On-Demand Performance Bonds: Why a Genuine Contract Dispute May Not Stop a Call
A contractor may be convinced that it has a strong extension of time claim and a complete answer to an employer’s claim for delay damages. That does not necessarily prevent huge sums of money having to be paid under an on-demand performance bond before the underlying dispute has been decided.
That is the stark commercial lesson from TTSJV W.L.L. and others v BapCo Refining B.S.C. (Closed) [2026] EWHC 2047 (TCC). The Technology and Construction Court refused to restrain a call for approximately US$484.4 million, even though substantial disputes remained about extensions of time and delay liquidated damages.
The case highlights why the protection against an on-demand bond call usually needs to be negotiated when the contract and security are agreed because once a call has been made, a good underlying claim may come too late to protect cash flow.
Why an on-demand performance bond creates a particular risk
A performance bond provides financial security if a contractor fails to perform its obligations. However, the distinction between a conditional bond and an on-demand bond is critical. A conditional bond generally requires the beneficiary to establish the contractor’s default and resulting loss. An on-demand bond simply requires a compliant demand to be presented, upon which the issuer may be required to pay without consideration of the merits of the underlying construction dispute.
Our guide to construction bonds explains the principal types of security and the wording to look out for. The important point for present purposes is that the bond is generally treated as autonomous from the construction contract. That commercial function would be undermined if every dispute about delay, defects or valuation could hold up payment.
The US$484 million warning from TTSJV v BapCo
TTSJV was engaged under an English-law EPC contract for a major refinery modernisation project in Bahrain. The adjusted contract price exceeded US$4.8 billion and the delay liquidated damages were capped at 10% of that price. BapCo maintained that the relevant completion milestone had not been achieved and claimed delay liquidated damages of approximately US$484.4 million. It then called on an on-demand performance guarantee.
TTSJV disputed BapCo’s entitlement. It relied upon extension of time claims, including delay said to arise from a serious incident at the refinery, and intended to pursue those claims in LCIA arbitration. Faced with the prospect of the bank paying before an emergency arbitrator could intervene, TTSJV made an urgent application to the TCC under section 44 of the Arbitration Act 1996.
The Court accepted that the situation was sufficiently urgent for it to consider short-term relief in support of the arbitration. The difficulty for TTSJV was not urgency. It was the exceptionally high substantive threshold for stopping an on-demand bond call.
Why the underlying dispute was not enough
In the absence of fraud, TTSJV argued that it should be enough to show a strongly arguable case that BapCo was not contractually entitled to call the bond. Mr Justice Pepperall rejected that approach. He held that a seriously arguable case of breach of the underlying contract was not sufficient. TTSJV needed to clearly establish that BapCo was precluded by the parties’ contract from making the call.
That distinction is commercially significant. A contractor may have a real dispute, supported by substantial evidence and capable of succeeding in adjudication, arbitration or litigation, but still be unable to obtain an injunction. The Court will not ordinarily conduct a final determination of a complex delay or damages dispute during an urgent interim application. Unless the contractual restriction on the call is clear and the contractor can establish that it applies, the bond may operate first and the merits may be resolved later.
The three arguments that did not stop payment
1. The liquidated damages challenge
TTSJV argued that the delay liquidated damages regime was an unenforceable penalty because BapCo could use parts of the works and retain the resulting revenue without a corresponding reduction in damages. The Court did not finally decide the enforceability of the regime. It concluded that TTSJV had not clearly established, on the evidence available during the urgent application, that the clause was penal.
The judgment emphasises the strong starting presumption in favour of provisions carefully negotiated by sophisticated commercial parties.
2. The alleged defect in the demand
TTSJV also argued that BapCo’s demand did not comply with the bond and the incorporated Uniform Rules for Demand Guarantees. That argument failed. BapCo had used the prescribed form and the required statement of breach could be supplied in a separate accompanying document. For the purposes of the hearing, TTSJV did not dispute that such a statement had been provided.
Formal requirements can still be decisive, but they must be checked against the precise wording of the bond. It is unsafe to assume that a demand is defective because information does not appear in the demand itself if the security permits it to be supplied separately.
3. The unresolved extension of time claim
The extension of time dispute might appear to have been TTSJV’s strongest commercial answer. If the contractor was entitled to more time, the corresponding delay damages might not be due. However, the contractual determination machinery was crucial. BapCo had rejected the extension of time claim and the contract required both parties to give effect to a determination even where it had been challenged and the dispute was awaiting arbitration.
