Bank Guarantee and Performance Guarantee: Bond (Mis)described

Abstract

Bank guarantee’ and ‘Performance guarantee’ are familiar financial instruments. More often than not, a party wants a demand bond and not a guarantee. A demand bond is payable on demand while a guarantee is payable only when a breach is established by a court. The rights and obligations of the parties are very different under these instruments. The banks, since the inception in the 1970s, (mis)described what was intended to be a demand bond to be a guarantee. This led to much confusion and dispute. The British Court judgement, Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., (1978) QB 159. brought to the surface the (mis)description. Since, the businesses describe the instrument as performance bond and structure it like a bond. Indifferent practices, however, continue.