How to call a Performance Bond under Italian Law

19 May 2022

Giuseppe Broccoli

Written by Giuseppe Broccoli

4 MIN READ

The Performance Bond is, in almost all the cases, an autonomous and on-demand guarantee which can be called with a simple request sent by the beneficiary to the bank-guarantor. As any other aspect which regulates the Performance Bond, also its calling must comply with specific requirements which are normally indicated in the text of the bond. If the text does not specify anything, it is advisable to follow international standard practices laid down on this.

 

Considering that the performance bond is an on-demand guarantee, the bank shall reject the payment if the formal requirements indicated in the text of the bond are not met.

 

Given this, it is essential to carefully read the text of the bond to check how to properly call it. Therefore, it is advisable to negotiate and insert in the text of the guarantee a precise and clear calling procedure to avoid any ‘risky’ holes.

 

Read also our suggestions to negotiate a Performance Bond

 

 

It is a good practice that the text of the performance bond expressly indicates:

 

  • the individual who will sign the calling demand (for example, the legal representative of the beneficiary);

 

  • the place where the calling demand must be served (for example, the registered office of the bank or of the branch which issued the bond);
  • the deadline within which the demand must be submitted to the guarantor (for example, a specific date and hour – remembering that if the text of the bond does not specify any hour, the beneficiary may legitimately submit the calling demand within 11:59 pm of the expiry date);
  • any other requirement to be inserted in calling demand (for example, that the applicant is still in breach notwithstanding the warning letter requiring to remedy the breach);

 

 

To avoid doubts and uncertainties (especially during the calling process), it is advisable to provide that the performance bond is regulated by the International Chamber of Commerce ICC Rules no. 758 (very common rules at international level).

 

This will allow to avoid any interpretation and practical issues, provided however that such rules are well-known by the parties.

 

If, instead, the performance bond is not regulated by the ICC Rules no. 758 and the text does not detail how to call the bond, it would be advisable to follow the following few rules (unless otherwise provided in the bond text):

 

  • the demand must be signed by the legal representative of the beneficiary or by other director or attorney with powers to undertake obligations on behalf of the company;
  • it is advisable that the demand contains a (generic) indication of the reasons justifying the calling (for example, the applicant did not comply with the delivery deadlines);
  • the demand must be sent to the bank branch which issued the bond (it would be advisable to send a copy of it also to the bank main office) and it would be preferable to identify a specific individual to whom the demand will be addressed;
  • it is essential to accurately identify the performance bond (making reference to the issuing date, the number of the bond and the underlying contract);
  • it would be advisable that the demand is received (or sent) at least the day before the expiry date (taking into account in any event that the demand will be valid also in case the bank receives it on the expiry date);
  • it would be advisable that the demand is received during the working hours (taking into account that generally, if the bond does not specify anything, the demand should be in any event valid if received within 11:59 pm of the expiry date);
  • if the performance bond states the occurrence of a specific event as expiry date of the bond (for example, the completion of the works), then the demand must be sent before the occurrence of said event. This means that if the bond states just a fixed date as expiry date, then the calling may be in principle submitted also on the expiry date, but if the bond provides the occurrence of an event as expiry date, then the calling must be made at least the day before the occurrence of said event.

 

Conclusions

Even if the performance bond has a quit simple structure and may be called with a ‘simple demand’, it is in any event necessary to remind that such calling must be properly carried out to avoid that the bank rejects the payment for merely formal issues.

 

As always, the above-mentioned advice may be followed as generic considerations which need to be customized on the concrete performance bond to be called.

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