How on-demand (first-demand) bonds differ from conditional surety bonds, using Central Térmica de Temane v Banco Santander [2026] EWHC 2587 (Comm): a US$90.8 million claim on two English-law demand bonds, a foreign injunction, and why place of payment mattered.
Education only / verify at source / not legal advice. This page explains the difference between on-demand bonds and conditional surety bonds, using one English High Court judgment as a worked example. Every bond is worded differently, and the result in any dispute depends on the bond's own words and its governing law. Global Guarantors publishes industry education. We aren't a surety, bank, broker or law firm, and we don't publish premiums. Read the signed instrument and speak with licensed counsel before relying on anything here.
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Construction and infrastructure projects are secured with two very different kinds of bond that often share the same name. A "performance bond" issued by a surety under a typical North American form is usually a conditional instrument: the surety's liability follows the contractor's, and the owner has to show a default before the surety has to act. A "performance bond" issued by a bank on an international project is often an on-demand instrument: the bank pays when it receives a demand in the agreed form, without looking into the underlying dispute.
On October 13, 2026, the Commercial Court in London handed down Central Térmica de Temane S.A. and Citibank, N.A., London Branch v Banco Santander S.A. [2026] EWHC 2587 (Comm). Mr Justice Calver held that Banco Santander had no defence to a claim for US$90,796,078.66, plus interest, under two English-law on-demand bonds it had issued for a gas-fired power plant in Mozambique. The bank had not paid because a Spanish court had ordered it not to. The English court held that the order did not excuse payment, because the place of payment the bank had agreed to was Mozambique, not Spain, and it refused to pause enforcement.
The judgment is a clear, recent illustration of why on-demand bonds are described as close to cash, and of how three drafting points that are easy to overlook (where payment is made, which law governs, and what happens if payment becomes unlawful somewhere) can decide a nine-figure dispute.
This guide explains on-demand and conditional bonds, sets out the facts and the questions the court answered, and closes with general lessons and a short drafting checklist.
The word "bond" covers instruments that work in opposite ways. The difference matters to everyone who asks for one, gives one, or issues one.
In a conditional bond, the issuer's promise is tied to the underlying contract. Under the common North American surety model, the surety guarantees that the contractor will perform, and the owner must generally establish the contractor's default, follow the bond's notice steps and allow the surety its options before the surety pays or completes the work. The surety can usually raise the contractor's own defences. For how these forms are structured, see our AIA A312 performance and payment bond card, and for the wider framework, our contract surety guide.
In an on-demand bond, the issuer's promise stands on its own. The issuer pays when it receives a demand that matches the bond's terms. It does not decide whether the contractor is really in default, and the contractor's dispute with the employer is fought out separately, later, in the underlying contract's forum. If the employer turns out not to have been entitled to the money, the remedy is usually to recover it from the employer under the underlying contract, not to stop the payment.
That allocation is the point of the instrument. In the Temane case, CTT's own submissions to the Spanish court (as summarised in the judgment) put it this way: by agreeing that the bonds were to be on demand, the contractor "expressly assumed the contractual risk inherent in this type of guarantee." An English law expert whose opinion CTT filed in Spain explained that "an important function of a first demand guarantee is to secure cash flow for the beneficiary once the demand has been issued."
The table below is a general comparison for education, not a summary of the judgment. Any particular instrument can mix features, so always read the wording.
| Conditional surety bond | On-demand bond / demand guarantee | |
|---|---|---|
| What triggers payment | Proof of the principal's default, plus the bond's notice and claim steps | A demand that complies with the bond's terms |
| Who usually issues it | A surety company | Often a bank, sometimes a surety |
| Can the issuer raise the principal's contract defences? | Usually yes | Generally no; the instrument is separate from the underlying contract |
| Speed | Slower; investigation is part of the process | Fast; payment within a short fixed period |
| Where the dispute is decided | Before or alongside payment | Usually after payment, between employer and contractor |
| Contractor's main risk | Being declared in default | A demand being made while the contract dispute is unresolved |
| Typical setting | US and Canadian public and private construction | International EPC and infrastructure projects; many cross-border contracts |
Bank instruments also interact with a contractor's credit lines differently from surety bonds; we compare those effects in surety bond vs letter of credit. For how large projects choose between these forms of security, see our megaproject performance security guide.
