Bonds are common in the construction and finance industry and their primary purpose is to secure, or guarantee, the performance of another’s obligation. They are commonly provided by banks, insurance companies and parent companies.
In simple terms a bond is a promise to do something (usually pay money) upon the occurrence of an event. The ‘event’ will be vary depending on the type of the bond which are generally:
- On-demand bonds; or
- Performance bonds.
Where an on-demand bond has been provided, the guarantor (or surety) agrees to pay the amount on request and the ‘event’ in this situation is the request for payment. Any performance of the underlying contract is irrelevant in an on-demand bond.
A performance bond is different to an on-demand bond in that a call on a performance bond cannot be made until the subject fails to perform. In this case the ’event’ is the failure to perform and the surety can consider whether performance has occurred before paying out (loss may also need to be established).
There are a number of other nuances when it comes to bonds, although the above are the types that are typically well recognised in the industry.