A recent decision of the High Court (UGL (NZ) Limited v Trade Indemnity + Surety Limited [2013] NZHC 2623) serves as a reminder of the need for developers/contractors (and their financiers) to carefully consider the wording of bonds provided by contract counterparties.

Where unconditional third party support of a counterparty's obligations is required, the document should be clearly worded to require payment 'on demand', and to avoid wording which is characteristic of a guarantee.  As shown in this case, if a bond is not clearly drafted as an unconditional on demand obligation, a court may hold that it is a contract of guarantee.  Accordingly, breach by the counterparty and loss by the beneficiary will need to be established before payment can be required.

In reaching their decision, and as might be expected, the court rejected UGL's argument that the bond should be read against the bond-provider in light of terms contained in the underlying subcontract, where the bond itself did not contain provisions to the same effect.