The judgment describes CTT as a Mozambique corporation and the employer for the design, construction and operation of a 450 MW combined-cycle power plant fuelled by natural gas at Temane, Mozambique. Companies in the TSK Group were the onshore and offshore contractors under an EPC (engineering, procurement and construction) contract and a co-ordination agreement.
Santander issued two bonds at the request of its customer, TSK Electrónica y Electricidad, S.A. of Spain:
| Bond | Purpose (as described in the judgment) | Bond Amount |
|---|---|---|
| Performance Bond | Security if TSK failed to complete the project in accordance with the contractual scheme | US$86,030,000 |
| Advance Payment Bond | Security if TSK failed to earn the full advance payment; value reduces as interim payments are earned | Originally US$24,088,400; reduced contractually to US$4,766,078.66 after milestones |
The bonds originally expired on December 1, 2024. Around November 5, 2024, they were extended to February 28, 2026.
Citibank, N.A., London Branch was the second claimant because it was the project lenders' offshore security trustee, and CTT had given the bank notices of assignment. Santander later accepted that CTT, not Citi, was the beneficiary entitled to demand, so Citi's own claim fell away.
The judgment quotes the key clauses. The bonds were identical in the relevant respects unless noted. These are the words the case turned on:
The demand form in Annexure 2 is short. It names the bond, states the amount demanded and gives the account number and bank to which "Payment should be made". It does not ask the beneficiary to describe or prove a default.
Two features stand out. First, nothing in the bond required evidence of default. Second, the bond let the beneficiary choose the account, and therefore the place, where payment would be made. That second feature decided the case.
All dates are from the judgment.
| Date | Event |
|---|---|
| Dec 2, 2021 | Advance Payment Bond and Performance Bond issued |
| Nov 5, 2024 (about) | Expiry extended from Dec 1, 2024 to Feb 28, 2026 |
| Apr 3, 2025 | TSK gives notice purporting to terminate the EPC contract for prolonged force majeure (tropical storm Filipo); CTT disputes it |
| Apr 4, 2025 | CTT delivers demands to Santander's Madrid office for payment to ABSA Bank, Mozambique |
| Apr 7, 2025 | TSK applies, without notice, to a court of first instance in Móstoles, Spain, for an interim injunction |
| Apr 10, 2025 | Spanish court grants the injunction; Santander tells CTT it cannot pay "by the moment" |
| Apr 11, 2025 | Payment deadline under the bonds |
| May 15, 2025 | TSK starts a London-seated arbitration against CTT |
| May 22, 2025 | CTT applies in Spain to discharge the injunction |
| Oct 29, 2025 | CTT and Citi issue the English proceedings (a Part 8 claim) |
| Jan 6, 2026 | Arbitral tribunal dismisses TSK's application for orders that CTT withdraw the English claim and its demands |
| Jan 20, 2026 | Spanish court dismisses CTT's discharge application |
| Mar 24, 2026 | CTT appeals in Spain |
| Mar 27, 2026 | Knowles J dismisses TSK's application to join the English claim |
| May 12, 2026 | Court of Appeal refuses TSK permission to appeal the joinder decision |
| Sep 15–17, 2026 | Trial in the Commercial Court |
| Oct 13, 2026 | Judgment handed down |
Two details from this sequence matter later. The Spanish injunction arrived one day before the payment deadline. And the Court of Appeal, refusing TSK permission to appeal the joinder decision, said (per Popplewell LJ, as quoted in the judgment) that "the validity of the demands as a matter of TSK's contractual rights and obligations vis a vis CTT under the EPC are not relevant to whether Santander has a defence to the claim on the bonds". That is the autonomy principle in a sentence.
Santander did not argue that the demands were defective or that CTT was acting fraudulently. The judge recorded that the bank "has always accepted that the Bonds are autonomous instruments payable in accordance with their terms regardless of any dispute between CTT and TSK." It resisted the claim on one ground only: that the Spanish order made payment unlawful, and so English law would not force it to pay.
That argument relies on a century-old English case, Ralli Brothers v Compania Naviera Sota y Aznar [1920]. As the judgment explains, foreign illegality generally does not excuse a party from performing an English-law contract. The Ralli Brothers rule is a "limited exception." It applies where the contract requires performance in a place where that performance is unlawful under the law of that place.
