A contractor gets a call from the bank: the project owner has sent a demand for payment under the performance guarantee, the bank will pay within a few days and will charge the amount to the company's facility. The contractor believes the delay was caused by the owner's late drawings and several extra-work instructions. Another common case is a letter from the owner saying "extend the guarantee or we will call it", even though the work has already been delivered.
This guide is written for contractors, subcontractors and machinery suppliers who also install, and who have issued a bank guarantee to a customer. It explains what to check in the few days before replying to the owner and the bank. If your issue is that the owner has not returned retention money held in cash, see retention money not returned, which is covered separately.
Short Answer
Do three things at the same time. First, get a copy of the demand and the actual guarantee, and read what it covers, when it can be called, when it expires and how much of the limit remains. Second, compare the ground the owner relies on with the evidence under the main contract: delivery, acceptance, extra work and extensions of time. Third, reply in writing to both the bank and the owner, within the time the bank gives.
Legal framework: a bank guarantee is a contract of guarantee under the Civil and Commercial Code. A guarantor that is a juristic person may agree to be liable as a joint debtor (Section 681/1, paragraph 2). A guarantor may raise the defences the debtor has against the creditor (Section 694), and an agreement that differs from Section 694 is void (Section 685/1). But raising those defences is the bank's right, not a duty the bank must perform for the contractor. In practice the bank checks whether the demand matches the conditions in the guarantee, then pays, and recovers from the contractor under the facility agreement. So there is no blanket answer on whether the bank can or cannot be stopped from paying. It depends on the actual guarantee, the main contract and the actual demand, case by case.
1. What Does This Guarantee Cover, and How Does It Differ From Retention?
Each guarantee is usually issued to cover a different risk. Some contractors have several in one project, so identify which one has been called.
| Type | What it covers | What to check |
|---|---|---|
| Bid bond | The winning bidder refusing to sign the contract | Usually ends once the contract is signed. If it is called after signing, ask what ground is relied on |
| Advance payment guarantee | The advance paid by the owner and not yet recovered | Should the amount reduce as the advance is recovered? Is there a reduction letter or proof that recovery is complete? |
| Performance guarantee | Breach of the main contract, such as abandoning the work, not completing it or not meeting the specification | Limit, end date, and the wording on which obligations are covered |
| Warranty guarantee | Defects after handover, often used in place of cash retention | When does the warranty period start? Was there a defect notice and an opportunity to repair first? |
The difference from retention is that retention is cash the owner deducts and holds itself, so the dispute is directly between contractor and owner. A bank guarantee has the bank as a third party. The bank pays out of its own undertaking under the wording of the guarantee, then recovers from the contractor. The contractor may therefore pay first and argue with the owner afterwards.
The first question to ask is whether the ground for the call matches the type of guarantee. For example, a warranty guarantee called to recover delay penalties, or an advance payment guarantee called in full when almost all of the advance has already been recovered. But be careful: some guarantees are drafted widely, for example covering "all obligations under the contract", so this argument depends on the actual wording.
For machinery suppliers, a guarantee is often tied to delivery, commissioning tests and warranty. If the factory owner says the machine cannot produce to specification, see the evidence points in machinery that does not meet the specification.
2. What Wording Must You Read: Call Conditions, Expiry and Limit?
Ask the bank for a copy of the guarantee it actually issued. Do not rely only on the template in the main contract, because the issued wording sometimes differs from the template. Then check the following.
- Call conditions. Some guarantees say the bank pays on receipt of a written demand, without the owner having to prove breach (an "on-demand" guarantee). Others require supporting documents, such as a certificate from the supervising engineer, a termination notice or an arbitral award. In the second case, a demand without the required documents is an objection the bank has to consider.
- Expiry. See by which date the demand must "reach the bank". A demand that arrives after that date is a clearer objection than any dispute about the work.
- Extension. An "extend or pay" demand usually comes shortly before expiry. Check the main contract for how long the contractor must keep the guarantee in place.
