Being able to provide a bond will give confidence to many suppliers and sometimes will give access to new markets; however, it is nonetheless sensible to be fully aware of its use – especially in the context of a bond being called. There are many forms of bonds with different legal implications. Among the most known and used are: the conditional bond and the “on demand” guarantee.
In both cases, it comes down to a “signed commitment” which allows the beneficiary of the bond to ensure the enforcement of the bond provider’s obligations and to protect himself from default and/or non-performance of a contract. In such situations, the guarantor/issuer of the bond will be compelled to pay. Whether you are the provider or beneficiary of a bond you obviously need to be careful about the wording and nature of the bond.
If you have a bond issued on your behalf (and depending on the nature of the bond provided) the guarantor will be made aware by the beneficiary of the reasons why a bond is called and will (or will not) negotiate with the beneficiary. The intervention of the guarantor, on your behalf, will be subject to the legal obligations of the bond and the obligations of the underlying contract.
Conditional and On Demand Bonds
The conditional bond is related to a valid obligation, clearly quantified or qualified in a contract. In case of a call under such a bond, it is necessary for the beneficiary to prove the non-performance of the guaranteed obligation. Without such proof of non performance under the contract, the guarantor will be able to reject any call under the bond.
The On Demand Bond (or guarantee) is a commitment to pay whenever the beneficiary requires, without any possibility to object or contest. Such an On Demand bond is independent from the basic contract, which means payment cannot be avoided, except in a clear case of fraud or abuse. This explains why it is so important to define precisely the terms used in the issue of the bond to avoid it being called for any reason.
The use of the conditional bond is more common in B2B but On Demand bonds are frequently required by beneficiaries for international contracts. Beneficiaries will often dictate what bond wordings and guarantors are required, which is why companies should truly pay attention.
The purpose of talking to bond insurers is to obtain expert external advice and to draw from a library of standard, proven wordings, thus protecting your interests.