The judge stressed that "the confines of the doctrine are, however, narrow." Drawing on earlier authority, the judgment sets out its limits:
When the rule does apply, it is a complete defence to a claim for performance. That is why the place of performance was the battleground.
The bank's position was genuinely difficult, and the judge said so. The Spanish law experts agreed that, had Santander paid in breach of the injunction before any English ruling, the risk of civil and criminal liability in Spain "would have been high." The judge also rejected suggestions by CTT's counsel that Santander was acting in bad faith or as TSK's "mouthpiece," finding no evidence for them.
The judge identified four issues, and took the second first.
Santander argued that the place of performance was Spain: the demands had to be delivered to its Madrid office, and the steps to make the payment would be taken there. CTT argued it was Mozambique, where the nominated account was.
The court started with the words of the bonds. The bank's obligation was to pay within five business days of a conforming demand, and clause 7 said payment "shall be made" to the account specified in the demand. In the judge's words, by clause 7 "Santander accordingly agreed to a contractual term which allows CTT to fix the place of payment." Once a conforming demand arrived, the obligation arose "without more." So:
"the place of performance of the payment obligation is Mozambique. Compliance with that obligation is not contrary to the law of Mozambique and accordingly the Ralli Brothers exception does not apply."
Delivering the demand in Madrid was CTT's step, not the bank's performance, and anything the bank did in Spain to arrange the transfer was preparatory. The judge also addressed Santander's argument that the presumptive place of payment should be the place the demand was delivered and that only clear words could displace it. He rejected it:
"Santander chose to agree with CTT that all payments made by it under the Bonds had to be made to the account specified in the relevant demand. It did, therefore, afford the beneficiary with an unfettered choice to change the legally relevant place of payment ... and it must live with the consequences of that agreement. It was open to the Bank to have insisted upon Spanish law being the governing law of the Bonds, or to have insisted on a clause which stated that the place of performance/payment was to be Spain, but it chose not to do so."
The judgment contrasts an earlier Commercial Court decision, EuroChem v Société Générale [2025] EWHC 1938 (Comm), which concerned English-law on-demand bonds blocked by sanctions. As the judgment describes it, one of the bonds there had no clause saying where payment was to be made, and another was subject to the ICC Uniform Rules for Demand Guarantees (URDG), whose Article 20(c), as summarised in the judgment, provides for payment at the branch or office of the guarantor that issued the guarantee or another place indicated in the guarantee. The Temane bonds had their own express clause, and the judge held that it settled the point. To the extent remarks in EuroChem pointed the other way, he held that the analysis of Stephen Tomlinson QC, sitting as a deputy judge at first instance in Credit Agricole Indosuez v Chailease Finance Corp (a decision "followed by the Court of Appeal", reported at [2000] 1 All ER (Comm) 399) and not cited in EuroChem, "is to be preferred and provides the correct analysis" (judgment [79]–[86], [115]).
CTT argued that the Ralli Brothers rule covers foreign legislation and regulation, not foreign court orders, relying on two recent first-instance decisions (Litasco and Beneathco). The judge said the question did not arise, given his finding on place of performance, but addressed it in case he was wrong. He disagreed with those decisions. Because the binding force of a Spanish court order comes from Spanish legislation, he found it "arbitrary and unprincipled" to treat a court order differently from a statute. His conclusion:
"the Spanish interim injunction is capable of engaging the principle in Ralli Brothers so as to provide a defence to the claim. However since the place of performance under the Bonds is Mozambique, on the facts of this case it does not."
This part of the judgment is an alternative holding, and it differs from two earlier first-instance decisions. Readers should treat it as a live point of English law.
The defence also failed on a separate ground. The party relying on illegality carries the burden of showing it took reasonable steps to avoid it, or that those steps would have failed. Santander made no attempt to intervene in the Spanish proceedings, even though it was common ground that it could have. The judge wrote:
"The fact is that Santander made no effort at all to have the injunction discharged."
He added that the bank's silence "may well have made it more likely that the injunction would be maintained," and that it was no answer that CTT had not asked the bank to join it: "The burden rested on Santander ... But it did nothing."
