This document, whether it is called a performance guarantee or performance bond, contains terms under which the bank (or bondsman) issuing the security undertakes with the client, sometimes called the “beneficiary”, to pay the client an agreed sum of money upon receiving the client’s first written demand. The amount of the bond is usually expressed as a percentage of the contract price—normally 10%. In other words, the performance bond is, in some respects, similar to a letter of credit: it can be converted into money by the simple expedient of the client giving notice to the bondsman in the manner set out in the bond.

Usually the notice requires a statement by the client that the contractor is in default. Unless there are conditions attached to the call, the bond will then have to be paid irrespective of any dispute that might exist between the client and the contractor and regardless of whether the client is entitled to the money claimed.

From the client’s point of view, a performance bond can provide a source of cash at a time when it is needed. Without this right of recourse, the client’s only option would be to bring proceedings for breach of contract and this will not only be time consuming and expensive but, in the case of a contractor that is insolvent, it is unlikely to result in any substantial compensation for the client.

Viewed from the contractor’s perspective, the position is somewhat different. As an on-demand bond can be called even if there is no proven default by the contractor, the bondsman will pay the amount demanded by

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