LEGAL PRINCIPLE: CONTRACT LAW – Guarantees – Classification of Performance Bonds – On Demand Bond Distinguished from Guarantee
PRINCIPLE STATEMENT
The proper approach when there is dispute as to whether the obligation incurred on a bond is to pay on demand or whether the obligation incurred is that of a suretyship is to revert to the contents of the bond; in this case the performance bond is not an 'on demand bond' but a guarantee.
RATIO DECIDENDI (SOURCE)
"The proper approach when there is dispute as to whether the obligation incurred on a bond is to pay on demand or whether the obligation incurred is that of a suretyship is to revert to the contents of the bond.... In this case the performance bond is not an 'on demand bond' but a guarantee."
EXPLANATION / SCOPE
Performance bonds can be categorized as: (1) On demand bonds—unconditional obligation to pay on demand, regardless of underlying dispute, autonomous from principal contract. (2) Guarantees (suretyship)—secondary obligation dependent on principal’s default, guarantor liable only if principal is liable. Classification is determined by: examining bond contents, interpreting language used, and ascertaining parties’ intentions. “Revert to contents” means courts must: read the actual bond terms, interpret obligations created, and classify based on what parties agreed. Key distinctions: On demand bonds: pay first, argue later; immediate payment on demand; independent of principal contract disputes. Guarantees: secondary to principal’s obligation; guarantor liable only upon principal’s default; dependent on principal contract. Classification matters for: when payment is due, defenses available, and relationship to principal contract. Courts examine bond language for: unconditional payment obligations (on demand), conditional obligations tied to principal’s default (guarantee), and autonomy from principal contract (on demand) versus dependency (guarantee). This principle requires careful contractual analysis to determine bond nature and consequent rights/obligations.