The Performance Bond

The Contractor signed with the Supplier a contract for the supply of certain major components in respect of the revamping of a power station in Middle East. The contract provided the issue of a Performance Bond to secure the proper and timely performance of the Supplier's obligations.

The Italian bank of the Supplier issued a Performance Bond subject to the ICC Publication no. 758 and therefore in the form of an on-demand guarantee.

The Performance Bond expressly provided that the Guarantor should have paid the guarantee upon demand sent together with a declaration (from the Contractor) with a detailed indication of the breaches of the Supplier. 

The structure of the guarantee was in line with the standard practice in respect of bonds in the construction industry.

The (sought) restraining order

The Supplier started an action before the Italian Court to obtain a restraining order based on the fact that the bond was (allegedly) called fraudulently. The Supplier stated that all the contractual obligations had been performed in full.

The Contractor rejected the arguments of the Supplier on the simple observation that the payment of an on-demand bond can be blocked only when the Applicant proves the fraudulent calling on the basis of documentary evidence which demonstrates clearly and plainly the full performance of the contractual obligations. 

The Court decision

Based on the arguments put forward by the parties, the Court accepted entirely the position of the Contractor and rightly found that the Supplier did not prove the abusive and fraudulent calling of the Performance Bond.

The Court rejected the application made by the Supplier on the basis of the fact that the Supplier failed to prove, with documentary evidence, that the contract was fully performed.

As it is in fact the case of on-demand bond, the payment of the guarantee can be blocked by a Court order only in limited cases and in particular:

1. either if the demand from the beneficiary does not fulfil the requirements of the text of the guarantee; 

2. or the demand is fraudulent or abusive.

This is in line with the almost unanimous Court decisions and with the construction of an on demand bond.

The features of an on-demand bond

As known, an on-demand bond grants the Employer the right to call the bond at its request, without the need to prove the actual default and notwithstanding any objection that the Contractor might raise on the basis of the contract pursuant to which the bond has been issued.

It is instead the Contractor who has to prove (in case it wants to block the payment) that the contract has been performed timely and in full, with documentary evidence which does not request any detailed investigation from the Court.