Warranties, bonds and novation - Construction Contracts - page 56

35 JCT contracts do not seem to mention performance bonds.
What are they?
AlthoughJCTcontractsrefertocertainbonds,suchasadvancepaymentandoff-sitemateri-
alsbonds,theymakenomentionofperformancebonds.Thepurposeofanybondistoguar-
antee payment of some compensation, usually in the event that the party on whose behalf
the bond is provided fails to carry out some contractual obligation. In the instances noted
above, the bonds would relate to failures to repay the advance payment in the instalments
requiredorfailuretoprovidethematerialsorgoodsforwhichpaymenthasbeencertifiedby
the architect and paid by the employer. They are sometimes referred to as guarantee bonds
or guarantees. As a guarantee, a bond must be in writing. 2
Aperformance bondisaspecific kindofbondwhosepurposeistoprovidecompensation
if the contractor fails to carry out the building contract. Because JCT standard contracts do
not include performance bonds or provision for them, an employer requiring such a bond
must ensure that the necessary additional clauses are inserted in the contract at tender stage
and that a suitable bond is attached to the documents and, in due course, to the contract.
A bond is normally executed as a deed by a person referred to as the surety. The surety
is usually either a bank or an insurance company. If the contractor fails to perform, the
suretyagreesthatitwillcompensatetheemployeruptoanagreedmaximum.Themaximum
amount is usually 10 per cent of the contract sum, but it may be more on small contracts.
This ensures that the employer will have some money available, for example if it becomes
necessary to engage another contractor to complete the Works, probably at additional cost.
There are two basic types of bond: default bonds, where the employer has to demonstrate
that the contractor was in default of its obligations before the surety can be required to pay
out, and on demand bonds, where payment can be required from the surety without the em-
ployer having to demonstrate any default on the part of the contractor. Sureties tend to fa-
vour on demand bonds because they do not have to carry out any expensive investigations
or make any judgment about the contractor's performance. 3 A surety is not usually worried
about having to pay out, because it will have made sure that it has adequate security from
the contractor for such an eventuality. It is often difficult to determine whether a bond is de-
fault or on demand, and courts are often asked to decide. In making the decision, especially
in cases where the question may be evenly balanced, a court will give weight to the bond's
commercial intention. 4
The provisions of a bond must be adhered to strictly. Any changes to the terms of the
contract between contractor and employer may result in the surety's liability coming to an
end. 5 When the surety is asked to pay, it is usually referred to as the employer 'calling in'
the bond.