On demand guarantees/bonds

This overview is a guide to the Banking & Finance content within the on demand guarantees/bonds subtopic, with links to the appropriate materials.

On demand guarantees (sometimes called ‘on demand bonds’) typically secure the obligations (monetary or non-monetary) of a party to a contract.

Banks are often requested by their customers to issue on demand guarantees/bonds in connection with a contractual obligation which the bank's customer has entered into with a third party where there is some doubt over the bank's customer's ability to pay or perform its obligations under that contract. Banks issue such instruments for their customers as part of the range of facilities that they offer. They charge a fee for issuing them.

On demand guarantees/bonds share their key characteristics with letters of credit (see: Letters of credit—overview), as follows:

1. •

   they are an undertaking to pay given by a bank

2. •

   they create a primary obligation (not a secondary obligation like a traditional guarantee)

3. •

   the banks that issue them deal in documents only, and

4. •

   the doctrine of strict compliance applies to the documents being presented under them