Introduction
Risk management is a critical aspect of international construction projects. One of the key tools used to manage risk in this context is the provision of bonds. It is common industry practice for employers to require contractors to provide bonds as security for potential risks and various obligations. This practice is also reflected in standard form construction contracts, such as those issued by the International Federation of Consulting Engineers (FIDIC), the New Engineering Contract (NEC) and the Joint Contracts Tribunal (JCT), which include provisions addressing different scenarios in which bonds may be provided.
In general, bonds take the form of a third party’s written promise to pay a specified amount of money upon the occurrence of a defined event. Bonds are typically issued by banks or other financial institutions. This arrangement creates a tripartite relationship between the employer, the contractor and the issuer.[1] The relationship between the employer and the contractor is based on the construction contract, while the contractor enters into a separate arrangement with the bank to procure the bond. Once issued, the bond is delivered to the employer, who may call on it by applying to the issuer and demonstrating that the event specified in the instrument has occurred.
The validity and terms of bonds are determined by the law governing the instrument. This choice of governing law influences not only the interpretation of the terms but also the conditions under which the instrument may be called and the defences available to the parties involved. Parties should also pay attention to ensure that there are not inconsistencies between the terms of the bond and the underlying contract.[2]
Types of Bonds in Construction Projects
Given the range of risks that may arise in a construction project, various types of bonds have been developed to address specific categories of risk. The most commonly used instruments and their purposes are explored below.
Advance Payment Bonds
Employers often make advance payments to contractors at the outset of a construction project to help cover initial costs, such as mobilisation expenses. To safeguard the repayment of these advances, employers require contractors to provide advance payment bonds.
It is common for the value of an advance payment bond to match the amount of the advance paid by the employer. The contractor typically repays the advance through deductions in interim payment certificates as the project progresses. Correspondingly, the amount secured by the bond is reduced over time to reflect the outstanding balance of the advance. This gradual reduction benefits the contractor in two ways: it lowers the fees charged by banks, and it frees up the contractor’s credit line, allowing greater flexibility to secure financing for other purposes.
Performance Bonds
A key priority for employers is ensuring that contractors carry out and complete the works in a timely manner and in accordance with the agreed specification. To mitigate the risk of non-performance, employers commonly require contractors to provide a performance bond, which usually covers 10 per cent of the contract price.[3] If the contractor fails to complete the works in accordance with the contract terms, the employer may call on the performance bond and use the proceeds to complete the outstanding works either directly or by contracting a third party.
The value of performance bonds may be adjusted in certain circumstances, such as when the contract price increases or decreases significantly owing to the introduction of variations.[4]
Retention Bonds
In the construction industry, it is common practice for employers to withhold a percentage of payments otherwise due to the contractor as security for the proper completion of the entire project or a specific section of the works.[5] This practice is known as ‘retention’.
Instead of withholding retention sums, the employer may agree to release those sums and receive a retention bond from the contractor. This arrangement allows the contractor to receive full payment without deductions, while still providing the employer with financial security. If the contractor fails to complete the works, the employer may call on the bond to recover the retention amount.
An important consideration in relation to retention and retention bonds is compliance with applicable legal requirements. For example, under German law, parties are permitted to use retention mechanisms and related bonds; however, the retained amount or the value secured by the retention bond must not exceed 10 per cent of the total contract price.[6]
Other Types of Bonds
In addition to the more commonly used bonds in international construction projects, parties may also choose to use other forms of security instruments tailored to specific risks, such as payment bonds, tender or bid bonds, defects liability bonds, and maintenance bonds.
Dispute Resolution and Arbitration Practice
This section examines common disputes involving the use of bonds in construction contracts, including disputes over liability under conditional bonds, resisting or challenging calls on on-demand bonds, seeking the return of bonds and related damages and pursuing remedies after encashment.
Conditional Bonds: Proving Breach of Underlying Contract and Damages
Conditional bonds require the beneficiary to satisfy certain conditions before the bond can be called.[7] To trigger payment, the party calling on the bond must prove that the condition specified in the bond has been met, such as a breach of contract or a failure to perform, resulting in a loss or damage. If the required condition is not fulfilled, the bank is entitled to reject the payment demand. This is because an unjustified payment under a conditional bond may expose the bank to a claim for compensation by the party that originally provided the bond. To mitigate this risk, banks generally require clear and adequate evidence that the condition has been satisfied before honouring the demand. In practice, this often means the bank will require the employer to present a binding court judgment or arbitral award establishing both liability and quantum of damages before agreeing to honour the bond.
