. The second is the discussion of autonomy.
As to the first, the Bond was FEC’s security and, if successful, the injunction application would have stripped FEC of that security. Further, instruments such as bonds are used to regulate cash flow on default such that the beneficiary is paid without debating the underlying dispute. FEC by exclusion would be deprived of its right to seek to protect its cashflow.[6] FEC therefore submitted that it was entitled to be present. The learned judge accepted that submission and in particular, in relation to costs.[7]
The learned judge was manifestly right so to do. The beneficiary’s (here FEC) and the surety’s (here Barclays) interests are not aligned.[8] The surety will be interested in its reputation as someone who does or does not pay on an otherwise valid instrument[9] and therefore on market and reputational risks in a wider context than that purely of the instrument at issue. The beneficiary will be concerned about its security, its cashflow and whether the beneficiary is protected on the project(s) at issue. Further, as indicated above, the beneficiary will know whether that which the defaulting party now says is correct per se or as a representation of the parties’ various contentions – the surety will not. There are therefore principled and pragmatic reasons why the beneficiary should be joined and should be present at any application.
As to the second, it is established that financial instruments like letters of credit and bonds are autonomous from the underlying dispute. Thus, determining liability on the instrument – provided the instrument’s requirements are met[10] - is not dependent on deciding the underlying merits of the dispute: the instrument is said to be autonomous. For this reason, a consideration of the underlying merits will, in the usual case, not be grounds for granting an injunction.
What CR Construction discusses is what autonomy may mean as against the surety and the beneficiary. As against the surety, the Court held, as per long-standing authority, the only ground on which a surety can be precluded against paying on an instrument (if the wording so provides) is fraud.[11] Fraud undermines and removes autonomy. Thus, a surety, where the instrument wording so provides, can only have an injunction granted against it if there is strong evidence of fraud of which the surety is aware.[12]
Fraud was not substantively alleged in CR Construction and so the claim against Barclays was bound to fail. As FEC was not a party – at CR’s instigation – no injunction could be granted against FEC in any event.[13]
What the Court did, however, was to consider whether autonomy meant the same in relation to the beneficiary as it did in relation to the surety. Applying Simon Carves Ltd v Ensus UK Ltd,[14] the Court stated that the instrument was less autonomous in relation to the beneficiary than it was in relation to the surety.[15] Thus, a beneficiary might be precluded from calling on an instrument if there was a clear contractual stipulation between the beneficiary and the defaulting party[16] precluding the beneficiary from so calling. Fraud was thus not the only ground on which an injunction could be granted as against a beneficiary.
In CR Construction, the argument was hopeless. The JCT 2016 Design and Build contains no stipulation against calling on an instrument, the Contract did not so provide and CR could point to no such stipulation. Thus, any consideration could be said to be obiter. That said, however, this possible erosion of autonomy requires some consideration.
It must be remembered that both the surety and the beneficiary are parties to the instrument at issue and there are reciprocal provisions (pay and be paid). Due, however, to the differing approaches to autonomy, the same reciprocity and the same wording (to pay and be paid) mean differing things to each party. Where there is a contractual stipulation in relation to a call on the instrument, and assuming the surety is unaware of that stipulation, the surety is obliged to pay but the beneficiary is not entitled to receive. That is odd and is quite capable of creating uncertainty in relation to instruments whose sole purpose, it might be said, is certainty.
Factually, it is possible that where there is a contractual stipulation against calling on the instrument, the beneficiary (if it is aware of that stipulation) is acting in bad faith in making a call. If the surety is aware of that bad faith, then the fraud exception to autonomy would apply. There is no difficulty in this case.
Assume, however, that is not the case – what is the basis for the imbalance?[17]
There are, it seems to me, two answers.[18]
First, at common law, it is well established that if X claims on an instrument, the instrument pays but the loss in fact suffered is less than the amount paid, then X must make restitution.[19] Here, X by calling on the instrument is in breach of contract and the damages will be the amount called.[20] X would be required to pay those damages or to repay the amount called. Thus, there would be the call and then a claim for instant repayment. Any money would, in essence, go round in a circle. The courts avoid that outcome by the concept of circuity of action; the action which starts the circle is blocked.[21] Here, therefore, the beneficiary’s call would likewise be blocked.
