A type of on demand guarantee (also known as on demand bonds), which are a means of securing payment or other obligations. Performance bonds are used where the underlying obligation is not the payment of money, but the performance of other obligations.
Performance bonds often arise in construction, for example, where the employer under the construction contract requires security for the building contractor's obligations under the construction contract. The essential feature of an on demand performance bond is that it can be called, and is payable, on demand. This means that, in a construction context for example, the employer does not have to demonstrate that it has suffered loss at the time of the demand. In the absence of fraud, there is little scope for the building contractor to challenge the demand, unless it does not comply with the procedural requirements of the performance bond.