Review your bond: is it on demand?

Being the recipient of a bond is a little like being given a betting slip. The bond, of which you are now a proud owner, promises much. It may even be the key to huge wealth. Or, in the end, it may prove to be a worthless piece of paper.

You need to distinguish between the two before you place your bet!

This post sets out some tips from Wuyhan Guoyu Logistics v Emporiki Bank of Greece.

What is an On Demand Bond?

An ‘on demand’ bond provides a much cleaner right for the recipient to bring a claim against the bondsman. You do not need to prove either your loss or the contractor’s breach.  A claim under an ‘on demand’ bond is paid quicker (there are only two defences)

  • easier to make (follow the procedure in the bond)
  • paid in full (there are no cross-claims or deductions).

The bondsman has only two defences to a claim under an on demand bond: the claim is fraudulent or in the incorrect form. Fraud means actual notice of dishonesty, rather than a mere impression of impropriety. Any procedural irregularity can normally be rectified and is no more than a stalling tactic.

A claim under an on demand bond is similar to storing pennies in a piggybank – easy and quick to access. In stark contrast, a claim under a conditional bond or guarantee is more like having your money in a safe to which you have forgotten the combination or password.

Checklist for Being ‘On Demand’

The case involved an agreement to buy two bulk carriers from a shipyard in China. A ‘letter of guarantee’ from the Emporiki Bank of Greece guaranteed an instalment of US $10m in these terms:

‘…we, [the Bank] IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as the primary obligor and not merely as the surety, the due and punctual payment by the BUYER of the second instalment of the Contract Price…’

The Court of Appeal allowed the appeal, restating that the proper construction of the document depends on the words used by the parties and suggested these critical questions to determine if your bond is ‘on demand’:

Q1: does it relates to an international transaction ie between companies in different jurisdictions? [note: no conclusive]

Q2: is it issued by a bank?

Q3: does it contain an undertaking or promise to pay ‘on demand’ ie without conditions?

To which I add my bonus question:

Q4: does it refer to a primary obligation ie independent of the underlying contract?

The Court said the document was an ‘on demand’ bond and that:

“guarantees of this kind…are almost worthless if the Bank can resist payment on the basis that the foreign buyer is disputing whether a payment is due.”

Case: Wuyhan Guoyu Logistics v Emporiki Bank of Greece published in the Building Law Reports at [2013] 1 BLR 75 [available to subscribers from i-law]

[Updated November 2018]

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