Performance Bonds: On Demand Or Conditional?

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