The existence of the dispute therefore did not suspend the immediate contractual effect of BapCo’s determination. TTSJV had also not engaged in its injunction evidence with the seven grounds upon which BapCo had rejected its claim. It had not established that the delay damages were not due and payable, still less that BapCo was clearly prohibited from calling the bond.
The clause that can change the commercial outcome
One of the most important lessons from the case lies in the interaction between the bond and the underlying contract. The immediate risk did not arise from the bond wording alone. It was reinforced by a contract requiring the parties to comply with BapCo’s determination pending the final resolution of the dispute.
Clauses of this kind can create a ‘comply now, argue later’ position. A contractor may eventually establish an entitlement to an extension of time or defeat part of a damages claim, but only after the bond proceeds have been paid. That timing difference can be as important commercially as the ultimate legal outcome.
What should be checked before an on-demand bond is agreed?
The best opportunity to manage this exposure is usually before the contract and security documents are signed. Contractors and subcontractors should consider:
- Nature of the security. Is the bond genuinely conditional, or does its wording allow payment on demand without proof of loss?
- Express restrictions on a call. Does the underlying contract clearly limit when, why or for how much the beneficiary may call?
- Status of disputed entitlement. Can a call be made while extensions of time, defects or damages remain disputed, or only once liability has been established?
- Interim determinations. Must the parties give effect to an employer’s or contract administrator’s determination pending adjudication, arbitration or litigation?
- Amount, reduction and expiry. Does the security reduce as work progresses and expire automatically at a clear and achievable milestone?
- Demand requirements. What form, certification, supporting information, notice and method of service are required?
- Relationship with the contract. Are the bond, liquidated damages, set-off, extension of time and dispute provisions consistent, or do they produce an unintended route to immediate payment?
Where an on-demand bond cannot be avoided, the contractor may seek express limits on calls, staged reductions, an earlier expiry date or an alternative security structure. The commercial value of those protections depends on precise drafting. A general requirement for the beneficiary to act reasonably is unlikely to provide the same certainty as a clear restriction on the circumstances in which a demand may be made.
What if a call has already been made?
Speed is essential. The bond, underlying contract, demand, accompanying documents, relevant determinations and correspondence should be assembled immediately. A broad assertion that the employer’s claim is wrong will rarely be enough; the immediate question is whether there is a clear defect in the demand, fraud, or an express contractual restriction that positively prevents the call.
A negotiated standstill or escrow arrangement may sometimes protect both parties while the underlying dispute is resolved. CCC’s article on escrow, bonds and contract formation in GMC v Sumitomo illustrates both the potential value of that approach and the need to comply carefully with any deadlines or release conditions.
What does the decision mean for employers?
For employers and other beneficiaries, TTSJV v BapCo confirms the commercial strength of properly drafted on-demand security. It does not, however, remove the need for care. A demand must comply strictly with the bond, any incorporated rules and any restrictions in the underlying contract. Before making a call, the beneficiary should verify the contractual trigger, amount, prescribed form, supporting documents, authorisation and service requirements.
The fact that a bank may pay on demand also does not finally determine the beneficiary’s underlying entitlement. An unjustified call may expose the beneficiary to a later claim for repayment or damages. The bond provides immediate security, but it does not convert a disputed claim into an undisputed one.
The key takeaway
The central lesson is simple but important – an on-demand performance bond may operate before the underlying construction dispute is decided. A credible extension of time claim, a substantial challenge to liquidated damages or a pending arbitration will not necessarily stop payment.
Contractors should carefully review any bond requirements especially in relation to on demand bonds. Employers should ensure that any call is made strictly in accordance with both documents. Once a demand is imminent, the time available to identify a viable restriction and protect the commercial position may be extremely short.
How CCC can help
Contract & Construction Consultants (CCC) advises employers, contractors and subcontractors on the contractual and evidential issues arising from performance bonds, delay, extensions of time and liquidated damages. We can:
- review bonds and the related construction contract before signature;
- identify call triggers, restrictions, reduction mechanisms and expiry risks;
- assess the contractual and evidential position underlying a proposed or disputed call;
- prepare or assess extension of time and delay claims; and
- support the contractual and quantum analysis required for adjudication, arbitration or other dispute-resolution proceedings.
Where an urgent court application is being considered, CCC can work alongside the client’s solicitors and counsel on the construction contract, delay and quantum issues.
Contact us to discuss your position or arrange a free initial consultation.
