Bonds and guarantees have been a normal feature of domestic contracts for many years. In the early 1970s, however, recession in the home markets forced British suppliers and contractors to look to new outlets for additional business; often in markets where performance and other bonds were required if business was to be won. Suppliers and contractors looked, primarily, to the United Kingdom clearing banks1 to provide these “new” bonds for overseas buyers, and since 1975 the amount of bond and guarantee support provided by such banks has quadrupled in value.

The clearing banks have traditionally favoured the “on-demand” type of performance bond, believing that such bonds would enable them to stand clear of any dispute between the parties to the underlying contract, in connection with which the bond has been issued. However, a number of banks will now generally provide conditional performance bonds when such bonds are required by their customers and are found to be acceptable by the overseas buyer.

In the case of conditional bonds the obligation to make payment on the part of the bank will be conditional upon the party to whom the bond is issued (the beneficiary) proving default by the party who is to perform the subject matter of the bond (the bank’s customer). Therefore, in such cases the overseas buyer must prove breach/default by the customer and the bank must determine whether the breach in question is sufficient to enable it to make payment to the beneficiary under the terms of the bond. In many situations the breach cited by the beneficiary may not be wholly conclusive and may place the bank in the unenviable position of facing potential litigation by its customer should it make payment under the bond to the beneficiary.

It is in order to avoid such a situation arising that most banks will insist on an arbitration clause being included within the terms of all conditional bonds which it issues. The standard clause will insist on a copy of an arbitration award, in favour of the beneficiary, being presented to the bank which will accept such an award as conclusive evidence that the amount claimed is due under the bond.

One could argue that such a bond is as unconditional as the “on-demand” variety because the bank has no duty to investigate the default in question and must pay purely on production of the arbitral award. The bank’s duty to pay in such circumstances is not dependent on its being satisfied of the fact of default, but solely on presentation of the document embodying the default.

An alternative view is that such bonds must be conditional since payment is dependent upon the finding of default by an independent arbitrator, so that the duty to