Restraining bond calls in Saudi Arabia

On-demand performance bonds and advance payment bonds are commonly used on major infrastructure and construction projects in Saudi Arabia. Where a project breaks down or is terminated, the risk of a beneficiary calling on bonds is real and some urgent actions are required to prevent a payment under those bonds.

On-demand bonds are designed to be payable quickly, and once a letter of demand is made, the issuing bank typically pays withing a few days. For contractors and other stakeholders, this necessitates thinking strategically and early about the available routes for urgent relief.

Below we outline the options available to parties seeking to restrain bond calls or payment under Saudi law, and the practical challenges they entail.

Seeking relief in the Commercial Court

In Saudi Arabia, performance bonds and advance payment bonds are usually unconditional, irrevocable types of on‑demand bonds that constitute a direct primary obligation of the issuing bank.

These on-demand bonds are autonomous instruments, Once a call is made, the bank is ordinarily required to pay quickly, without prior investigation into the grounds or merits of the claim under the underlying contract. This can create significant challenges and time pressures for contractors.

The principal remedy under Saudi law is an urgent application before the Commercial Court, or any competent court, which has jurisdiction over disputes arising from commercial contracts, including construction contracts and bank-issued bonds.

Under the Commercial Courts Procedures Law (CCP), a party may apply ‘ex parte’ for an order restraining the call itself on the basis that it would cause imminent and irreparable harm.

To obtain injunctive relief, the applicant generally must establish three elements:

• urgency, that is, that any delay in dealing with the bond call will cause harm that cannot adequately be remedied by an award of damages;
• a ‘prima facie’ right whereby the applicant must demonstrate a plausible legal right or claim; and
• serious harm caused by the bond call, which would be disproportionate to the employer's interest.

In respect of that third element – serious harm – it is worth noting that it is not assessed purely by reference to monetary value, but by reference to whether the harm suffered would be difficult or impossible to reverse if interim relief was refused. Saudi courts have recognised that an unfair call under a bond, particularly where the contractor has substantially performed, can constitute such harm.

Contractors should be aware, though, that the judge will typically deal with these applications based on a limited number of documents and assess whether these documents establish, on a ‘prima facie’ basis, the factual conditions for urgent relief, without undertaking any evaluation of disputed contractual rights or liability.

Practical challenges

Although contractors and other parties involved in stalled projects may naturally focus on the need to stop payment by the issuing bank, Saudi law may present some obstacles when seeking to obtain an order against the bank to stop the payment.

Restraining the issuing bank directly is a distinct and potentially more difficult avenue as there is no procedure under Saudi law for restraining a bank in these circumstances. For this reason, Saudi courts are more likely to grant an injunction restraining a call being made than restraining a bank paying out under the bond, which may not be the case in other jurisdictions.

Contractors therefore typically seek to restrain the employer rather than the bank. Once an order to restrain a call has been made, the bank will receive instructions from the urgent matters judge to suspend any payment under the bond and dismiss any future instructions from a party to that effect – importantly, without the need for the bank to be a party to the injunction proceedings

However, while the injunction is being heard, there is no automatic stay on a potential call under Saudi law and nothing would in theory prevent the bank from paying out under the bond if a call is made. The bank can only formally be stopped once a court order has been obtained and served. In practice, though, a bank is likely to await the outcome of any such application before proceeding with any payment under the bond.

Under Article 35 of the CCP, the applicant is then required to file its substantive claim within seven days of the court order granting the injunction. Failure to file its claim within this period may result in the automatic lapse of the order. This is one of the most significant procedural risks and must be planned for carefully. 

Best practice

Saudi courts typically require clear, contemporaneous documentation to demonstrate that a call on a bond lacks a legitimate contractual or factual basis. A well‑evidenced application – such as one that shows clear certification of the contractor’s performance or compliance with contractual milestones – may have the most meaningful prospect of success.

The window for action can, however, be very short once the threat of a bond call becomes imminent. When seeking an injunction, parties should therefore prepare the necessary evidence, powers of attorney and submissions in Arabic in advance, rather than waiting for a call to be made.

Co-written by Abdullah Alsugari of Pinsent Masons