- Limit. The amount called must not exceed the limit. If the guarantee provides for reduction by stages, such as with recovery of the advance, work out the real balance.
- Who calls and who signs. The demand must come from the beneficiary named in the guarantee, be signed by an authorised person, and refer to the correct guarantee number and contract. Where the contract rights have been assigned, check whether the guarantee allows the transfer.
- Your own agreement with the bank. Open the facility agreement and the consent letters the company signed with the bank. In most cases the bank may debit the account or convert the amount paid into a loan to the company straight away. Know in advance where and when the money will be taken.
Public-sector projects often use a form prescribed by the agency. Private projects, and projects with a counter-guarantee from a foreign bank, may use very different wording and governing law, so it is even more important to read the actual document.
3. Does the Owner's Ground Match the Facts: What Evidence Should You Collect?
Even if the bank may not decide the dispute on the work, this evidence is still needed for the objection letter, negotiation, any court application and any later claim to recover the money. Collect it from the first day.
| Evidence | Question it answers |
|---|---|
| Main contract, specifications, BOQ and programme | What are our obligations, and what was the original completion date? |
| Delivery records, acceptance certificates or requests for acceptance | Was the work delivered, and did the owner accept or ignore it? |
| Extension-of-time requests and replies | Who caused the delay, and has time been extended? |
| Evidence of owner-caused delay | Late site handover, late drawings, late material approval or late payments |
| Extra-work or variation instructions | Did the extra work need more time, and through what channel was it ordered? |
| Defect notices and repair records | When was notice received, has it been repaired, was access given? |
| Unpaid invoices | How much does the owner still owe us? |
| Meeting minutes, emails and chat messages | Agreements reached along the way that were not put in writing |
| Dispute resolution clause | Court or arbitration, and is negotiation required first? |
Extra work ordered by chat has its own guide: extra work ordered via LINE and not paid. For a customer who will not sign acceptance, see customer not signing acceptance, cannot invoice.
Prepare a one-page timeline in date order, from signing the contract to the date of the call, with a document reference against each event. You will reuse it with the bank, the owner and your lawyer.
4. How Should You Reply to the Bank?
- Call the bank's account officer immediately. Ask for a copy of the demand, by which day the bank will decide whether to pay, and what documents it wants from the company.
- Send a written objection. Quote the guarantee number and separate the objections into two groups.
- Group one: the demand does not match the guarantee. For example, it reached the bank after expiry, the amount exceeds the remaining limit, the documents the guarantee requires are missing, or the signatory has no authority. The bank can check these from the documents themselves.
- Group two: disputes under the main contract. For example, the delay was caused by the owner, or the work has passed acceptance. Attach the evidence, but understand that this group may not make the bank suspend payment, particularly where the guarantee says the bank pays on receipt of a demand.
- Do not threaten the bank. The bank has its own undertaking to the beneficiary and must protect the credibility of the guarantees it issues. A polite, clear letter with complete documents is more likely to be considered.
- Prepare cash. Discuss with finance how much liquidity would be affected if the bank pays and debits the account, and whether the company's other guarantee lines would be reduced.
5. How Should You Reply to the Project Owner?
- Reply in writing within the time given. Deny the alleged breaches that are untrue, and attach the timeline and the evidence from section 3. Silence may be read as acceptance.
- Offer a workable way forward. For example, a site meeting, a rectification plan with dates, or a proposal to extend time.
- If it is an "extend or pay" demand and the company still has real obligations under the contract, an extension is often less damaging than a call for the full amount. But if the work has been delivered and the period required by the contract has passed, reply with evidence and ask for the original guarantee or a release letter to be returned.
- Reserve your position on the contractual penalty. If the owner calls the money to recover penalties, Section 379 of the Civil and Commercial Code provides that the penalty is forfeited when the debtor is in default, and Section 383 allows the court to reduce a disproportionate penalty. But the right to seek reduction is lost once the penalty has been paid, so object in writing before any payment. How payment through a bank affects this right depends on the facts of each case. For deductions of penalties, see customer deducts penalty from payment.
