On demand performance bonds—construction projects
Produced in partnership with Kennedys

The following Construction practice note produced in partnership with Kennedys provides comprehensive and up to date legal information covering:

  • On demand performance bonds—construction projects
  • Introduction
  • Key features
  • Other features of on demand bonds
  • Execution
  • Demand procedure
  • Maximum bond amount
  • Duration of the bond/Implications of expiry
  • Time and indulgence provisions
  • Repayment obligations
  • More...

On demand performance bonds—construction projects

Introduction

The purpose of this Practice Note is to:

  1. examine the nature of the on demand performance bond, and

  2. key elements that help identify whether a performance bond is likely to be construed as an on demand instrument, as compared to a 'conditional' guarantee or bond

For consideration of performance bonds generally, see Practice Note: Performance bonds—construction projects. For guidance on making a call under a bond, see Checklist: Calling on an on demand bond—checklist.

Key features

The principle features of an on demand bond are:

  1. the obligation to pay is a primary obligation of the surety

  2. the bond can be called and is payable on demand

  3. the 'pay first, argue later' principle applies meaning that the surety must first pay the demand, and then if necessary pursue a claim against the beneficiary, for wrongful call

  4. in the absence of fraud, there is little scope for challenging such a demand (unless the demand does not comply with the procedural requirements of the bond or the underlying contract)

  5. a variation of the underlying contract will not discharge the surety, provided the demand is made in conformity with the contractual demand procedure set out in the bond wording

In comparison, the key features of a conditional bond are:

  1. the obligation is a secondary obligation—in effect, the bond is underwriting the principal contractor’s failure to perform under the

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