We recently reviewed a bond/guarantee which started with the wording above and continued in the “archaic” form that was widely criticised in the Trafalgar House case in the mid-90s.
In that case, Lord Jauncey commented that he found:
“great difficulty in understanding the desire of commercial men to embody so simple an obligation in a document which is quite unnecessarily lengthy, which obfuscates its true purpose and which is likely to give rise to unnecessary arguments and litigation as to its meaning”.
It is almost unbelievable that, nearly 15 years later, these forms continue to persist in the market.
The key problem with a security instrument provided in this form, as outlined by the House of Lords in 1995, is that its true purpose and meaning is unclear. It contains language indicative of an on-demand instrument (for example, payment on first written demand without proof of fault) but also includes the “saving” wording which is only relevant to guarantees (whereby the guarantor is not released from its obligations under the guarantee if the underlying contract is varied or if there is any indulgence, forbearance or forgiveness given by the beneficiary to its contractual counterparty).
Even where an on-demand security instrument is relatively clearly drafted, in our experience, it often contains a provision setting out a long list of matters which would not discharge a guarantor’s obligations under a guarantee. This is often regarded as a belt and braces approach, just in case a court construes the document as a guarantee rather than an on-demand bond. However, as the recent case of IIG Capital Llc v Van Der Merwe & Anr made clear, this type of provision can, in practice, result in the “on-demand” instrument being construed as a secondary security instrument precisely because a provision of this type is not required in an on-demand instrument.
The problem is not helped by the fact that the terms “bond” and “guarantee” are often used interchangeably. It is not unusual for the terms bond, performance bond, on-demand bond and demand guarantee to be used to describe the same security instrument.
Terminology aside, ultimately what is important is that the parties to a contract understand precisely the nature of any security that is provided and any limitations on that security. This has never been more crucial than in the current economic climate, when more calls than ever are being made on bonds and guarantees.