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Bond or Guarantee?

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

The High Court has refused summary judgment in a claim to enforce a document which the claimant argued was a performance bond.

The court held that the defendant had an arguable case that the document was a guarantee, not a performance bond, and because there was a dispute about whether the underlying sum which triggered the claim was actually payable, the defendant’s liability could not be decided summarily.

The decision applies the well-established distinction between a demand bond (such as a performance bond) and a guarantee. The beneficiary of a performance bond is entitled to payment simply on submitting a statement that the underlying obligor is in default of the underlying contract and the beneficiary has suffered a loss. A guarantee, in contrast, creates a secondary obligation to support a primary obligation of one party to another, so that liability is contingent on the underlying obligation.

The decision is a useful reminder of a distinction which is crucial to any seller that wishes to obtain maximum protection against a payment default by its buyer. Lawyers drafting a performance bond should be careful to stick to terse and appropriate language. Elaboration about the obligations and circumstances in which they are guaranteed is likely to support an argument that the document is a guarantee rather than a performance bond. (Group Co Ltd and others v Emporiki Bank of Greece SA [2012] EWHC 1715)

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