On Demand Bonds: A Strategic Retreat?

An On Demand Bond¹ is as an unconditional undertaking to pay a specified amount to a named beneficiary, usually on demand and sometimes on the presentation of certain specified documents². In other words, Big Bank promises to pay Mr Employer £x immediately, and without hesitation or further investigation, on presentation of the correct documents (normally a certificate) to him, completed in the way specified on the face of the On Demand Bond. The contract to pay out in these circumstances is directly with Big Bank and Mr Employer. (Big Bank will have a separate agreement with Mr Contractor to ensure he doesn't end up out of pocket).

Historically, under English Law, the only circumstances in which the courts would prevent a call on an On Demand Bond once it has been made, and monies being paid out, were "when there is a clear fraud of which the bank has notice."³ This was a hard test to satisfy.