Deposit Bond for Construction Works: When the Bank Does Not Have to Repay

Imagine: you entrust a contractor with the renovation of your flat in Saint-Denis. The contract provides for a 10% deposit at the start, guaranteed by a bank bond. You pay the deposit, the contractor starts the work… then disappears overnight. The site is abandoned. You turn to the bank to recover your deposit. It replies: “Sorry, the work has started, our guarantee no longer applies.” Unfair? Not necessarily, as explained by a decision of the French Court of Cassation of 26 February 1992 (No. 90-12.684).

This case, concerning a social housing developer in Saint-Denis, raises a crucial question for any employer: what exactly is the purpose of a deposit bond? The answer is less simple than it seems. The judges ruled: if the contractor has actually started the work, even partially, the surety does not have to repay the deposit, unless the employer proves that the advance was not justified.

This decision, made more than thirty years ago, remains relevant today. It reminds us that the deposit bond is not an all-risk insurance. It guarantees that the deposit will indeed be used to finance the start of the site, not that the work will be completed. A nuance that can cost dearly to those who do not read the small print of the bond contract.

The facts: a story like many that happen every day

In 1984, the social housing authority “La Seimaroise” (the employer) entrusted the company Novabat with the construction of social housing units in Saint-Denis. Three contracts were signed, each providing for a 10% deposit of the total price, guaranteed by a bank bond. The bank BPRNP granted its guarantee up to 1,322,524.50 francs for all contracts, in accordance with Article 9-2 of the contract.

The contractor collected the deposit, started the work… but very quickly, the site stalled. The work did not proceed as planned. La Seimaroise, dissatisfied, terminated the contracts and demanded that the bank reimburse the deposit paid, i.e. 784,257.05 francs. The bank refused: according to it, the guarantee only covered the start of the work, and the work had indeed started.

The dispute came before the Paris Court of Appeal, then the Court of Cassation. The question was simple: should the bank pay? The Court of Appeal said no, and the Court of Cassation confirmed. For the judges, the bond deed provided for a deposit “exclusively for the start of the work”. However, the contractor had started the work – even if he did not finish – and La Seimaroise did not demonstrate that the advance was not justified by the work actually carried out. The bank was therefore released.

The reasoning of the court — dissected

The Court of Cassation relied on a strict interpretation of the bond contract. Under French law, a bond is an undertaking by which a bank (the surety) guarantees the obligation of another person (the contractor) towards the creditor (the employer). But this undertaking is limited by the terms of the contract: here, the guarantee only covers the use of the deposit for the start of the work.

The judges recalled that the employer paid the deposit “in execution of the contract”, i.e. in accordance with the contract. The contractor did start the work – he therefore used the deposit for its purpose. It does not matter that the work subsequently stopped: the condition of the bond is fulfilled as soon as the start has taken place. The employer cannot turn against the bank for a subsequent failure of performance, which falls under the contractual liability of the contractor, not the surety.

The Court also rejected La Seimaroise's argument that the work was not “legitimate” because it was not continued. The burden of proof lay with the employer: it was for him to demonstrate that the deposit was not used for the intended start. In the absence of such proof, the bank is released. This solution is consistent: the Court of Cassation here applies a classic line of authority on deposit bonds (Civ. 3rd, 26 Feb. 1992, No. 90-12.684, Bull. III, No. 57).

What this means for you — practically

For a landlord: if you pay a deposit guaranteed by a bond and the contractor stops the site after starting, you cannot claim reimbursement from the bank. You must act directly against the contractor. Example: in Créteil, a landlord entrusts the renovation of his co-ownership for €200,000, with a €20,000 deposit guaranteed. The contractor digs the foundations then disappears. The bank will refuse to reimburse, because the work has started.

For a tenant: if you are a tenant and the landlord carries out work with a deposit, this decision does not directly concern you. But if the site stops, you may suffer prolonged disruption. You can ask for a rent reduction or damages from the landlord, but not from the bank.

For a purchaser in VEFA (sale in the future state of completion): beware of completion guarantees. The deposit bond is distinct from the completion guarantee. If the developer stops work after starting, you can activate the completion guarantee, but not the deposit bond.

In practice, remember that the deposit bond is a guarantee limited to the start. To be protected against site abandonment, you must require a good-performance guarantee or a deposit repayment bond (which covers the entire advance in case of non-performance).

Four tips to avoid this type of dispute

• Read the bond deed carefully: check whether the guarantee covers only the start or the entire performance. If the text mentions “deposit for the start”, the bank will be released as soon as the first spade is turned.
• Require a deposit repayment bond: this more protective guarantee obliges the bank to reimburse the deposit if the contractor fails to perform his obligations, whether he has started or not. Negotiate it in the contract.
• Stagger the payments: instead of a single deposit of 10 or 20%, provide for instalments based on actual progress (e.g., 10% on signing, 20% after foundations, 30% after the shell is watertight, etc.).
• Document the start: if you are the employer, have a bailiff or expert record the state of progress of the work before paying the deposit. In case of dispute, you can prove that the work was not justified.

Further reading: related case law and developments

This 1992 decision is part of a consistent line of authority of the Third Civil Chamber of the Court of Cassation. One can cite a judgment of 5 July 1994 (No. 92-15.032) which holds that “the surety is only liable within the limits of its undertaking”: if the bond deed provides for a specific condition (such as the start of work), the creditor cannot extend the guarantee beyond that.

More recently, the Court of Cassation recalled in a judgment of 10 March 2016 (No. 15-10.204) that the bank which paid the deposit to the contractor on the order of the employer is not required to verify the use of funds. The burden of proof always lies with the employer, as in 1992.

The trend is therefore consistent: judges interpret bonds strictly. If you want broad protection, you must stipulate it expressly in the bond contract. Standard bank templates are often minimalist: it is up to you to negotiate.

Frequently asked questions

1. Can I recover my deposit if the contractor started the work but abandoned it? No, from the bank as surety, if the bond only covers the start. You must sue the contractor for non-performance.
2. What is the difference between a deposit bond and a good-performance bond? The deposit bond only guarantees the use of the advance for the start. The good-performance bond guarantees the proper performance of the entire contract up to the acceptance of the work.
3. What should I do if I am the employer and want to be protected? Require a deposit repayment bond (or “deposit refund bond”) which covers the entire advance in case of non-performance, without a start condition.
4. Does this decision apply to individuals having work done at home? Yes, the same principles apply. If you sign a contract with a tradesman and the bank guarantees the deposit for the start, you will be bound by that clause.
5. What is the time limit to sue the contractor? The limitation period is 5 years from the termination of the contract or the abandonment of the site (Article 2224 of the Civil Code). Act quickly, as finding a defaulting contractor can be difficult.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →