Performance security: bonds, guarantees and letters of credit

When considering security requirements to support project contracts, parties often wonder what form of security is appropriate — a performance bond, parent company guarantee, bank guarantee or letter of credit. Each of these instruments is used to achieve the same goal: namely to increase confidence and manage risk between the parties in order to facilitate the underlying transaction. However, each instrument carries nuances that may impact upon its operation and utility, and therefore its appropriateness in different commercial contexts. These issues were brought into sharper focus following the UK Court of Appeal’s decision in Wuhan Guoyu Logistics Group Co Ltd, Yangzhou Guoyu Shipbuilding Co Ltd v Emporiki Bank of Greece.

In the Wuhan case, a decision was made as to whether a payment guarantee in relation to a shipbuilding contract provided by a bank was properly classified as a guarantee or an ‘on demand bond’. As will be discussed, the distinction between a guarantee and an ‘on demand’ bond is an important one, with significant consequences for both those seeking to rely on the security and those providing it.

This paper sets out the key differences between the various forms of security commonly used in the Asia- Pacific market to help you determine which instrument is most appropriate for your projects…

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