Indemnity Surety Bond Guarantee | Indemnity Bond With Guarantee Sks Microfinance

UK: Performance Bonds: On Demand Or Conditional?

Last Updated: 20 October 2010
Article by Liam Hart

A recent High Court case suggests that the courts will require clear and unambiguous words to establish that a performance bond or guarantee was intended to be payable merely on demand, as opposed to on the default of a contractor.

Performance bonds are a familiar feature of the construction industry.  In the construction context, a performance bond is a form of security, generally provided by a contractor to an employer, consisting of an undertaking by a third party (known as the "bondsman" or the "surety") to make a payment to the employer in specified circumstances.  There are two main categories of performance bond - "conditional" and "on demand", which differ as follows:

  • Under an "on demand" bond the bondsman (ordinarily a bank) is required to pay out whenever the employer demands payment, irrespective of whether or not the contractor is in default under the underlying construction contract.  A bondsman can only refuse make payment on a regular demand for payment if the demand is clearly made fraudulently or dishonestly.  Although many UK contractors are reluctant to provide "on demand" bonds for domestic projects, they are used widely in international projects.
  • Under a "conditional" bond the bondsman is only required to pay out if the contractor is in default under the underlying construction contract.  "Conditional" bonds are a common feature of construction works undertaken within the UK, in which circumstances the bondsman will often be an insurer or the parent company of the contractor (as in the case discussed below).

Given the fairly arcane law in this area and obscure wording of many bonds, the courts often have difficulty in working out whether a bond is "on demand" or "conditional".   Historically, the courts used a complex set of rules drawn from banking law to decide whether or not a bond was "on demand".  Fortunately, in recent years the courts have increasingly said that principles drawn from the banking cases are of only limited applicability in performance bond cases involving the construction industry - these cases often turn on very different facts and the drafters of the agreements will often be unfamiliar with the more technical aspects of banking law.  The courts stress that given the onerous nature of the bondsman's obligation under an "on demand" bond, only clear words will suffice to establish that the parties intended a bond to be "on demand" rather than "conditional".  

The Vossloh Case

This modern trend is evidenced by a recent High Court judgment in Vossloh.  The claimant was the parent company of a group of companies that manufactured locomotive rolling stock.  One of the claimant's subsidiaries contracted to supply the defendant with a number of locomotives.  The claimant provided a parent company guarantee (the "Guarantee") in favour of the defendant, which guaranteed the performance of the contracted works.  The defendant subsequently alleged that the locomotives were faulty, and made a call on the Guarantee.  

At the time of the call the defendant had neither established in court the liability of the claimant's subsidiary nor shown that it had expended any money in repairing the locomotives.  It followed, therefore, that the only way that the defendant could make a call on the Guarantee was if it showed that the Guarantee was similar to an "on demand" bond, rather than a "conditional" bond.  The Guarantee stated that if the claimant's subsidiary did not make payment to the defendant against a secured obligation when the same was said to be due, the claimant would be obliged to pay such sums as were said to be due "on demand", and that all sums payable under the Guarantee were to be payable "on demand". 

Despite the use of the words "on demand", the High Court held that a proper reading of the Guarantee showed it to be a "conditional" bond, and that accordingly the defendant had first to establish the liability of the claimant's subsidiary in the sums claimed before it could make a valid call on the Guarantee.

Commercial Implications of Vossloh

  • The courts will generally only find that there is an "on demand" bond where it is clear on a proper interpretation of the document as a whole that the parties intended the liability of the bondsman to exist separately from the underlying liability of the contractor.  The use of the words "on demand" will not in every case suggest that a bond is in fact "on demand" in nature, if it is clear that on a proper construction of the bond the parties intended it to be "conditional".  A bond may provide that if certain conditions are fulfilled (e.g. the contractor being in default) then the bondsman will make payment "on demand".  In such a case the bond is not truly "on demand" because of the preconditions to any call on it.
  • Parties to bonds should be very careful to ensure that the wording of a bond or guarantee properly expresses their intentions.  It was implicit in Vossloh that if the Guarantee in question were found to be of an "on demand" nature, the call on it would have to be honoured, even though liability and quantum remained to be established.  As we have stressed in previous  Law- Now articles, contractors should be alive to what giving an "on demand" bond entails.
  • From a bondsman's perspective, having clear wording in a bond is every bit as important to it as it is to the beneficiary of the bond, so that the bondsman knows when it is required (or not required) to make payment when a demand is made on the bond.
  • A further matter, in the international context, is that performance bonds will usually specify the governing law and jurisdiction to apply to the bond, which will usually be the home jurisdiction of the bondsman.  Courts in many jurisdictions are unfamiliar with the nuances of bond wording and its significance, whereas in England there is an established body of knowledge on the meaning of particular wordings.  Choice of jurisdiction is therefore particularly important.

Reference: Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 18/10/2010.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions