Pay-On-Demand Surety Bonds
An on-demand bond pays first and argues afterwards. The obligee makes a written demand, the surety pays, and any dispute about whether the money was owed happens later — with the contractor, not the surety, out of pocket in the meantime. That single reversal is what separates it from every other bond on this site.
What Is a Pay-On-Demand Surety Bond?
Almost every surety bond used in Canada is a conditional instrument. The Surety Association of Canada puts it in four words: surety bonds are “on default” instruments. Under the 2024 CCDC performance bond the obligee has to declare a default, give the required notices, be current on its own obligations and make the remaining contract funds available before the surety owes anything at all. Then the surety investigates and chooses how to respond.
A pay-on-demand bond — an on-demand bond, in the usual shorthand — removes all of that. The surety agrees in advance that it will not investigate, will not dispute the amount, and will not raise the defence that no default occurred. Ontario’s regulation for these instruments requires the insurer to state that it “will not assert any defence or grounds of any nature or description”. New Brunswick’s holdback release bond makes the obligee’s demand “conclusive evidence that a default has occurred”.
What that means in practice:
- Payment windows are short and fixed — seven business days in Calgary, ten in New Brunswick and Burnaby, fifteen under Ontario’s regulation
- The obligee usually needs only to certify default, sometimes expressly “in its sole and absolute discretion”
- The contractor’s recourse is to pursue the obligee afterwards, and the surety recovers what it paid under the indemnity agreement either way
- An on-demand bond changes the timing and the leverage, not who is ultimately liable — that was always the principal
The Three Instruments
Conditional Bond, On-Demand Bond, or Letter of Credit
An on-demand bond is one of three instruments that answer the same question — what happens if the contractor does not perform — and they answer it very differently.
The trade-off is straightforward once you see it. A conditional bond gives the obligee the best outcome, a completed project, but slowly and only on proof. The other two give money quickly, and the price of that speed is paid by the contractor.
Conditional Surety Bond
- The obligee must declare a default and satisfy conditions precedent before the surety owes anything
- The surety investigates, then chooses how to respond — and completing the work is usually its preferred option
- The obligee ends up with a finished project rather than a cheque
- Weeks to months, not days — the investigation is the point, not a delay
- This is what a CCDC 221 performance bond is, and what most Canadian bonds are
Pay-On-Demand Bond
- A written demand is enough; the surety is barred from investigating or disputing the amount
- Payment inside a fixed window — seven to fifteen business days depending on the jurisdiction
- The obligee ends up with cash, and an unfinished project if the work was genuinely incomplete
- Does not tie up your operating line the way a letter of credit does
- Rare in Canada, and confined to specific situations rather than general contract security
Irrevocable Letter of Credit
- Payable on a complying presentation, with the bank barred from looking behind the demand
- Encumbers your bank facility dollar for dollar, usually against cash margin or security
- Fixed term with an expiry to renew, and often an evergreen clause that renews it automatically
- The Surety Association of Canada’s objection is blunt: it “may be demanded by the owner at any time for any reason”
- Still the default answer in Canada wherever an obligee wants guaranteed access to cash
One nuance worth carrying into a negotiation. Where an owner or lender says it needs “liquid security”, it usually means a letter of credit. A surety alternative can sometimes be substituted, but the market description of that product is closer to fast pay than to true payment on demand, and the wording is negotiated rather than standard.
Where They Come Up
When an On-Demand Bond Gets Asked For
You will not meet one on an ordinary bonded construction contract. On-demand bonds occupy a small number of specific situations in Canada, and it is worth knowing which one you are in before you agree to provide anything.
Municipal Servicing and Subdivision Work
The largest Canadian use by far. Calgary, Edmonton, Burnaby, Halton Hills and Vancouver all accept demand-worded development bonds as security for a developer’s servicing obligations, and Ontario brought in a province-wide framework in November 2024. Halifax added development bonds to its Regional Subdivision By-law effective 1 November 2024.
Statutory Holdback Release
Ontario’s holdback repayment bond and New Brunswick’s holdback release bond are both demand-worded by prescription. If you are releasing holdback early on a contract in either province, the instrument you are giving is an on-demand bond whether or not anyone calls it that.
Where a Lender Is Involved
Project lenders want certainty of cash and speed of access. A conditional bond gives neither quickly, because the surety investigates first and paying the penal sum is its last resort. That is why financed projects tend to ask for a letter of credit, and occasionally for an on-demand bond as a surety alternative to it.
P3 and Alternative Financing Projects
Public-private projects are where the phrase “liquid security” comes from. The Surety Association of Canada has argued against it since 2008, on the basis that liquid security “provides no protection against the political risk of an unfinished project” — the authority ends up with cash but no viable asset. The instrument in question is normally a letter of credit rather than a bond.
