Key point

A Court gives some guidance on how to decide if a guarantee is a demand or performance bond or a simple guarantee.

The facts

The claimant entered into a sub-contract with a construction company which was guaranteed by various bonds issued by the defendant. After terminating the sub-contract, the claimant demanded payment of various sums from the defendant pursuant to the bonds. The defendant refused payment and the claimant applied to Court for summary judgment that the bonds were payable on demand without needing to prove more.

The decision

  • Whether the bonds in question were payable on demand depended on how “commercial men” would construe them.
  • Amongst other factors, where a bond document contains an undertaking to pay “on demand”, there will be a presumption that it is on demand.
  • The bonds contained undertakings by the defendant to “pay forthwith on demand… without reference to the sub-contractor…” and, therefore, were payable on demand by the claimant.

Comment

The case is useful confirmation that, if guarantees and bonds are properly drafted, the underlying liabilities will be payable on demand: it will not be necessary for a claimant to first prove that the sums are due (or admitted) under the contract with the principal.

Caterpillar Motoren GMBH & Co K.G. v Mutual Benefits Assurance Company