As conditional bonds are not autonomous instruments, they are closely tied to the underlying contract. This can give rise to jurisdictional and procedural complexity, particularly where the bond and the construction contract contain different dispute resolution or governing law provisions. For instance, the underlying contract may be subject to arbitration, while the bond may provide for litigation, which can lead to parallel proceedings before different fora.
English courts have refused to stay proceedings commenced under a bond, even where parallel arbitral proceedings are ongoing under the underlying construction contract, thereby creating a risk of inconsistent decisions.[8] To mitigate this risk, parties should ensure consistency between the dispute resolution and governing law provisions in their construction contracts and related security instruments.
On-Demand Bonds: Resisting a Call
On-demand bonds are payable upon presentation, meaning that once the bank receives a demand in the form specified in the bond, it must pay the stated amount without requiring proof of any breach, underlying default, loss or damage. The beneficiary does not need to demonstrate that any conditions have been fulfilled or that the other party has failed to perform.
In certain circumstances, a contractor may seek injunctive relief to resist a call on an on-demand bond, making such application one of the most common types of disputes involving on-demand bonds.
Typically, the contractor must apply to the local courts to obtain an injunction preventing either the employer from making the call or the bank from honouring it. The procedural requirements and likelihood of success for such relief vary across jurisdictions. While injunctive relief is difficult to obtain in many jurisdictions, some are comparatively more permissive. The approaches taken by courts in England and Wales, Switzerland and Turkey are outlined below for comparison.
In addition to seeking relief from national courts, contractors may also pursue interim measures through arbitration when the underlying contract contains an arbitration clause. Arbitral tribunals, once constituted, generally have the power to order interim measures restraining a party from calling or enforcing an on-demand bond. Furthermore, where urgent action is required before the tribunal is formed, many arbitral institutions offer emergency arbitration procedures that allow parties to request expedited injunctive relief. The availability and effectiveness of these remedies are discussed below.
Practice of English courts
Under English law, it is difficult to obtain an injunction restraining a bank from paying out under an on-demand bond, provided that the employer’s call complies with the bond’s formal requirements.[9] To succeed, the contractor must establish that the employer’s call is fraudulent and that the bank is aware of the fraud.[10] English courts are generally reluctant to find fraud in the absence of clear and compelling evidence.[11] This high threshold reflects the courts’ consistent view that on-demand bonds are akin to cash.[12]
In light of this, a contractor may try to seek an injunction restraining the employer from making a call on the bond in the first place. This remedy is viewed as more attainable – albeit still exceptional – than restraining the bank post-call. English courts have granted such injunctions where the contractor can demonstrate that the employer’s call is expressly precluded by the terms of the underlying contract.[13] English courts require a high threshold, generally requiring the contractor to ‘positively establish’ that the employer’s call would not comply with the mechanism agreed in the underlying contract.[14]
Although the threshold for restraining an employer’s call is somewhat lower than the fraud test applicable to restraining the bank, the fact that contractors are often not notified before the employer makes the call constitutes a practical obstacle. Nonetheless, in Shapoorji Pallonji v. Yumn, the English High Court confirmed that it had the power to grant an injunction requiring the employer to reverse a prior call.[15] This development may offer a more viable post-call remedy for contractors, avoiding the need to establish fraud.
Practice of Swiss courts
Under Swiss law, a court may restrain an employer from calling on an on-demand bond if the contractor or the issuing bank (guarantor) can establish that the prerequisites for the call were not fulfilled and that the employer was aware of this failure. The applicant must demonstrate that the demand constitutes a manifest abuse of rights by the employer. This is a high threshold, and Swiss courts consider such relief to be an exceptional remedy, granted only in narrow circumstances, such as when the secured obligation has clearly been performed or the demand is evidently fraudulent.[16]
Swiss courts generally adhere to the principle of ‘pay first, litigate later’, which reflects their strong commitment to upholding the autonomy and reliability of on-demand bonds. Accordingly, judicial intervention is rare and only granted where the abuse is both clear and substantiated with persuasive evidence.
Practice of Turkish courts
Under Turkish law, a court may grant an interim injunction to restrain a bank from paying out under an on-demand bond,[17] provided that the contractor demonstrates that the employer’s call constitutes an abuse of right and that irreparable or serious harm would result from payment, among other general requirements for interim injunctions.[18] Turkish courts often base their reasoning on the principle of good faith codified in Article 2 of the Turkish Civil Code, and, in recent years, they have tended to grant such injunctions with relatively greater ease compared to other jurisdictions.
