Defining The Difference Between On-demand Bonds And Guarantees

Bonds, guarantees, performance security or whatever they are called form an important part of every major international contract. Despite this, there are a regular number of cases, in many different jurisdictions, where the courts are asked to decide what the nature of the particular project security actually is. Is the security an on-demand bond or guarantee? An on-demand security bond is an unconditional obligation to pay when a demand has been made. A surety bond or performance guarantee requires certain conditions to be met before payment is made.

Some contracts provide standard form security documents. For exmaple, the Annexes to the FIDIC Red Book 1999 set out seven recommended forms of security, of which six relate to different types of security which the Contractor might be required to provide. Of these, five are securities which are callable on demand. These standard securities incorporate the Rules produced by the International Chamber of Commerce. One