UK: Performance Bonds: On Demand Or Conditional?

Last Updated: 20 October 2010
Article by Liam Hart

A recent High Court case suggests that the courts will require clear and unambiguous words to establish that a performance bond or guarantee was intended to be payable merely on demand, as opposed to on the default of a contractor.

Performance bonds are a familiar feature of the construction industry.  In the construction context, a performance bond is a form of security, generally provided by a contractor to an employer, consisting of an undertaking by a third party (known as the "bondsman" or the "surety") to make a payment to the employer in specified circumstances.  There are two main categories of performance bond - "conditional" and "on demand", which differ as follows:

  • Under an "on demand" bond the bondsman (ordinarily a bank) is required to pay out whenever the employer demands payment, irrespective of whether or not the contractor is in default under the underlying construction contract.  A bondsman can only refuse make payment on a regular demand for payment if the demand is clearly made fraudulently or dishonestly.  Although many UK contractors are reluctant to provide "on demand" bonds for domestic projects, they are used widely in international projects.
  • Under a "conditional" bond the bondsman is only required to pay out if the contractor is in default under the underlying construction contract.  "Conditional" bonds are a common feature of construction works undertaken within the UK, in which circumstances the bondsman will often be an insurer or the parent company of the contractor (as in the case discussed below).

Given the fairly arcane law in this area and obscure wording of many bonds, the courts often have difficulty in working out whether a bond is "on demand" or "conditional".   Historically, the courts used a complex set of rules drawn from banking law to decide whether or not a bond was "on demand".  Fortunately, in recent years the courts have increasingly said that principles drawn from the banking cases are of only limited applicability in performance bond cases involving the construction industry - these cases often turn on very different facts and the drafters of the agreements will often be unfamiliar with the more technical aspects of banking law.  The courts stress that given the onerous nature of the bondsman's obligation under an "on demand" bond, only clear words will suffice to establish that the parties intended a bond to be "on demand" rather than "conditional".  

The Vossloh Case

This modern trend is evidenced by a recent High Court judgment in Vossloh.  The claimant was the parent company of a group of companies that manufactured locomotive rolling stock.  One of the claimant's subsidiaries contracted to supply the defendant with a number of locomotives.  The claimant provided a parent company guarantee (the "Guarantee") in favour of the defendant, which guaranteed the performance of the contracted works.  The defendant subsequently alleged that the locomotives were faulty, and made a call on the Guarantee.  

At the time of the call the defendant had neither established in court the liability of the claimant's subsidiary nor shown that it had expended any money in repairing the locomotives.  It followed, therefore, that the only way that the defendant could make a call on the Guarantee was if it showed that the Guarantee was similar to an "on demand" bond, rather than a "conditional" bond.  The Guarantee stated that if the claimant's subsidiary did not make payment to the defendant against a secured obligation when the same was said to be due, the claimant would be obliged to pay such sums as were said to be due "on demand", and that all sums payable under the Guarantee were to be payable "on demand". 

Despite the use of the words "on demand", the High Court held that a proper reading of the Guarantee showed it to be a "conditional" bond, and that accordingly the defendant had first to establish the liability of the claimant's subsidiary in the sums claimed before it could make a valid call on the Guarantee.

Commercial Implications of Vossloh

  • The courts will generally only find that there is an "on demand" bond where it is clear on a proper interpretation of the document as a whole that the parties intended the liability of the bondsman to exist separately from the underlying liability of the contractor.  The use of the words "on demand" will not in every case suggest that a bond is in fact "on demand" in nature, if it is clear that on a proper construction of the bond the parties intended it to be "conditional".  A bond may provide that if certain conditions are fulfilled (e.g. the contractor being in default) then the bondsman will make payment "on demand".  In such a case the bond is not truly "on demand" because of the preconditions to any call on it.
  • Parties to bonds should be very careful to ensure that the wording of a bond or guarantee properly expresses their intentions.  It was implicit in Vossloh that if the Guarantee in question were found to be of an "on demand" nature, the call on it would have to be honoured, even though liability and quantum remained to be established.  As we have stressed in previous  Law- Now articles, contractors should be alive to what giving an "on demand" bond entails.
  • From a bondsman's perspective, having clear wording in a bond is every bit as important to it as it is to the beneficiary of the bond, so that the bondsman knows when it is required (or not required) to make payment when a demand is made on the bond.
  • A further matter, in the international context, is that performance bonds will usually specify the governing law and jurisdiction to apply to the bond, which will usually be the home jurisdiction of the bondsman.  Courts in many jurisdictions are unfamiliar with the nuances of bond wording and its significance, whereas in England there is an established body of knowledge on the meaning of particular wordings.  Choice of jurisdiction is therefore particularly important.

Reference: Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 18/10/2010.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.