Drafting a Performance Bond – On-Demand or Indemnity?

Introduction

A performance bond is a common requirement in construction projects and can be made payable either upon demand or upon the fulfilment of certain conditions. Under an on-demand bond, the guarantor must pay the beneficiary the bonded sum when the demand is made. Under a conditional indemnity bond, the guarantor only becomes liable to the beneficiary for the bonded sum on proof of a breach of the underlying contract.

The distinction between an on-demand bond and an indemnity bond can have a significant practical impact on how readily the beneficiary under the instrument can obtain payment, and it is thus important to ensure that the parties’ intentions are accurately represented in the contractual terms. However, simply labelling a performance bond as “on-demand” or “indemnity” may not be sufficient. This was aptly demonstrated in the Singapore High Court decision of Tradesmen Pte Ltd v Ten-League Corporations Pte Ltd [2025] SGHC 114.

The wording of the performance bond in this case bore similarities to both an on-demand bond and an indemnity bond. The Court thus looked into the underlying contract and the conduct of the parties, ultimately finding that the performance bond was an indemnity bond, and that the call on the performance bond was invalid. Notably, the Court took into account the fact that the contract referred to the Real Estate Developers’ Association of Singapore Design and Build Conditions of Main Contract (4^th Ed, 2022) (“REDAS Conditions“), which contained a specimen on-demand performance bond, and found that the parties had chosen not to use the specimen as the basis for preparing the actual performance bond.

This Update on the Court’s decision sheds light on how the court will approach the interpretation of a performance bond in a contract and provides guidance on how a performance bond should be drafted to reflect the parties’ intentions.

Brief Facts

The Applicant had been engaged by the Respondent as the main contractor for a building project. Under their contract (“Contract“), the Applicant was required to provide a performance bond. The Applicant duly obtained a performance bond (“Performance Bond“) in favour of the Respondent, for a guaranteed sum of S$570,000. The Performance Bond included the following key provisions:

1. Clause 1 of the Performance Bond stated: “In consideration of [the Respondent] not insisting on [the Applicant] paying ten per cent (10%) of the Contract Sum as security deposit for the Contract, we [undertake] to pay in full immediately upon demand in writing any sum or sums that may from time to time be demanded by [the Respondent]”.

2. Clause 2 provided that: “In the event of [the Applicant] failing to fulfil any of the terms and conditions of the said Contract, we shall indemnify [the Respondent] against all losses, damages, costs, expenses or otherwise sustained by [the Respondent] up to the sum of the Guaranteed Sum upon receiving [the Respondent’s] written notice of claim”.

The Respondent later called on the Performance Bond, demanding the full guaranteed sum. The Applicant sought an injunction to restrain the Respondent from calling on the bond or receiving the monies, arguing that the Performance Bond was an indemnity bond, and that the bond call was invalid as it did not state that the Applicant had breached the Contract or that the Respondent had suffered any actual loss. The Applicant also argued that even if the Performance Bond was an on-demand bond, the call was fraudulent and/or unconscionable.

The Respondent took the position that the Performance Bond was an on-demand performance bond and therefore, that it was entitled to call on the Performance Bond without proof of loss.   

The Court was asked to determine:

1. Whether the Performance Bond was an on-demand bond or an indemnity bond; and

2. Whether the Respondent’s call on the Performance Bond was fraudulent or unconscionable.

Holding of the High Court

The Court ruled in favour of the Applicant, finding that the Performance Bond was an indemnity bond requiring proof of breach and loss before the Respondent could receive payment pursuant to the same. The Respondent’s call on the bond was found to be invalid, and the Court restrained the Respondent from receiving the bond monies.

The Court also clarified that, if the bond were an on-demand bond, the call would have been neither unconscionable nor fraudulent in respect of certain losses.

General Law

The Court set out the general principles regarding performance bonds:

1. Under an on-demand bond, the guarantor must pay the beneficiary the bonded sum when the demand is made in the manner provided for in the bond, and the beneficiary need not prove a breach of the underlying contract or that it has suffered loss.

2. Under an indemnity bond, the guarantor only becomes liable to the beneficiary for the bonded sum on proof of breach of contract and loss resulting from the breach.