Turkish courts are also empowered to issue interim injunctions before or during arbitration proceedings, including in cases where the arbitration is seated abroad;[19] however, where an interim injunction is granted before the commencement of arbitration, the applicant must initiate arbitration within a statutory time limit to preserve the injunction’s effect. This period is 30 days for international arbitrations[20] or two weeks for domestic arbitrations.[21]
Arbitral Tribunals’ Power to Issue Interim Measures
Most arbitration rules expressly empower arbitral tribunals to grant interim measures.[22] For example, the ICC Rules provide that the arbitral tribunal may order “any interim or conservatory measure it deems appropriate”, which may take the form of either an order or an award.[23] The UNCITRAL Rules empower tribunals to grant interim measures, including measures to prevent the taking of any action that is likely to cause current or imminent harm or prejudice to the arbitral process.[24] In a similar vein, the ICSID Rules also provide that an ICSID tribunal may recommend provisional measures to preserve a party’s rights.[25]
In the context of on-demand bonds, a tribunal may issue an interim measure restraining a party from calling or enforcing such a bond, provided that the relevant requirements – such as urgency, necessity and risk of irreparable harm – are met.[26]
A key limitation, however, is that arbitral tribunals cannot issue binding orders against third parties,[27] such as the issuing bank, unless the bond itself is subject to the arbitration agreement. Where an injunction is sought against the bank (e.g., to prevent payment under an on-demand bond), the appropriate forum is usually the local courts, not the arbitral tribunal.
Another practical constraint arises when urgent relief is required before the constitution of the arbitral tribunal. To address this, many leading arbitral institutions have introduced emergency arbitration procedures.[28] These mechanisms enable a party to seek interim relief on an expedited basis from an emergency arbitrator, appointed specifically for that purpose. For instance, under the ICC Rules, a party may apply for emergency measures before the formation of the tribunal.[29]
Emergency arbitration can serve as a useful alternative to domestic courts in disputes involving on-demand bonds, particularly where a call on the bond is imminent and immediate relief is needed; however, the effectiveness of emergency arbitration may depend on whether courts at the seat of enforcement recognise and enforce emergency arbitrator decisions, which is a matter that remains jurisdiction-specific.[30] Additionally, the requirement to provide notice to the opposing party in emergency arbitration may reduce its utility in situations where ex parte relief is needed and could otherwise be obtained from a national court.
Return of Bond and Damages Claims
In construction projects, bonds are typically held for a defined period or until the occurrence of specific milestones, such as the expiry of the defects liability period or the final acceptance of the works. Upon fulfilment of these conditions, the employer is generally under an obligation to return the bond; however, disputes may arise regarding the timing of the bond’s return. If the bond is not returned when due, the contractor may seek return of the bond, as well as compensation for the damage caused by the prolonged withholding, which may include the cost of maintaining the security, losses arising from the contractor’s inability to issue further securities and lost opportunities, and reputation damages.
Whether the claims succeed depends on the specific terms of the bond, the underlying contractual framework and the applicable law.
Post-Encashment Remedies
Once a bond has been wrongfully encashed by the employer, the contractor may seek damages against the employer on the basis of breach of contract or unjust enrichment, depending on the applicable law. Recoverable damages may include reimbursement of the full amount paid by the issuing bank, interest on that amount, increased financing costs and compensation for any resulting loss of bonding capacity or reputational harm. The success of the claims depends on the specific terms of the bond, the underlying contractual framework and the applicable law.
Conclusion
Bonds play a crucial role in international construction projects as key risk management instruments. The inherent complexity of these projects has given rise to a wide variety of bonds employed by both employers and contractors. Their wording, governing rules and expiry dates require careful attention, as they are often decisive in shaping the rights and obligations of the parties.
Because bonds are called on when the underlying risks materialise, they frequently become the subject of arbitral and judicial disputes. In recent years, there has been a notable increase in parties seeking intervention from courts and arbitral tribunals to prevent calls on bonds. Looking ahead, further decisions are expected in this area, which will provide more guidance to parties on the steps they should take before a dispute arises. This evolving landscape may also give rise to more complex instruments and innovative contractual terms governing bonds.
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[1] For ease of reference, this article refers to the beneficiary of the bond as the employer and the principal as the contractor, reflecting the typical roles of the parties in construction contracts.
[2] See Simon Carves Ltd v. Ensus UK Ltd [2011] EWHC 657 (TCC) (“Simon Carves v. Ensus UK”) (holding that the terms of the underlying contract prevailed in case of inconsistencies concerning the expiry of a bond).
[3] Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers, FIDIC Contracts: Law and Practice, 5th ed., Informa, 2009 (“Baker et al.”), para. 7.192.
[4] Leo Grutters and Brian Barr, FIDIC Red, Yellow and Silver Books: A Practical Guide to the 2017 Editions, 1st ed., Sweet & Maxwell, 2018, p. 103.