Foreign or Foreign-Owned Owners
Owners accustomed to civil-law or international practice often expect a demand guarantee as a matter of course. Abroad these are bank instruments governed by the International Chamber of Commerce rules for demand guarantees, drawn against your credit line rather than your surety facility.
Advance Payments
Where an owner advances money before work is performed, the security against it is usually an on-demand instrument. In Canada that is a bank guarantee rather than a surety product — advance payment bonds are not part of the standard Canadian surety line-up.
Two of those six are genuinely surety products in Canada: municipal development security and statutory holdback release. In the others, the instrument an obligee or lender actually wants is usually a bank letter of credit, and the useful conversation is whether a surety alternative can be substituted at all.
For Contractors and Developers
What You Are Agreeing To
Your Bank Line Stays Free
This is the real attraction. A letter of credit posted for the same obligation ties up your operating facility dollar for dollar, often against cash margin, for as long as it is outstanding. A surety instrument does not touch the bank line at all.
You Lose the Right to Argue First
A conditional bond gives you a surety with an interest in investigating before it pays. An on-demand bond removes that entirely. If the obligee certifies default, the money goes, and you are left pursuing the obligee afterwards to get it back.
You Were Always Liable
The indemnity agreement makes you responsible for whatever the surety pays out, on any bond. An on-demand bond does not add a liability you did not already carry — it removes the buffer that would have tested the claim before your money moved.
For Owners, Municipalities and Lenders
What You Get, and What You Give Up
Cash, Quickly, and On Your Say-So
Payment inside a defined window on a written demand, with no investigation and no argument about quantum. Where a project has stalled and something has to be fixed now, that is worth a great deal.
Cash Is Not a Finished Project
The Surety Association of Canada’s objection to liquid security is worth weighing before you specify one. Calling the instrument leaves you with money and an incomplete asset — and on servicing work, money does not lay the watermain.
Specify Carefully, and Only Once
Wording is not standardised across Canadian municipalities, payment windows run from seven to fifteen business days, and rating requirements for the issuing surety differ. An instrument drafted for one jurisdiction should not be assumed acceptable in another.
The Practical Reality
Why These Are Hard to Place
It is worth being straight about this. An on-demand bond is not something a surety issues as a matter of course, and a contractor who assumes one can be arranged because a conditional bond was available is likely to be disappointed.
In our experience placing these instruments, sureties underwrite an on-demand bond far more conservatively than conventional on-default bonds, and appetite concentrates among contractors and developers with the strongest balance sheets. That reflects our own market experience rather than any published standard — no Canadian surety publishes its appetite for demand wording.
The Surety Has No Defences
On a conditional bond the surety can investigate, negotiate and, if the claim is bad, decline it. Demand wording strips all of that out in advance. Underwriters price and select for that difference, and some markets simply will not write it.
The Wording Is Not Standardised
There is no CCDC form and no national standard. Every municipality that accepts these has written its own, and the terms differ in ways that matter — payment windows, whether default is at the obligee’s sole discretion, reduction provisions, and how the instrument is terminated.
The Issuer Has to Qualify Too
Ontario’s framework and several municipal policies set credit-rating floors for the issuing surety, and some require Canadian incorporation for a minimum number of years or membership of the Surety Association of Canada. Not every market that writes your other bonds will qualify.
Collateral Is a Live Question
Whether security is required, and how much, is not something any Canadian source publishes. It is negotiated file by file. Ask your surety before you commit in an agreement — the answer materially changes whether the instrument is better than a letter of credit for you.
Capacity May Be Treated Differently
How a demand-worded exposure is counted against your facility is a question for your underwriter rather than something you can look up. Assume it will be treated more conservatively than an equivalent conditional bond.
Timing Is Not Elastic
Because the wording has to be negotiated with both the surety and the obligee, these take longer to arrange than a bond written on a standard form. If a servicing agreement or project agreement specifies one, start the conversation before you sign it, not afterwards.
Before You Sign
What to Check in the Wording
Where the form is prescribed by regulation there is nothing to negotiate. Where it is not — and in Halifax, for instance, the by-law asks only for a development bond “in a format acceptable to the Municipality” — these are the points worth raising.
The Amount, and Whether It Steps Down
Fix a maximum, and make sure the instrument reduces as the work is accepted rather than staying at full value until the very end. Ontario’s framework requires the bond to state the reduction conditions on its face; where that is not mandated, ask for it.
When It Ends
Match the expiry to the obligation. An instrument that expires early leaves the obligee unsecured and you in breach; one with no expiry at all outlives the obligation and has to be actively released. Some policies require exactly that — no expiry date — so know which you are agreeing to.
How It Is Released
Release is almost always request-driven, not automatic. Find out what triggers it, who has to certify what, and how long the municipality has to respond. The gap between finishing the work and getting the instrument back is a live exposure window.
Who Can Make the Demand
Prescribed forms name signatories — two officers of the owner, or the municipal clerk under seal. That is a genuine protection. Where the form is negotiable, ask for a named-signatory requirement and for notice to you at the time the demand is made.
Auto-Renewal
Evergreen clauses renew year on year unless someone gives notice in time. Nobody’s calendar does this for you. If your instrument auto-extends, diarise the notice date the day it is issued.
Whether a Bond Is Even Accepted
Do not assume an on-demand bond will be taken. Some Canadian municipalities that accept development bonds publish no bond template at all — only a letter of credit form. In that situation the wording is negotiated case by case, and confirming acceptance before you tender is the whole job.
If a project or servicing agreement in front of you specifies an on-demand bond or another unconditional instrument, the sequence that works is: read the wording, ask your surety whether it will write it and on what security, and only then price the work. The same facility that supports your bid bonds, performance bonds and payment bonds is where the answer comes from, and the answer is not always yes.
On-Demand Bond FAQs
What is an on-demand bond?
An on-demand bond is a surety bond written so that the surety must pay on the obligee’s written demand, without investigating and without raising the defence that no default occurred. The Canadian term of art is a pay-on-demand surety bond. An on-demand bond is the opposite of a conventional bond, which the Surety Association of Canada describes as an “on default” instrument.
How is it different from a performance bond?
Under a performance bond the obligee has to declare a default, give notice, be current on its own obligations and make the remaining contract funds available before the surety owes anything. The surety then investigates and usually prefers to complete the work. An on-demand bond removes every one of those steps and pays cash inside a fixed window.
Is a “liquidity bond” the same thing?
“Liquidity bond” is not an established term in Canadian surety, in international practice or in project finance, and it collides with two unrelated meanings in the debt markets. What people usually mean by it is either liquid security — which in Canadian public-private projects means a bank letter of credit — or a demand-worded surety alternative to one. Ask which is actually being required.
Are on-demand bonds common in Canada?
No. Almost all Canadian surety bonds are conditional. On-demand bonds exist in two specific places: municipal development and servicing security, where several provinces and cities have created them deliberately as an alternative to letters of credit, and statutory holdback release in Ontario and New Brunswick. Outside those, an obligee wanting guaranteed access to cash is normally asking for a letter of credit.
Why would I want one instead of a letter of credit?
Because a letter of credit encumbers your bank facility dollar for dollar, usually against cash margin, for as long as it stays outstanding. On a multi-year servicing agreement that is a large amount of capital doing nothing. A surety instrument does not touch the operating line.
What is the catch?
You give up the right to have the claim tested before the money moves. If the obligee certifies default, the surety pays and then recovers from you under the indemnity agreement. Getting the money back means pursuing the obligee afterwards, from a much weaker position than if you had never paid.
How quickly does the surety have to pay?
It depends on the jurisdiction, and the spread is wide. Calgary’s development agreement bond requires payment within seven business days. New Brunswick’s holdback release bond and several municipal policies use ten. Ontario’s framework uses fifteen. One municipality’s terms should never be assumed to apply in another.
Are they hard to get?
Yes, relative to conventional bonds. In our experience appetite is concentrated among contractors and developers with the strongest balance sheets, and some markets decline to write an on-demand bond at all. No Canadian surety publishes its appetite, so the only reliable answer comes from asking your own underwriter before you commit in an agreement.
Will I have to post collateral?
Possibly, and it is negotiated file by file. No Canadian source publishes a norm, and the answer matters because full collateral would remove the main advantage over a letter of credit. Establish it before you sign anything that specifies a pay-on-demand instrument.
Are they used on P3 and alternative financing projects?
The security that lenders and public authorities ask for on those projects is usually a bank letter of credit rather than an on-demand bond. The Surety Association of Canada has argued against liquid security on public-private projects since 2008, on the basis that it leaves the authority with cash rather than a completed asset. Actual project security packages are commercially confidential, so treat any general statement about them with care.
What about work outside Canada?
Foreign owners typically require a demand guarantee issued by a bank, commonly under the International Chamber of Commerce rules for demand guarantees. Those are independent of your construction contract, are examined on documents alone, and draw on your credit line rather than your surety facility. Arrangements abroad also bring a foreign forum and foreign law into any dispute.
