Mora & Associati won another case for a Performance Bond calling

29 May 2020

Giuseppe Broccoli

Written by Giuseppe Broccoli


Mora & Associati, with a team composed of Giuseppe Broccoli and Elisabetta Ventrella, won another Italian legal proceeding for the calling of a USD 6.5 Million Performance Bond issued by an Italian Bank in favor of a foreign Owner in connection with the construction of a mine plant in the Republic of Zambia.

Performance Bond

The Performance Bond

In the context of a mine project to be executed in Africa, the Owner (our client) awarded to an Italian Contractor a contract for the execution of certain works. In this respect the Contractor (issued, via an Italian bank (as guarantor), an on-demand Performance Bond to secure the proper and timely performance of the Supplier's obligations.

After certain breaches of the Contractor, the Owner called the Performance Bond simply declaring to the Italian bank that the Italian Contractor was in default of the contract by failing to meet contractual obligations.

The Performance Bond was governed by the ICC Rules no. 758 and provided that that:

  • the guarantor should have paid upon simple demand; and
  • The guarantor would have had 5 business days to ascertain whether the calling of the Performance Bond was a compliant demand pursuant to the Rules; and

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


The (sought) restraining order

The Italian Contractor (acting as claimant) started a precautionary proceeding before an Italian Court and obtained a temporary restraining measure ordering the guarantor to refrain from paying the amounts under Performance Bond, based on the fact that the bond was (allegedly) called fraudulently by the Owner. 

The Italian Contractor, in order to stop the payment of the Performance bond, stated that:

  • The demand was signed by non-authorised individuals, and
  • it was not able to fulfil all its contractual obligations due to the contractual breaches from the Owner (which, as they alleged, unreasonably failed to make t he payments provided in the contract).

The Owner rejected the arguments of the Contractor on the simple observation that the payment of an on-demand guarantee can be stopped only when the Contractor (as applicant) proves the fraudulent calling on the basis of documentary evidence which, for instance, demonstrates the full performance of the contractual obligations.


The Court decision

Based on the arguments put forward by the parties, the Court substantially followed the arguments highlighted by of the Owner and rightly found that the Contractor did not prove the abusive and fraudulent calling of the Performance Bond.

As it is in fact the case of an on-demand bond, the payment of the guarantee can be stopped by a Court order only in limited cases and, in particular, when the demand is fraudulent or abusive (as alleged by the Contractor in the case at issue). This is in line with the almost unanimous Italian case law and with the construction of an on demand bond.

As mentioned above, the proceedings was a precautionary legal case aimed at allowing the Court to assess the existence, on the balance of probabilities, of both the fumus boni iuris and the periculum in mora requirements on the basis of what the claimant has to prove that there is a prima facie fraudulent and unlawful calling. Such requirements can be proved only with the documentary evidence, inter alia, of the exact fulfilment of the contractual obligations or of the fact that the breach is not attributable to the claimant (which the Contractor omitted to do in the case at issue).

The Contractor, instead, simply mentioned factual circumstances (which can be only the subject of a proceeding on the merit), selling such circumstances as the proof of a fraudulent calling.

In particular, as to the fumus boni iuris, the Performance Bond at issue was an autonomous on demand bond, the payment of which may be rejected only with the exceptio doli action and in particular when the claimant proves that the calling is unlawful and fraudulent on the basis of undisputed, clear (objective and documental) proofs from which the misconduct is “evident and clear”.

The Contractor attempted to base the fumus boni iuris on the fact that some events which caused delays in the performance of the project were attributable to the Owner or, in any event, not attributable to the Contractor itself, but did not submit any objective and documental proof to demonstrate either the misconduct in the calling, or the (alleged) duly performance of its contractual obligations and the consequent Owner’s contractual breaches.

These were evident documentary omissions which determined, as an immediate and direct consequence (from both a factual and legal point of view), the rejection of the Contractor’s application due to the non occurrence of the fumus boni iuris.

As to the periculum in mora, the Contractor mainly based said requirement on the value of the called amount and on the difficulty to recover abroad (in an African Country) the amounts eventually paid by the guarantor. Also this argument was totally ungrounded as the Contractor is leader in the domestic and international construction market and has already had experience in the African market which must have taken into consideration an in-depth examination of the risks related to the country.

In the light of the above-mentioned arguments pointed out by the Owner, the Court rejected the application of the Contractor and ordered the Italian guarantor to pay the called amount. The Court also ordered the Contractor to reimburse the legal costs to the Owner.

In particular, the Court motivated its decision (by rejecting therefore the application made by the Contractor) on the basis of the fact that the Contractor failed to prove, with documentary evidence, that the Contractor’s default to perform its contractual obligations was attributable to the Owner’s breach of contract (ie the alleged missing or delayed payments of amounts contractually agreed).


The features of an on-demand bond and the case at issue

As known, an on-demand bond grants the Owner 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 or that its breach of contract is attributable to the Owner’s contractual default, with documentary evidence which does not request any detailed investigation from the Court.






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