The second would be that equity would assist the defaulting party. A beneficiary calling on an instrument when it was clearly barred from so doing would not have clean hands. Similarly, the balance of convenience would hardly favour a beneficiary in those circumstances.[22] An injunction could therefore lie.[23]
[1] [2026] EWHC 202 (TCC).
[2] The Bond here was a hybrid and not the usual JCT wording.
[3] As to which see Oval (717) Ltd v Aegon Insurance Company (UK) Ltd (1997) 85 B.L.R. 97; IE Contractors Ltd v Lloyds Bank [1989] 2 Lloyd’s Rep. 205 at 207 but cf Siporex Trade SA v Banque Indosuez [1986] 2 Lloyd’s Rep. 146 at 159; AES-3C Maritza East 1 EOOD v Credit Agricole Corporate & Investment Bank [2011] EWHC 123 (bond does not require same level of precision as a letter of credit); or a literal approach to the demand requirements may be rejected if that approach would strip the security of effect - Seele Middle East FZE v Raiffesenlandesbank [2014] EWHC 343.
[4] These elements of the case have been considered in several articles in the industry press and are not repeated here.
[5] [1978] QB 146, 155G-156B; [1978] QB 159 at 171; [1984] 1 WLR 392, 393 respectively.
[6] See judgment at [75].
[7] Although there is a line of authority (mainly derived from the public law context) that a successful intervenor is not automatically entitled to their costs, here FEC was entitled to its costs as FEC had an interest – that under the Bond – to protect.
[8] Even if they agree on the proper construction of the instrument.
[9] For the balance of this article as I am dealing with the general position (which would include letters of credit) I refer to the document at issue as an instrument rather than a bond.
[10] Bearing in mind those may require some form of decision as to the merits – see Yuanda (UK) Co Ltd v Multiplex Construction Europe Limited [2020] BLR 320.
[11] See [9 – 10].
[12] See Bolivinter supra.
[13] See [11]. The Court then went on to hold that a claim against FEC would have failed in any event – see [11] and [13 ff].
[14] [2011] EWHC 657 (TCC). The proposition has been explained as follows: It is clear from these authorities that an Injunction restraining a beneficiary from enforcing payment under an on demand bond will be granted only where it is shown either that the demand would be in breach of an express condition precedent to the right to demand payment or in breach of an implied obligation to similar effect providing such an implied term can be shown to the enhanced standard or it can be shown to the enhanced evidential standard that any demand is fraudulent unless (perhaps) an injunction has been sought before any question of enforcement arose. Shapoorji Pallonji & Company Private Ltd v Yumn Ltd & Anor [2021] EWHC 862 at [23].
[15] There is an argument as to whether this statement is obiter, the Court having held that the application failed against Barclays and there was no application as against FEC.
[16] Which would have been CR here if there had been such a stipulation which there was not.
[17] If there is one – see the point about the cases on point being obiter.
[18] I put on one side the point that in many of cases, the discussion over the contractual bar is obiter – see eg Simon Carves itself; Doosan Babcock Ltd v Comercializadora de Equipos y Materiales mabe Limitada [2014] BLR 33.
[19] See eg Cargill International SA v Bangladesh Sugar and Food Industries Corpn [1998] 1 WLR 469.
[20] The defaulting party is obliged to pay the surety all and any amounts paid under the call either by debit from the defaulting party’s bank account or some other financial instrument.
[21]Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; The Brede [1973] 2 Lloyd’s Rep 333; Post Office v Hampshire CC [1980] 124; Magdeev v Tsetkov [2019] EWHC 1557.
[22] It has to be borne in mind, however, that it will remain very difficult for a defaulting party to show that the balance of convenience favours it – see Harbottle (Mercantile) Ltd v National Westminster Bank [1978] Q.B. 146 at 155.
[23] It must be noted, however, that interim injunctions granted in Simon Carves cases often do not survive further scrutiny – see eg Sirius International Insurance Co v FAI General Insurance Ltd [2003] 1 WLR 2214.
