Contract Practice - Performance security

Contract Practice - Performance security

1. Bonds

   • What is a bond?
     • A contractual duty duty owed by one party to another is backed up by a third party
     • what are the two main sources of gurrantee that can be sought in construction?
   • Terms of bonds (12 points)
     • 1. addressed to employer
     • 2. details of project
     • 3. value of bond
     • 4. name and address of bank
     • 5. validity of period of bond
     • 6. irrevocable & unconditional undertaking by bank
     • 7. immediate & freely transferable payment
     • 8. reduction mechanism
     • 9. without any deduction
     • 10. should not affect organisational changes to the contract
     • 11. rights & benefits should b made transferable
     • 12. local laws and regulations r applicable
   • who provides a bond
     • bank/ financial institution
   • on demand bond
     • 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
     • Disadvantages?
       • -ve affects contractors cashflow
       • added to contract sum - employer pays for something not really necessary
   • Conditional Bond
     • surety only pays when specific conditions r met e.g. default
   • Types of Bonds
     • Retention Bonds
       • Purpose?
         • Instead of ddt retention form each interim payment
       • Value?
         • same amount as if retention is ddt e.g. 3% contract sum
     • Performance Bond
       • Most common
       • Emp recover losses in a breach of contractors obligations
       • Usually 10% of Contract Sum
         • + premium 4 taking out bond
       • FIDIC
         • contractor must submit bond within 28 days
         • valid up to works completion
           • rtn. back to contractor within 14 days of Defects liability certificate
         • Notify contractor in writing
       • JCT
       • Guarantees performance
     • Materials off-Site bond
       • Covers emp. against loss/ damage 2 materials already paid for (in interim vals) before materials delivered to site.
     • Advance Payment Bond
       • JCT
         • Ent. into contract particulars
         • Fixed OR % sum
         • Note date 2 b paid & date of reimbursement
           • could be in full OR stages
         • issued b4 1st pay cert.
           • Cont. provide bond 1st
         • CA keep copies of bond corres.
     • Tender Bond
       • covers party inviting the tender if the lowest tender refuses to enter into contract with them
       • important = if inviting party is in turn tendering for works on the basis of that tender
       • Prevents idle tendering
       • Usually 1-5% of tender sum
     • Payment Bond
       • provides security that all persons supplying labor and material to the project will be paid
       • Subcontractors and suppliers are the "beneficiaries" of a payment bond
   • How does the Emp. call the bond?
     • prove the contractor is in breach + loss suffered
   • What kinds of Bonds does JCT provide?
     • Advanced
       • ent. in contract particulars
         • Schedule 6
     • Materials off-site
     • Performance
   • argument against bonds
     • shouldn't really be needed - tender process should ensure only reliable + caberble contractors r selected.
     • Unneccessary premiums
     • if a reg dev. adds a lot to projects
   • When is a bond appropriate?
     • contractor new/ unapproved
     • protect 'one-off' dev.
     • appropriate to risks of project

2. The difference between a gurrantee and a bond?

   • Guarantees are conditional
     • contractor must commit a default b 4 the guarantor can be called in to perform
     • The contractor has to fulfil its obligations
   • Payment bonds are unconditional
     • don't require proof of default
     • often referred to as unconditional/ on-demand bonds
       • guarantor pays a predetermined sum
       • Doesn't matter if there is a loss or not
     • bank has to pay without waiting for contractors action
     • Bank has primary liability
   • Protection
     • PB = comfort of being a payment guarantee from an independent third party
       • PB be from a reputable guarantor
     • PCG is directly related to the financial covenant of the parent
       • employer should be satisfied with the identity of the parent
   • Cost/availability
     • PB = Contrractor charge a premium
     • PCG = no cost implication
       • PCG will not be available if the contractor has no paren
       • not desirable parentdoesn't have a good financial covenant
   • Cover
     • PB doesn't guarantee completion of project, just recovery of financial loss up to a stated maximum amount.
     • PCG guarantees performance of the contract BUT little benefit if the parent unable to perform the contract (e.g. insolvency)
   • Duration
     • PCG = Often co-extensive with duration of contractor liabiltiy e.g. six or 12 years (deed/underhand) & covers contractor’s liability 4 remedies
     • PB = operate for the period contractor obligations to carry out the works e.g,
       • expires at either practical completion or the end of the 12-month rectification period.
   • Insolvency
     • PB = not necessarily give rise to payment entitlement under a standard unamended ABI form of PB
       • may be treated as an event terminating the main contract
     • PCG = needs reviewed to ensure they cover an event of insolvency
   • Enforcement
     • PB = nutoriously difficult to obtain payment
       • bondsman require the breach of contract to be upheld either in adjudication or court proceedings + emp. prove evidence of the loss it has suffered

3. Guarantees

   • FIDIC
     • 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
   • What is a payment account?
     • where the employer keeps two months payment to the contractor incase the employer goes insolvent
       • same as secure account for retention monies
       • contractor has to ask for mechanism
   • Parent company guarantee
     • provided by the parent company of contractor
     • the take on the obligations to the employer if the contractor fails
     • access to contractors executive authority
     • use?
       • when employer wants a gurantee
     • liability only arises if its subsidiary commits a breach
       • any fails to rectify the breach

4. Payment provision

   • what are the options for contractors for non-payment?
     • Settlement, quick dispute resolution e.g. adjudication
     • contractual mechanism (suspension & termination)
     • Dispute resolution methods as per contract e.g. arbirtration
     • litigation

5. different types of adjustment mechanism?

   • Adjustment from a specified material price in the contract (base rate)
   • index escalation provision (TPI and other indices)

6. What are the different types of securities?

   • Surety (conditional) gurantees
     • performance gurantees
     • parent company gurantees
   • on demand (unconditional) bonds
     • tender bonds
     • advance payment bonds
     • retention bonds
     • Maintainence bonds