On demand guarantees and bonds
On demand guarantees and bonds

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • On demand guarantees and bonds
  • Purpose of and common uses for on demand guarantees/bonds
  • On demand guarantees/bonds distinguished from traditional guarantees
  • Structure of and parties to an on demand guarantee/bond
  • An independent obligation (the autonomy principle)
  • Fraud and injunctions against the bank
  • Injunctions against the beneficiary
  • Form of the demand
  • Uniform rules for on demand guarantees/bonds

This Practice Note deals with on demand guarantees and bonds. (It does not deal with conditional guarantees and bonds which are usually provided by insurance companies and are outside of the scope of this Practice Note.)

On demand guarantees and bonds are typically provided by banks at the request of their customers as a form of quasi-security for contractual obligations which the bank's customer has entered into with a third party.

This Practice Note summarises:

  1. the purpose and common uses of on demand guarantees and bonds

  2. the distinction between:

    1. on demand guarantees and bonds, and

    2. guarantees in the traditional sense of the word

  3. the structure and parties in on demand guarantee and bond transactions

  4. the key characteristics of on demand guarantees and bonds, and

  5. the standard rules and practices that are commonly incorporated into on demand guarantees and bonds

The terminology surrounding on demand guarantees and bonds can be confusing. On demand guarantees and on demand bonds typically perform the same function and share the same characteristics. On demand guarantees and on demand bonds are also referred to as 'first demand guarantees' or 'first demand bonds'. For ease of reference, they are referred to as 'on demand guarantees/bonds' in this Practice Note.

Purpose of and common uses for on demand guarantees/bonds

On demand guarantees/bonds are a means of securing payment or other obligations.