What’s the difference between a guarantee and a performance bond?

September 2012

A guarantee creates a secondary obligation to support someone else’s primary obligation. Lots of guarantees include wording which you would expect to see in a performance bond. If you are claiming under a guarantee you have to show that the person with the primary obligation is liable. If you are claiming under a performance bond, you just need to do whatever the bond says, eg deliver a certificate signed by yourself stating that the event triggering liability under the performance bond has happened.

However, it’s not always totally clear whether a particular document is a guarantee or a performance bond. Many guarantees include wording such as ‘we guarantee as primary obligor’, which is a bit inconsistent – you are either guaranteeing something or you are the ‘primary obligor’, ie the person with the primary obligation.

A recent case made clear that even if you are getting it from a bank (which is where you more usually expect to see performance bonds), you need to be very specific if what you want is a performance bond rather than a guarantee (the shorter and terser the better). Any ambiguity in the wording will be construed against you. Don’t call it a guarantee, for a start. The court interpreted the performance bond-type words, eg ‘primary obligor’, and ‘upon receipt by us of your first written demand…we shall immediately pay…’ as effectively creating primary obligations but only once liability had arisen under the secondary obligation, ie the guarantee.

So, probably, if you have agreed to give a guarantee and are asked to sign something which includes the words ‘primary obligor’ (as do quite a lot of bank guarantees, by which I mean guarantees to banks such as those demanded of directors and shareholders in support of their companies’ liabilities), you can be a bit more relaxed that it is still just a guarantee.

From time to time I am asked to review banking documents such as performance bonds, and other documents which can be quite complicated, such as factoring agreements. When I do, I am often surprised how badly worded they are (considering they are meant to be standard documents from reputable banks) and how they don’t quite make sense or say what the parties think they say. This is partly because over time what were originally well-crafted documents get altered from deal to deal, and the trading parties and the people in the banks have no idea what they say, being full of legal gobbledegook.

En passant: when someone, for example in a TV advert, says they guarantee that their product will deliver a certain result, they don’t mean it – how can you guarantee your own obligation? I shout at the telly if this happens. This is more of a warranty – a contractual promise which can be relied on and sued on if it proves to be inaccurate. Excuse me for being pedantic (I also correct spelling mistakes on menus).

(Case: Wuhan Guoyu Logistics Group Co Ltd and others v Emporiki Bank of Greece SA [2012] EWHC 1715 (Comm) (22 June 2012)