What is an
On-Demand Performance Bond?
An on-demand performance bond is a bank guarantee payable on the beneficiary's compliant demand, typically 5 to 10 percent of the contract price, without the bank asking whether the contractor actually breached. The bond is autonomous: it is the bank's own payment obligation, independent of the construction contract, and UAE courts will restrain a call only in narrow cases of fraud or manifest abuse.
The autonomy principle
The bank pays against a demand that complies with the bond's terms, not against proof of default. Arguments that the employer is wrong on the merits belong in the underlying dispute, not between contractor and bank. That is the commercial point of the instrument: it converts the employer's claim into cash now and pushes the argument about who was right into arbitration later. Both sides need to plan around that reality, which we unpack in our guide to performance bonds in UAE construction.
Calls, extend-or-pay, and the 72-hour response
For employers, a valid call is a compliance exercise: match the demand precisely to the bond's wording, mind the expiry date, and paper the contractual basis. For contractors facing a call, the first days decide most of it: check the demand for non-compliance, assess the narrow injunction route, manage the bank relationship and counter-indemnity exposure, and preserve the merits for the arbitration. The extend-or-pay demand near expiry, where the employer asks the bank to extend the bond or pay out, is standard UAE practice and needs a decision, not surprise.
Can a court stop an on-demand bond call in the UAE?
Rarely. Courts, onshore and in the DIFC and ADGM, respect the autonomy of the bank's obligation and will intervene only for fraud or manifest abuse of right that is evident on clear proof, such as a demand for works never contracted or after undisputed full payment. A genuine dispute about performance is not enough.
What is an extend-or-pay demand?
A demand the employer sends the bank as the bond nears expiry: extend the validity or pay the bond amount. It forces the contractor to procure an extension or face a payout. In UAE practice it is routine at year-end and project close-out, and contracts and pricing should anticipate it rather than treat it as an escalation.
Is calling the bond the end of the dispute?
No. The call moves cash, not rights. If the employer drew more than its actual entitlement, the contractor recovers the difference in the underlying arbitration or court case. Employers who call bonds aggressively should expect the drawn amount to be fully litigated, with interest, in the main dispute.
A bond call on the table?
Senior counsel only. We act on bond calls, injunctions and the arbitrations that follow, for employers and contractors.
Construction Counsel →