[5] Baker et al., para. 7.217.
[6] Götz-Sebastian Hök and Henry Stieglmeier, ‘Germany’, in Donald Charrett (ed.), The International Application of FIDIC Contracts: A Practical Guide, Informa, 2020, p. 191.
[7] See Trafalgar House Construction (Regions) Ltd v. General Surety & Guarantee Co Ltd [1996] 1 AC 199.
[8] Autoridad del Canal de Panama v. Sacyr SA and others [2017] EWHC 2337 (Comm); Deutsche Bank Ag v. Tongkah Harbour Public Company Ltd [2011] EWHC 2251 (Comm).
[9] See Franz Maas (UK) Limited v. Habib Bank AG Zurich [2001] Lloyd’s Rep 14.
[10] Edward Owen Engineering v. Barclays Bank International [1978] 1 QB 159 (“Edward Owen v. Barclays”), p. 171.
[11] See Alternative Power Solution Ltd v. Central Electricity Board and another (Mauritius) [2014] UKPC 31.
[12] Edward Owen v. Barclays, p. 170.
[13] Sirius International Insurance Co v. FAI General Insurance Ltd [2003] EWCA Civ 470; Simon Carves v. Ensus UK.
[14] Permasteelisa Japan v. Bouyguesstroi and Banca Intesa SpA [2007] EWHC 3508, para. 51; MW High Tech Projects UK Ltd & Anor v. Biffa Waste Services Ltd [2015] EWHC 949 (TCC).
[15] Shapoorji Pallonji & Company Private Ltd v. Yumn Ltd & Anor [2021] EWHC 862 (Comm).
[16] Judgment of the Zurich Commercial Court, Case No. HG180051-O, 8 May 2019, para. 3.3.4.
[17] Turkish Court of Cassation, General Assembly of Civil Chambers, Case No. 2007/852, Decision No. 2007/892, dated 28.11.2007.
[18] See Turkish Code of Civil Procedure No. 6100 dated 12 January 2011 (“Turkish Code of Civil Procedure”), arts. 389-392.
[19] Turkish International Arbitration Law No. 4686 dated 21 June 2001 (“Turkish International Arbitration Law”), art. 6; Turkish Code of Civil Procedure, art. 414.
[20] Turkish International Arbitration Law, art. 10(A)(2).
[21] Turkish Code of Civil Procedure, art. 426(2).
[22] See, e.g., Arbitration Rules 2020 of the London Court of International Arbitration (“LCIA Rules”), art. 25.1; Arbitration Rules of the Singapore International Arbitration Centre 2025 (“SIAC Rules”), rule 45.1; 2024 Hong Kong International Arbitration Centre Administered Arbitration Rules (“HKIAC Rules”), art. 23; Stockholm Chamber of Commerce Arbitration Rules 2023 (“SCC Rules”), art. 37; Istanbul Arbitration Centre Arbitration Rules (“ISTAC Rules”), art. 31.
[23] International Chamber of Commerce 2021 Arbitration Rules (“ICC Rules”), art. 28.
[24] United Nations Commission on International Trade Law Arbitration Rules 2021 (“UNCITRAL Rules”), art. 26.
[25] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (“ICSID Convention”), art. 47; ICSID Arbitration Rules 2022 (“ICSID Rules”), rule 47.
[26] ICC Commission on Arbitration and ADR, “Emergency Arbitrator Proceedings” (2019) (“ICC Report on Emergency Arbitrator Proceedings”), www.iccwbo.org/wp-content/uploads/sites/3/2019/03/icc-arbitration-adr-commission-report-on-emergency-arbitrator-proceedings.pdf, accessed 4 March 2026, paras. 138-140.
[27] However, the arbitral tribunals can issue interim measures requiring the parties to the dispute to ensure that a third party take or refrain from taking certain actions. For instance, in Bayindir v. Pakistan (I), the ICSID tribunal granted a provisional measure recommending that Pakistan take “whatever steps may be necessary” to ensure that National Highway Authority, a Pakistani corporate body with separate legal personality, does not enforce any final judgment it may obtain from the Turkish courts with regard to mobilisation advance guarantees. See Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan (I), ICSID Case No. ARB/03/29, Award, 27 August 2009, para. 55.
[28] LCIA Rules, art. 9B; SIAC Rules, rule 12.1 and schedule 1; HKIAC Rules, schedule 4; SCC Rules (2023), appendix II; ISTAC Rules, art. 31.1 and ISTAC Emergency Arbitration Rules.
[29] ICC Rules, art. 29 and appendix V.
[30] ICC Report on Emergency Arbitrator Proceedings, paras. 182-191.
