Escaping from an on-demand performance bond can be extremely tricky – and a recent case gives little comfort to those hoping the courts will rescue them
Having your bank account emptied on virtually no notice must be a traumatic experience. Yet that is exactly what can happen to a contractor when its bank is notified by an employer that it wishes to enforce, or "call", an on-demand performance bond. With these bonds, the employer does not have to prove a breach by the contractor, but merely needs to assert one.

Given these severe financial consequences, it is not surprising that the courts have, over the years, dealt with a number of contractors' applications for injunctions to restrain such calls. These applications have been largely unsuccessful. The courts have tended to regard bonds as analogous to letters of credit used in the commercial work of sale of goods (even though there are big differences – for example, performance bonds are not traded). Unless bad faith, which means fraud or dishonesty, can be shown, it is difficult to stop a call being made. And even an "extend or pay" ultimatum – that is, a threat to call the bond unless the contractor agrees to extend it for a further period – probably does not count as bad faith.

A recent decision by Judge Thornton in the Technology and Construction Court (TTI Team Telecom International Limited vs Hutchison 3G UK Limited) provides useful guidance on the circumstances in which a court will consider restraining a call.

The bond in this case was given by a supplier of software (TTI) to a mobile phone company (Hutchison). Hutchison decided that TTI had failed to provide the relevant systems by the agreed dates. It then terminated the sales contract and gave notice to TTI of its intention to call the bond. TTI applied to the court for an injunction to prevent this happening.

The bond stated that the issuing bank would pay on presentation of a certificate by Hutchison that TTI was in breach of its obligations, with details of the breach and the amount claimed. TTI mounted a comprehensive assault on this certificate. Among other things, it argued that the alleged breaches had not occurred or had been waived; that the termination had been unlawful; and that requirements in the bond had not been fulfilled.

The judge reviewed the law. Leaving aside cases of bad faith, there were, he said, three limited exceptions to the general rule that a court will not intervene.

First, the employer might have completely failed to carry out its part of the contract – for example, made it impossible for the contractor to do its work by not making an agreed advance payment. Second, the call might fail to comply with certain stipulations in the bond itself – for example, as to notice periods. Third, and perhaps most important, the bond might be conditional or qualified, and require proof of loss.

TTI's argument on this third exception was that there could not be a valid certificate that the contract had been terminated if the termination itself was unjustified. The judge rejected this. The language of the bond suggested that it was "on demand". This was so even though those words did not appear in the bond itself. The mere fact that the bond referred to TTI's obligations in the sales contract did not mean that it was conditional – indeed, it would be rather odd for the bond to make no reference to such obligations. In short TTI could not dispute Hutchison's views about the facts.

TTI's final throw of the dice was to allege that the "bad faith" exception applied. In general, a contractor might be able to make something of this argument if it could show that there was some ulterior purpose for calling the bond, or that the employer was well aware that its allegations of breach were not justified. However, unless an employer is obliging enough to record its skulduggery in writing, or to leave an incriminating voicemail with the contractor, the point is almost always impossible to prove. In this case the judge duly found that the allegations were "mere speculation without any factual basis".

The judge's ruling that the bond was "on demand" is instructive. Plenty of contractors reading the wording would not have appreciated the point. It is as well to remember that such bonds do not generally come wrapped up in a parcel bearing the label "highly inflammable".