Bonds

Where a bondsman pays out pursuant to a call on an on-demand bond, this does not mean that, ultimately, the employer can recover sums under the bond in excess of their ultimate entitlement under the building contract. In Keating on Construction Contracts the authors feel that where a

'contractor has at the request of the employer procured an [on-demand] bond, the court may, depending upon the circumstances, be able to imply into the building contract a term that the employer should account to the contractor for the proceeds of the bond'.

Case law supports this assertion. In Cargill International SA v Bangladesh Sugar and Food Industries Corporation [1998] 1 W.L.R. 461 CA despite the defendant having suffered no loss as a result of the plaintiff's breach, the terms of the performance bond allowed the defendant to call on the bond. However, the court held that it was:

'implicit in the nature of a bond ... that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an "accounting" between the parties, in the sense that their rights and obligations will be finally determined at some future date'.

If, at the final account stage, it turns out that the sum paid under the performance bond 'exceeds the true loss sustained, then the party who provided the bond is entitled to recover the overpayment'.

The Cargill decision was followed in Tradigrain SA v State Trading Corp of India [2005] EWHC 2206 (comm.). In this case, the buyer asserted that goods supplied under a contract were defective, and for that breach claimed the full amount of the bond although their loss was less than the bond amount. The court held that where a buyer recovered a sum under an on-demand bond in excess of its actual loss, a term would be implied into the contract between the buyer and the seller that the buyer would account to the seller for any overpayment, and would repay any sum in excess of its loss accordingly.

The Court of Appeal in the recent case of IIG Capital LLC v Van Der Merwe & Another [2008] EWCA Civ 542 supports this view. As the bondsmen in this case were a husband and wife, the liability at stake was personal. The court considered what protection would be afforded to the bondsmen if they were compelled to pay on demand sums which it later transpired they did not owe. The court held that:

'...even in a case where an on demand obligation is undertaken a question might arise when judgment was given, whether there should be a stay. That would depend on the strength or otherwise of the claim that some money would ultimately be reimbursed'.