Commercial Solicitors Ipswich – Bonds

Clare Richards

‘A client telephoned me a few weeks ago to say that he had been asked by a potential customer to supply a bond.  He wanted to know what this was.

This is a really good question.

There are frequent references to bonds in the press.  However, there is no one meaning for bonds, which can be used to mean different things in different circumstances.

Sometimes, bond is used to mean a type of debt.  The bond issuer, which might be a company or other body, agrees to pay money to someone.  It issues a certificate that states that it owes a certain amount of money to the holder of the certificate, the bondholder.  The certificate will normally also include a stated amount of interest payable.  The underlying debt can then change hands by the transfer of the certificate.  The creditworthiness of the borrower and the interest rate payable will factor into the price payable when the debt changes hands.

Media references to the bond market are references to the way in which these bonds are traded.  Bonds of this type are sometimes convertible into shares or other rights in the borrower.

There is a common alternative use of the word bond.  This other usage means something more like a guarantee or indemnity.  The meaning will depend upon the actual wording of the bond itself.

Sometimes, a performance bond is required.  This might mean a parent company agreeing that it will perform a contract if its subsidiary fails to do so.

My client is a supplier of machinery.  After discussion, we thought that the request was probably for a guarantee of the financial obligations arising under the contract.  Alternatively, it might have related to the warranty on the machinery.  There was no way, however, to be sure just from the request to provide a bond.  I advised my client that he needed to go back to the customer and ask exactly what the concern was.  Once this was done, it would be possible to decide whether the request was acceptable and, if so, what steps to take next.

As a general point, if someone asks you for something using a technical term, and you are not sure what is required, that may well be because the technical term has more than one meaning.  The best approach is often to ask further questions to find out exactly what is required.  As this illustration shows, one word can mean very different things, depending on the circumstances.’

Clare Richards is a commercial solicitor at Barker Gotelee, solicitors in Ipswich

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