3. Although the beneficiary of an on-demand bond does not have to prove a breach of contract or loss resulting from the breach in order to be entitled to call on the bond, a call on an on-demand bond may still be restrained on the grounds of fraud or unconscionability. 

Nature of the Performance Bond

To determine whether the Performance Bond in this case was an on-demand bond or an indemnity bond, the Court first examined the wording of the Performance Bond. The Court took the view that there was ambiguity in the language of the bond.

1. Clause 1 appeared to have the characteristics of an on-demand bond.

2. On the other hand, Clause 2 was worded similarly to a clause previously held by the Singapore Court of Appeal to create an indemnity bond.

To determine the nature of the Performance Bond, the Court then looked to extrinsic evidence, including the parties’ conduct and the Contract terms.

1. The parties had incorporated the REDAS Conditions into the Contract but had deliberately chosen not to use the wording from the specimen performance bond contained in Appendix 6 of the REDAS Conditions, which would have created an unequivocal on-demand bond. Instead, they deliberately inserted Clause 2 into the Performance Bond. The Court therefore inferred that the parties intended for the Performance Bond to operate as an indemnity bond rather than as an on-demand bond.

2. The parties deliberately omitted to include in the Contract the language from Clause 2.1.3 of the REDAS Conditions that provided that the bond monies could be used to make good losses that were “likely to be incurred” but were not yet incurred, suggesting that they intended to limit the effect of the Performance Bond to only indemnify actual losses.

3. The Performance Bond was given in lieu of cash that would have served as a 10% security deposit or retention sum, and such cash under Clause 2.1.3 of the REDAS Conditions would have been used to set off against loss “incurred or likely to be incurred” with any cash in excess of the loss actually incurred having to be refunded to the Appellant or the bond issuer. This suggested that the Performance Bond’s purpose was to indemnify the Respondent against actual losses.

Based on this, the Court held that the parties intended the Performance Bond to be an indemnity bond and not an on-demand bond.

Validity of the Bond Call

For an indemnity bond, the beneficiary must show both a breach of contract and actual loss in order to be entitled to make a call. The Respondent’s call on the Performance Bond neither stated that the Applicant had breached the Contract nor that the Respondent had suffered any loss. Therefore, the call did not satisfy the conditions for a valid claim under the Performance Bond and was found to be invalid.

Accordingly, the Court granted the Applicant an injunction restraining the Respondent from receiving any part of the bonded sum, and to the extent that the Respondent had received any monies under the call, it had to repay the monies to the Applicant or the bond issuer.

Fraud or Unconscionability

Although not strictly necessary in light of the Court’s finding that the Performance Bond was an indemnity bond, the Court also considered, for completeness, whether the bond call would have been fraudulent or unconscionable if the Performance Bond was an on-demand bond.

The Court first set out the relevant principles:

1. Fraud requires proof that the beneficiary made the call knowing that it was invalid or with no honest belief in its validity.

2. Unconscionability involves unfairness or conduct so reprehensible that a court would restrain the party or refuse to assist the party.

The Court found that, while the Respondent could not claim losses arising from its termination of the Contract, it was neither fraudulent nor unconscionable for the Respondent to seek recovery of other losses (such as the unpaid portion of the advance payment, costs to complete defective works, and a loan to the Applicant). The total amount of these losses exceeded the Performance Bond sum, so the call would have been neither unconscionable nor fraudulent in respect of those losses. The Court also rejected the argument that the bond call was unconscionable because the Respondent was acting retaliatorily or seeking to negate an adjudication determination that the Applicant had successfully obtained.   

Concluding Words

This case provides a reminder on the importance of drafting when entering into a performance bond agreement. The wording should accurately reflect whether the bond is an on-demand bond or an indemnity bond, which goes beyond merely labelling the bond as “on-demand” or “indemnity”. If not properly drafted, a performance bond’s wording may be held to be ambiguous and the courts will have to resort to other considerations such as parties’ conduct in procuring the bond, to resolve the ambiguity. Parties should ensure that they are adequately advised on the effects and suitability of an on-demand or indemnity bond, and on the proper drafting of the agreement.

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