Contract Practice - Performance security

Bonds
1. What is a bond?
  1. A contractual duty duty owed by one party to another is backed up by a third party
  2. what are the two main sources of gurrantee that can be sought in construction?
2. Terms of bonds (12 points)
  1. 1. addressed to employer
  2. 2. details of project
  3. 3. value of bond
  4. 4. name and address of bank
  5. 5. validity of period of bond
  6. 6. irrevocable & unconditional undertaking by bank
  7. 7. immediate & freely transferable payment
  8. 8. reduction mechanism
  9. 9. without any deduction
  10. 10. should not affect organisational changes to the contract
  11. 11. rights & benefits should b made transferable
  12. 12. local laws and regulations r applicable
3. who provides a bond
  1. bank/ financial institution
4. on demand bond
  1. where beneficiary can call upon the surety 4 payment whether or not there has been a default under the main contract - as long as not fraudulent
  2. Disadvantages?
    1. -ve affects contractors cashflow
    2. added to contract sum - employer pays for something not really necessary
5. Conditional Bond
  1. surety only pays when specific conditions r met e.g. default
6. Types of Bonds
  1. Retention Bonds
    1. Purpose?
      1. Instead of ddt retention form each interim payment
    2. Value?
      1. same amount as if retention is ddt e.g. 3% contract sum
  2. Performance Bond
    1. Most common
    2. Emp recover losses in a breach of contractors obligations
    3. Usually 10% of Contract Sum
      1. + premium 4 taking out bond
    4. FIDIC
      1. contractor must submit bond within 28 days
      2. valid up to works completion
        rtn. back to contractor within 14 days of Defects liability certificate
      3. Notify contractor in writing
    5. JCT
    6. Guarantees performance
  3. Materials off-Site bond
    1. Covers emp. against loss/ damage 2 materials already paid for (in interim vals) before materials delivered to site.
  4. Advance Payment Bond
    1. JCT
      1. Ent. into contract particulars
      2. Fixed OR % sum
      3. Note date 2 b paid & date of reimbursement
        could be in full OR stages
      4. issued b4 1st pay cert.
        Cont. provide bond 1st
      5. CA keep copies of bond corres.
  5. Tender Bond
    1. covers party inviting the tender if the lowest tender refuses to enter into contract with them
    2. important = if inviting party is in turn tendering for works on the basis of that tender
    3. Prevents idle tendering
    4. Usually 1-5% of tender sum
  6. Payment Bond
    1. provides security that all persons supplying labor and material to the project will be paid
    2. Subcontractors and suppliers are the "beneficiaries" of a payment bond
7. How does the Emp. call the bond?
  1. prove the contractor is in breach + loss suffered
8. What kinds of Bonds does JCT provide?
  1. Advanced
    1. ent. in contract particulars
      1. Schedule 6
  2. Materials off-site
  3. Performance
9. argument against bonds
  1. shouldn't really be needed - tender process should ensure only reliable + caberble contractors r selected.
  2. Unneccessary premiums
  3. if a reg dev. adds a lot to projects
10. When is a bond appropriate?
  1. contractor new/ unapproved
  2. protect 'one-off' dev.
  3. appropriate to risks of project
The difference between a gurrantee and a bond?
1. Guarantees are conditional
  1. contractor must commit a default b 4 the guarantor can be called in to perform
  2. The contractor has to fulfil its obligations
2. Payment bonds are unconditional
  1. don't require proof of default
  2. often referred to as unconditional/ on-demand bonds
    1. guarantor pays a predetermined sum
    2. Doesn't matter if there is a loss or not
  3. bank has to pay without waiting for contractors action
  4. Bank has primary liability
3. Protection
  1. PB = comfort of being a payment guarantee from an independent third party
    1. PB be from a reputable guarantor
  2. PCG is directly related to the financial covenant of the parent
    1. employer should be satisfied with the identity of the parent
4. Cost/availability
  1. PB = Contrractor charge a premium
  2. PCG = no cost implication
    1. PCG will not be available if the contractor has no paren
    2. not desirable parentdoesn't have a good financial covenant
5. Cover
  1. PB doesn't guarantee completion of project, just recovery of financial loss up to a stated maximum amount.
  2. PCG guarantees performance of the contract BUT little benefit if the parent unable to perform the contract (e.g. insolvency)
6. Duration
  1. PCG = Often co-extensive with duration of contractor liabiltiy e.g. six or 12 years (deed/underhand) & covers contractor’s liability 4 remedies
  2. PB = operate for the period contractor obligations to carry out the works e.g,
    1. expires at either practical completion or the end of the 12-month rectification period.
7. Insolvency
  1. PB = not necessarily give rise to payment entitlement under a standard unamended ABI form of PB
    1. may be treated as an event terminating the main contract
  2. PCG = needs reviewed to ensure they cover an event of insolvency
8. Enforcement
  1. PB = nutoriously difficult to obtain payment
    1. bondsman require the breach of contract to be upheld either in adjudication or court proceedings + emp. prove evidence of the loss it has suffered
Guarantees
1. FIDIC
  1. there is a provision for paymnet guarantee 2 b provided by the employer to make sure that the employer shall pay for the works done by the contractor
2. What is a payment account?
  1. where the employer keeps two months payment to the contractor incase the employer goes insolvent
    1. same as secure account for retention monies
    2. contractor has to ask for mechanism
3. Parent company guarantee
  1. provided by the parent company of contractor
  2. the take on the obligations to the employer if the contractor fails
  3. access to contractors executive authority
  4. use?
    1. when employer wants a gurantee
  5. liability only arises if its subsidiary commits a breach
    1. any fails to rectify the breach
Payment provision
1. what are the options for contractors for non-payment?
  1. Settlement, quick dispute resolution e.g. adjudication
  2. contractual mechanism (suspension & termination)
  3. Dispute resolution methods as per contract e.g. arbirtration
  4. litigation
different types of adjustment mechanism?
1. Adjustment from a specified material price in the contract (base rate)
2. index escalation provision (TPI and other indices)
What are the different types of securities?
1. Surety (conditional) gurantees
  1. performance gurantees
  2. parent company gurantees
2. on demand (unconditional) bonds
  1. tender bonds
  2. advance payment bonds
  3. retention bonds
  4. Maintainence bonds

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