It's an on-demand bond, isn't it?


What's in a name?

It has been said that a name is an artificial and meaningless convention. What matters is what something is, not what it is called. The same is true in the world of guarantees and on-demand bonds.

In our client alert of 17 May 2011, we looked at the need for demands to comply strictly with the terms of on-demand bonds. This alert considers the fundamental question as to whether the security instrument you thought was an on-demand bond is actually a guarantee or vice versa.

To recap, the idea is that with guarantees, particular conditions, such as the seller's default, need to be established before the secondary obligation to pay has to be fulfilled, whereas, with on-demand bonds payment has to be made if the demand is in compliance with the terms of the bond.

Although labels given by parties to an instrument may be indicative of their intentions, the substance of the obligations will depend upon the actual words used to express them. Two English High Court cases from last year, one of which has recently been affirmed by the Court of Appeal, emphasise the risks to parties of imprecisely worded guarantees and on-demand bonds, and highlight the approach adopted when construing such documents.

Please see full alert below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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