A bond'>conditional bond which is callable on the contractor's default.

An unconditional bond obliging the surety to pay the beneficiary a specified sum on demand, usually issued by a bank. Unlike a conditional bond, there is no need for the beneficiary to prove breach of contract or resulting damage in order to be entitled to call on the bond.

This Checklist sets out points to consider when drafting and agreeing an on demand bond for a construction project. For more on the use of bonds in the construction industry, see Practice Notes: Performance bonds—construction projects and On demand performance bonds—construction projects. • Parties—a party with a registered office outside of England and Wales may be required to specify an address for service within England and Wales. Think carefully before accepting a surety based outside the UK and (where appropriate) check that the surety is duly authorised to issue bonds in the UK. Always insert company registration numbers so companies can be identified in the future. • Maximum bond amount—consider

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: • the purpose and common uses of on demand guarantees and bonds • the distinction between: ◦ on demand guarantees and bonds, and ◦ guarantees in the traditional sense of the word • the structure and parties in on demand guarantee and bond transactions • the key characteristics of on demand guarantees and bonds • the key issues to note when payments under on demand guarantees and bonds are affected by sanctions issues, and • the standard rules and practices that are commonly incorporated into on demand guarantees and bonds The terminology surrounding on demand

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. On demand guarantees/bonds are used as a form of quasi-security, typically for contractual obligations. Most types of security (eg mortgages and charges) or quasi-security (eg guarantees) are granted in favour of a lender (usually a bank) as collateral for a loan. On demand guarantees/bonds are provided by a bank, typically in connection with a contractual obligation that the bank's customer has entered into with a third party. The on demand guarantee/bond which is provided by the bank forms collateral for the bank's customer's contractual obligations to that third party. Banks issue on demand guarantees/bonds for their customers as part of the range of facilities that they offer their clients.

Introduction The purpose of this Practice Note is to: • examine the nature of the on demand performance bond, and • 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: • the obligation to pay is a primary obligation of the surety • the bond can be called and is payable on demand • 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 • 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) • a variation of

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