On-demand bonds are experiencing a revival in these recessionary times. They have the advantage of being able to be called upon immediately and are generally perceived as a “must-have” security document for most clients entering into construction contracts. So it is not surprising that parties are willing to go to court to secure a judgment that their instrument is an enforceable bond and not merely a guarantee.

In Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA [2012] EWCA Civ 1629 (7 December 2012) the Court of Appeal decided that a “payment guarantee” was a in fact performance bond on the basis of its commercial context. The Court itself stated that the case wasn’t a particularly easy one to decide especially as the instrument in question contained language commonly found in both guarantees and on-demand bonds. The Court concluded the “everything must in the end depend on the words actually used by the parties” and that it was important to focus on the commercial context of the document.

Even where a bond is executed the parties may try and argue that the formalities have not been fully complied with rendering it unenforceable.

In Segboer v AJ Richardson Properties, a recent Australian case (relevant to English law) confirmed the importance of complying with the formalities for deeds as regards both execution and delivery. In that case the Contractor had tried to argue that the bond in favour of a developer had not been “delivered”, because, although it had been validly issued by the bank as a deed, the bank had retained the original and the developer only had a faxed copy. The Contractor argued that the developer was not entitled to call upon the bond unless it presented the original to the bank. The court held in that case that the bond had been “delivered” to the developer, so it was valid and enforceable even though the developer did not possess the original. Crucially the court found that the bank had demonstrated a clear intention to be bound by the bond on its execution.

These cases serve as a timely reminder of the importance of careful drafting of bonds and their proper execution and delivery to ensure they are binding and enforceable.