Bonds and guarantees-knowing the difference when seeking protection against non-performance
Getting a performance bond from a service provider in an important contract can help you sleep easy, so long as the third party guarantor is of “good repute” and the agreement is of the right form.
Often used in banking, construction, IT and other critical commercial agreements a performance bond can help ensure high performance is achieved as sanctions exist for non-conformance but a basic understanding has to appreciate the difference between a guarantee bond version that operates “on demand” as opposed to one that is “a guarantee” pure and simple.
Key differences exist between the two forms:
- the former operates to give the beneficiary immediate payment on demand for any reason whatsoever;
- the latter is a guarantee and does not have the strict payment provision;
- a guarantee requires proof of damage or loss as opposed to a mere assertion;
- this is not required with the demand version.
Accordingly it is highly advisable to get a bond checked before you sign lest you unwittingly agree to pay on demand, which is far more onerous in nature.
