Monday, September 3rd, 2012

The complex world of Bonds – a business briefing.

The word ‘Bond’ is regularly used in procurement, often with regard to construction projects or capital equipment procurement. In order to apply, and include Bonds effectively in contracts, requires specialist knowledge, particularly, but not exclusively, by procurement. We are dedicating this whole week of Risk briefing to this specific subject.  First of all the terminology is very important. You will find the following terms in widespread use, on-demand bond, simple bonds, performance bonds, conditional demand bonds, bank guarantees, demand guarantees, default bonds, performance guarantees, surety bonds, surety guarantees and Parent Company Guarantees.

A starting point for the complexity is the case of Vossloh Aktiengesellschaft and Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch). Sir William Blackburne (sitting as a judge of the High Court) said that ‘Contracts of suretyship are an area of law bedevilled by imprecise terminology and where therefore it is important not to confuse the label given by the parties to the surety’s obligation (although the label may be indicative of what the parties intend) with the substance of that obligation. Because the parties are free to make any agreement they like, each case must depend upon the true construction of the actual words in which the surety’s obligation is expressed.

On-demand bonds are sometimes referred to as suicide bonds because the obligation to pay the beneficiary arises on first demand without proof of default.

Default bonds are most commonly underwritten by insurance companies and so, like any other insurer, they will look for a reason to avoid payment (Source: David Bebb – Fenwick Elliott).

For the rest of this week we will seek to explain this facet of professional procurement practice. Tomorrow we will write about On-demand bonds (Unconditional bond). Brace yourself!