- Do not stop work in anger. If the contract does not give a right to suspend, stopping work may become a real breach that gives the owner a clearer ground to terminate and to call the money.
6. Can You Ask a Court to Stop the Bank From Paying?
In some cases only, not in every case. An application for interim protection must be made quickly, because the bank often pays within a few days of receiving the demand, and the court will look at the wording of the guarantee, the urgency and the evidence put forward that day.
A general picture to start from:
- The application is stronger where the demand plainly does not match the guarantee on the face of the documents, for example a call after expiry, above the limit, under the wrong type of guarantee, or clear evidence that the call was made in bad faith.
- The application is harder where the guarantee says the bank pays on receipt of a demand, and what is disputed is only who breached the main contract, which has to be proved in the main case.
- If the main contract has an arbitration clause, the court may still grant interim measures in some cases, but this must be planned together with starting the arbitration.
Before filing, have a lawyer read the guarantee, the main contract, the demand and the whole body of evidence, because an application with insufficient evidence is usually refused, and may use up time that should be spent on negotiation or arranging cash.
7. What Can the Contractor Do If the Bank Has Already Paid?
- Check the amount debited. Compare it with the amount actually paid, interest and charges under the facility agreement, and ask the bank for the payment documents.
- Claim the money back from the owner. If the contractor can show it was not in breach, or that the owner received more than its actual loss or more than the contract entitled it to, use the dispute resolution route in the main contract. The outcome depends on the contract and the evidence, and limitation periods should be checked from the start.
- Bring every outstanding issue to one negotiation. For example, unpaid progress payments, extra work and retention, rather than running several separate disputes.
- Look after liquidity. If the debit affects payroll or suppliers, see profitable but short of cash, and if it is worse, see company in financial distress, what options.
- Fix the next contract. Negotiate guarantee wording that states the grounds for a call, a clear expiry date, a mechanism to reduce the amount by stages, and a duty to return the original once the obligations end.
8. Checklist for the First Three Days After a Guarantee Is Called
Documents
- Copy of the demand from the project owner
- Copy of the guarantee actually issued by the bank
- Facility agreement and consent letters the company signed with the bank
- Main contract, specifications, programme and dispute resolution clause
Check the guarantee
- Does the type of guarantee match the ground for the call?
- Did the demand reach the bank before expiry?
- Is the amount within the remaining limit, with stage reductions applied?
- Are the documents the guarantee requires complete, and does the signatory have authority?
Work evidence
- One-page timeline with document references
- Delivery, acceptance, extension requests and extra-work instructions
- Defect notices and repair records
- Invoices the owner has not paid
Replies
- Call and send a written objection to the bank, separating the two groups of objections
- Reply to the project owner in writing with a workable proposal
- Object in writing to a disproportionate penalty before any payment
- Ask a lawyer whether to seek interim protection before the bank pays
- Tell finance to prepare liquidity
Further Reading
- Retention money not returned — when the owner holds deducted cash
- Customer deducts penalty from payment — set-off and reduction of the penalty
- Customer not signing acceptance, cannot invoice — evidence of delivery and acceptance
- Extra work ordered via LINE and not paid — evidence of extra work and variations
- Machinery not meeting the specification — specification and machinery testing disputes
- Construction contract disputes and Construction contracts for factories and commercial buildings, for owners
- Services: contracts and business documents · legal retainer · civil litigation · alternative dispute resolution
When a guarantee is called, what decides the outcome is the wording of the actual guarantee and the work evidence you can prepare within a few days, not an assumption that the bank will always pay or never pay.
We help read the guarantee and the main contract, draft the objection to the bank and the reply to the project owner, assess whether interim protection should be sought, and negotiate or litigate to recover the money. For an initial consultation, call +66 92 254 2045 or send us the details. See also contracts and business documents.
This guide is published by Suwanvara Law Firm — a Khon Kaen law firm established in 1986. General information only, not legal advice on a specific matter.
