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Construction Industry Bonds

 Insolvency Performance Bond,

Below is an example of a Performance Bond which is used to give the employer, i.e. the next up in the contractual chain, the right to recover an amount which is properly due under the terms of the Bond wording up to the stated percentage of the contract value.  This percentage is usually 10% of the contract sum.  A company such as a Bank or Insurer can act as the surety which will form part of a 'charge' on the assets of the company until it is properly discharged and will result in quarterly or monthly invoices for the provision of the Bond by the Bank or Insurer. 

The 'On Demand' Bond

A contractor or sub-contractor should be aware of the need for careful scrutiny of the Bond wording as an 'On Demand' Bond or wording which effectively becomes an on demand Bond means that the value can be called in at any time for any breach, basically at the whim of the employer.  You may think that this is not a problem as it is provided by a third party, however, Insurers and Banks are not new to this and they will provide a 'Schedule of Understandings' which limits their risks/liabilities under a the wording of this second document.  This means that on default the surety will look to recover the cost from the defaulting party, which in the case of a Bank may mean pulling the funding from the company and actual insolvency.

The wording of a Bond should be only agreed to based on independent legal advice, which is not offered here.  The Bond wording below is an example of a simple Insolvency Bond, however you should not use this wording without taking advice based on your particular circumstances.

United Kingdom Performance Bond (this is offered as an example of the wording and is not to be used in any way at all)

The Guarantee Bond is made as a deed between the following parties whose names and
registered office addresses are set out in the schedule to this bond ("the Schedule"): -

(1) The “Contractor” as principal
(2) The “Guarantor”; as guarantor; and
(3) The “Employer”
Whereas
(1) By a Contract (the “Signed Contract”) entered into or to be entered into between the Employer
and the Contractor particulars of which are set out in the Schedule the Contractor has
agreed with the Employer to execute works (the “Works”) upon and subject to the
terms and conditions therein set out.
(2) The Guarantor has agreed with the Employer at the request of the Contractor to
guarantee the performance of the obligations of the Contractor under the Signed Contract
upon the terms and conditions of this Guarantee Bond subject to the limitations set out
in clause 3.
Now this deed witnesses as follows: -
1. The Guarantor guarantees to the Employer that in the event of the insolvency of the
contractor as defined in the Schedule the Guarantor shall subject to the provisions of
this Guarantee Bond satisfy and discharge the damages sustained by the Employer as
established and ascertained pursuant to and in accordance with the provisions of or by
reference to the Contract and taking into account all sums due or to become due to the
Contractor.
2. The damages payable under clause 3 of this Guarantee Bond shall include (without
limitation) any debt payable to the Employer under the Signed Contract following insolvency (as defined in the Schedule) of the Contract.
3. The maximum aggregate liability of the Guarantor and the Contractor under this
Guarantee Bond shall not exceed the sum set out in the Schedule (the “Bond Amount”)
but subject to such limitation and to clause 5 the liability of the Guarantor shall be coextensive
with the liability of the Contractor under the Signed Contract.
4. The Guarantor shall not be discharged or released by any alteration of any of the
terms, conditions and provisions of the Contract or in the extent or nature of the Works
and no allowance of time by the Employer under or in respect of the Contract or the
Works shall in any way release, reduce or affect this liability of the Guarantor under this
Guarantee Bond.
5. Whether or not this Guarantee Bond shall be returned to the Guarantor the obligations
of the Guarantor under this Guarantee Bond shall be released and discharged
absolutely upon Expiry (as defined in the Schedule) save in respect of any breach of
the Contract which has occurred and in respect of which a claim in writing containing
particulars of such breach has been made upon the Guarantor before Expiry.
6. The Contractor having requested the execution of this Guarantee Bond by the
Guarantor undertakes to the Guarantor (without limitation of any other rights and
remedies of the Employer or the Guarantor against the Contractor) to perform and
discharge the obligations on its part set out in the Signed Contract.
7. This Guarantee Bond and the benefits thereof shall not be assigned without the prior
written consent of the Guarantor and the Contractor.
8. The parties to this Guarantee Bond do not intend that any of its terms will be
enforceable, by virtue of The Contracts (Rights of Third Parties) Act 1999 or otherwise,
by any person not a party to it.
9. This Guarantee Bond shall be governed by and construed in accordance with the laws
of England and Wales and only the Courts of England and Wales shall have jurisdiction
hereunder.

The Schedule (this is offered as an example of the wording and is not to be used in any way at all)

The Contractor whose registered office address is at
The Guarantor whose registered office address is at
The Employer whose registered office address is at
The Contract A Contract [dated the day of 200 ]
[to be entered into] between the Employer and the Contractor
in the form known as [ ] for the construction of works
comprising [ ] for the original sum of [ ]
pounds sterling (£[ ])
The Bond Amount The sum of £[ ] pounds sterling (£[ ])
[Insert and provisions for reduction of the Bond Amount]
Insolvency: (a) composition or arrangement is made with all or any of
his creditors;
(b) a voluntary arrangement for a composition in
satisfaction of his debts or scheme of arrangement of
his affairs is approved under Part 1 of the Insolvency
Act 1986;
(c) an order is made for his bankruptcy or compulsory
winding-up;
(d) a resolution is passed for his voluntary winding-up
(otherwise than for the purposes of reconstruction or
amalgamation);
(e) an administration order is made under the provisions
of Part II of the Insolvency Act 1986;
(f) a receiver or administrative receiver is appointed over
all or part of his undertaking or assets;
(g) possession is taken by or on behalf of the holders of
any debentures secured by a floating charge of any
property comprised in or subject to a floating charge;
or
(h) he makes any arrangement for the benefit of his
creditors or takes or suffers any similar action in
consequence of debt.
Expiry The Guarantor shall be released and discharged from their
obligations under the above Guarantee Bond from the date of
issue of the Certificate of Practical Completion which shall be
conclusive for the purposes of this Guarantee Bond

In witness whereof the Contractor and the Guarantor have executed and delivered this
Guarantee Bond as a Deed this day of 200
Executed and delivered as a deed by (this is offered as an example of the wording and is not to be used in any way at all)
 

CONTRACTOR
 

DIRECTOR ________________________________
 

DIRECTOR ________________________________
 

Executed and delivered as a deed by [Bank or Insurance Company]
 

GUARANTOR
 

DIRECTOR ________________________________
 

DIRECTOR/SECRETARY ________________________________

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