In an earlier article on the UK Government's late payment consultation, I explained why the proposed ban on retention in construction contracts would push developers and contractors towards alternative forms of performance security - principally performance bonds and parent company guarantees.
A recent Technology and Construction Court (TCC) decision has shone a timely spotlight on just how powerful, and how difficult to restrain, those performance bonds can be.
Why construction retention reform puts performance bonds in focus
The Government's "Time to Pay Up" consultation response confirmed an intention to ban the withholding of retention payments in construction contracts, subject to further consultation on practical implementation before legislation is introduced. The rationale is clear: retention has been used as a tool of last resort for over a century, but it carries well-documented risks to cash flow, particularly for smaller firms in the supply chain. With retention in the crosshairs, the expectation is that performance bonds will shoulder more of the risk-mitigation burden that retention currently carries.
CR Construction: when can a performance bond payment be stopped?
The TCC's decision in CR Construction (UK) Company Limited v Barclays Bank plc & Northern Gateway (FEC) No. 7 Limited [2026] EWHC 202 (TCC) (“CR Construction”) is a useful illustration of the limited circumstances in which English courts will step in to prevent a bank from paying out under a performance bond. The court confirmed that the bond was a guarantee rather than a pure on-demand instrument, by reason of clause 5.1, which provided that the surety's liability was co-extensive with - and not greater than - the contractor's liability. The facts, briefly: a contractor sought an interim injunction to prevent a bank making payment to an employer under an on-demand bond, following a dispute over completion, liquidated damages and termination.
The court dismissed the application. The headline principle is well-established but worth restating plainly: courts will not generally restrain a bank (or "surety”, meaning the party guaranteeing performance) from paying out under a performance bond unless there is clear evidence of fraud of which the bank had notice. In practice, this is a very high bar - mere allegations of breach, overpayment, or contractual non-compliance by the employer will not be sufficient. The contractor must demonstrate that the demand was made dishonestly, and that the bank knew of the dishonesty. The contractor in this case could not - and did not - allege fraud against the bank. That was, effectively, the end of the matter.
The court went further and considered what the position would have been had the injunction been sought against the employer. The conclusion was equally sobering for contractors: even on the broader test applicable to a beneficiary - which asks whether the “balance of convenience” (i.e., the overall balance of prejudice and practical justice) favours granting interim relief - the contractor would have faced significant difficulty.
Key performance bond risks for contractors and developers
For those considering how to structure security arrangements in anticipation of retention reform, the CR Construction decision contains several practical messages about how the law works and what steps contractors should take:
- Bonds are powerful. An on-demand performance bond gives the employer ready access to cash if triggered, without needing to obtain a judgment first.
- Injunctions and interdicts are a high bar. Unless fraud can be clearly established against the bank with notice, contractors seeking to restrain payment under a bond are unlikely to succeed - whether by way of injunction in England or interdict in Scotland. Even seeking to restrain the employer (rather than the bank) faces a heavy “balance of convenience” hurdle.
- Bond wording matters. Crucially, the bond in CR Construction contained a certification provision (clause 5.3) requiring any demand to be accompanied by either a court judgment, arbitral award, adjudicator's decision, or a certificate counter-signed by the Employer's Agent — each of which was expressed to be conclusive evidence of the contractor's liability. Certification clauses of this kind significantly strengthen the employer's ability to make a call on the bond and limit the scope for the contractor to challenge the demand against the bank. Parties should consider carefully at the drafting stage whether, and on what terms, such a provision should be included.
- Consider default versus on-demand structures. Contractors may wish to push for "default bonds", where payment under the bond is contingent on a judgment, arbitral award or (as a middle ground) an adjudication decision establishing that the contractor is in breach. Unlike on-demand bonds - which allow the employer to call on the bond simply by making a compliant demand - default bonds provide an additional layer of protection by requiring the employer to first prove its entitlement. Act early if you need to challenge. Any application for interim relief should be brought at the earliest possible opportunity and supported by compelling evidence.
Preparing for construction retention reform
The CR Construction case illustrates a further practical reality: once the payment chain under a performance bond is triggered, it can be very difficult to unwind. Parties should be aware that the financial consequences of a bond call can crystallise rapidly and across multiple entities, making pre-emptive action and careful drafting all the more important. Affordability remains a real concern: bonds can be expensive and not universally accessible, particularly for smaller sub-contractors. Bonds are effective, but they are also blunt instruments that, once called, are very difficult to put back in the box. Getting the drafting right, and understanding the risk allocation at the outset, is critical. Parties should be reviewing their standard form security provisions now, considering whether on-demand or default bonds are appropriate for their risk profile, and ensuring that bond wording is carefully drafted to reflect the agreed allocation of risk. Our construction team is well placed to assist with reviewing security arrangements, bond drafting and risk allocation as the retention landscape continues to develop.
Review your construction security arrangements
For advice on reviewing security arrangements, bond drafting and risk allocation as the retention landscape continues to develop get in touch with Jennifer Young.