CTT also argued that Santander could have paid between April 4 and April 10, before the injunction. The judge rejected this. The bonds gave the bank five business days, so it was not in default before April 11, and "there is no basis to contend that it was unreasonable for it not to pay earlier than the contractually agreed long stop date." If the claimants were right, the five-day period "would be redundant." On this point the bank won, but it made no difference to the result.
Having found the bank liable, the court considered Santander's fallback request: a stay of enforcement (Santander asked for a four-month "initial stay") so that it could ask the Spanish court to lift the injunction in light of the English judgment, or alternatively a later payment date.
The judge refused both. He relied on the long line of English cases treating letters of credit and demand guarantees as instruments that must be paid on time, including a 2016 decision refusing a stay where a Brazilian injunction blocked a standby letter of credit. He held:
"Given the crucial commercial function of demand bonds as 'akin to cash' or the 'lifeblood' of commerce, any further delay and uncertainty should not be facilitated by this court."
Other factors he weighed:
He distinguished an earlier case (Maritza) where a short stay was granted: there the place of performance was France, where the French injunction made payment unlawful, and the French hearing was two days away.
Case studies are easy to over-read. This judgment does not decide:
These are general points for education, drawn from the judgment's reasoning. They are not advice on any particular instrument.
For the basic three-party structure behind both kinds of bond, start with Surety 101.
A short checklist of questions to raise with counsel when negotiating or reviewing an on-demand bond or demand guarantee. It is drawn from the issues in this judgment. It is not model wording.
| Issue | Question to ask | Why it mattered in Temane |
|---|---|---|
| Place of payment | Does the bond fix where payment is made, or let the beneficiary nominate an account (and so a country)? | Clause 7 let CTT nominate a Mozambique account, which made Mozambique the place of performance |
| Place of demand | Where must the demand be delivered, and is that separate from where payment is made? | Delivery in Madrid did not make Spain the place of performance |
| Governing law | Which law governs the bond, and does it match the parties' expectations? | English law applied; the judge noted the bank could have insisted on Spanish law |
| Forum | Is jurisdiction exclusive, and do the parties agree not to challenge it? | Clauses 13 and 14 gave the English courts exclusive jurisdiction |
| Rules incorporated | Is the bond subject to URDG or another rule set, and what does it say about place of payment? | The judgment contrasted a URDG bond in EuroChem |
| Illegality and sanctions | Does the bond address what happens if payment becomes unlawful somewhere? | The Temane bonds, as quoted, had no such clause; the dispute fell to the general law |
| Payment period and interest | How long does the issuer have to pay, and what interest runs on late payment? | Five business days; 8% per annum on late payment |
| Expiry | Do demands made before expiry survive it? | Clause 6 preserved liability for demands made on or before expiry |
What is an on-demand bond? A bond under which the issuer pays on receiving a demand that complies with the bond's terms, without investigating whether the underlying contract was breached. The Temane bonds said the bank "shall not be required or permitted to make any other investigation or enquiry".
How is that different from a surety performance bond? A conditional surety bond generally requires the obligee to establish the principal's default and follow the bond's claim steps, and the surety can usually raise the principal's defences. An on-demand bond is separate from the underlying contract.
Why did the Spanish injunction not stop the payment obligation? Because, under English law, foreign illegality only excuses performance where performance is unlawful at the place of performance. The court held the place of performance was Mozambique, where CTT's account was, and payment there was not unlawful.
Did the court say foreign injunctions can never excuse payment? No. It said a foreign court order is capable of engaging the Ralli Brothers rule, but that it did not do so here, because the place of performance was not Spain. It also held the bank could not rely on the rule because it took no steps to have the injunction discharged.
Was anyone accused of fraud? No fraud exception was argued. The bank accepted the demands were valid in form and content, and the judge rejected allegations that the bank acted in bad faith.
Who decides whether the contractor's termination was lawful? The London-seated arbitral tribunal in the dispute between TSK and CTT. The English court decided only the bank's obligation under the bonds.
How much was claimed? US$90,796,078.66 plus interest: US$86,030,000 under the Performance Bond and US$4,766,078.66 under the Advance Payment Bond.
Does this apply to bonds outside England? The judgment applies English law to English-law bonds. Bonds governed by other laws, or with different place-of-payment terms, may be treated differently. Speak with counsel in the relevant jurisdiction.
Retrieved or confirmed October 14, 2026 (PT).
