Parties and roles
- Guarantor or issuer
- Applicant — the contractor
- Beneficiary — the employer or buyer
Trade Finance
Performance guarantees / bonds
Protection against failure to perform, not against dissatisfaction. A performance guarantee protects a beneficiary where a contractor fails to perform its contractual obligations. Its value to the beneficiary lies in the demand conditions: an instrument payable on first written demand behaves very differently from one requiring proof of default.
Where it is typically used
Recurring situations, not recommendations: which instrument suits a transaction depends on the contract, the parties, and who has to accept it.
- Public tenders and construction contracts where the employer requires security for completion.
- Supply contracts with delivery obligations whose failure would cost the buyer more than the price paid.
- Engineering and installation work where performance is staged over months rather than delivered at once.
Applicable framework
Where the instrument expressly incorporates them, URDG 758 applies. Many performance bonds instead remain governed solely by the applicable law and their own wording — which is why the demand mechanism must be read closely in each case.
Performance assurance
Documentary lifecycle
The stages form a sequence: each presupposes completion of the one before it.
- 01
Performance obligation defined in the underlying contract
- 02
Percentage and duration agreed
- 03
Drafting of demand conditions
- 04
Issuance
- 05
Reduction on milestones, where provided
- 06
Demand or release
- 07
Expiry
Points of attention
Elements that, in practice, determine how the instrument behaves.
On-demand wording used where a conditional instrument was intended
Validity not aligned to the actual contract programme, including extensions
No reduction mechanism as the works progress
Release on completion not documented, leaving the instrument outstanding
Typical documents
Which documents an instrument of this kind normally involves. What a given transaction actually requires is set by the text of the instrument.
- Written demand stating the amount claimed and that it is due under the guarantee.
- Statement of non-performance identifying the contractual obligation not met.
- Copy of the underlying contract, where the guarantee requires it to be presented.
- Evidence that the contractor was notified, where the text provides for prior notice.
Frequently asked questions
- What is a performance guarantee?
- An undertaking that protects the beneficiary against the contractor failing to perform the contract. It responds to non-performance as defined in the instrument, not to dissatisfaction with the quality of work delivered.
- Is there a difference between a performance guarantee and a performance bond?
- In everyday use the terms are often interchangeable. What matters is the wording: whether a demand is payable on first written request or requires proof of default, and which ruleset the text incorporates.
- What is URDG 758?
- The ICC Uniform Rules for Demand Guarantees. They set out how a demand guarantee operates: the form of a demand, the examination period, and the position of the parties. They apply when the guarantee states that it is subject to them.
Nova structures the documentation and coordinates review of demand conditions between the parties.
This page is informational and describes the general function of the instrument. It does not constitute legal, financial or tax advice, nor an offer. Each transaction is subject to its own review, documentation and approval.