Performance Bond: Conditional or Unconditional

In construction contracts, a 'performance bond' is a bond taken out by the contractor, for the benefit of and at the request of the employer, in the event of the contractor's default, repudiation or insolvency. There are two types of performance bonds: Conditional bond or default bond, whereby the surety accepts 'joint and several' responsibility for the performance of the contractor's obligations under the contract; and Unconditional bond or on-demand bond, which is a covenant by the surety to indemnify the employer following contractor's default, subject to stated terms and up to a sum commonly 5% of the main contract sum. However, in Malaysia, the question of whether the performance bond in a construction contract is a conditional or an unconditional guarantees is one of the issues relating to performance bond that has been discussed. Thus, in order to determine the types of performance bond applicable in a contract, a thorough understanding of the content of the bond is required. Therefore, the objective of this research is to determine the phrase(s) in the Performance Bond in a construction contract that determine whether the performance bond is a conditional or unconditional.