A performance guarantee relating to a building contract included language stating that it was issued for the ‘due fulfilment’ by a sub-contractor of its obligations. The guarantee also stated that the amount was payable on receipt of a written demand made by the main contractor ‘if (in your opinion and at your sole discretion) the said sub-contractor fails and/or neglects to commence the work as prescribed in the contract or if he fails and/or neglects to proceed therewith or if, for any reason, he fails and/or neglects to complete the services in accordance with the conditions of contract’.
It was held by the court in Mutual & Federal v KNS Construction that the true purpose was to guarantee the due performance by the sub-contractor. The guarantee was only payable if the sub-contractor breached the sub-contract as expressly stated in the guarantee. Although the demand could be made at the discretion of the main contractor, this discretion had to be exercised as a reasonable business person.
The guarantee was held to be inextricably linked to the sub-contract and therefore akin to a suretyship. It was thus a conditional guarantee and not a call or demand guarantee.
It is an easy matter to draw a demand guarantee. But you have to resist all temptation to put conditions in the document if you don’t want to end up with a suretyship rather than a call guarantee.