International Construction Law Review
RECENT DEVELOPMENTS ON DEMAND BONDS AND GUARANTEES IN ENGLAND AND AUSTRALIA
CHRISTOPHER WONG *
White & Case, London
1. INTRODUCTION
Demand guarantees are an integral part of construction contracts as they serve an important function of providing security to the project owner over the performance of the contractual obligations of the contractor. Indeed, in more economically challenging times when the risk of owner insolvency is heightened, contractors have sought demand guarantees from owners to secure payment of the contract price. The demand guarantee is typically in the form of a liquid instrument with a value of a percentage of the contract price (for example, 10%). A call or demand for payment on the guarantee may be made by the owner in circumstances allowed for in the construction contract and the instrument itself, often where the contractor has breached its obligations under the underlying construction contract and caused the owner to suffer monetary loss (which it seeks to recover by making the call). In many cases, the contractor will seek to challenge the owner’s entitlement to call on the guarantee. The grounds for challenge are limited, most notably that the owner acted fraudulently in seeking to make the call.1
At this juncture, it is pertinent to distinguish between an on-demand guarantee and a conditional guarantee as they both carry different rights as regards the owner’s entitlement to make a call and the contractor’s ability to challenge a call. In the construction context, both instruments may be issued by a guarantor (usually an issuing bank or other financial institution) at the request of a principal (typically a contractor) for the benefit of a beneficiary (usually an owner of a project) to secure the obligations of the principal under its underlying construction contract with the beneficiary.2 The basic difference is that on-demand bonds can be called upon by the beneficiary for payment to be made by the guarantor without having to establish that the principal is in breach of the underlying construction contract. The payment should be made even if the principal disputes that it has breached the contract. By contrast, a conditional guarantee requires
* The assistance of Chris Duncan, Associate at White & Case, London, in the preparation of this article is acknowledged.
1 See also John Lurie, “On-Demand Performance Bonds: Is Fraud the Only Ground for Restraining Unfair Calls?” [2008] ICLR 443 for a more expansive discussion on the grounds for restraining a call on demand bonds.
2 The terms in italics will be used in this article in accordance with the meanings given.
The International Construction Law Review [2012
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