LAW
The types of performance bond generally available will depend upon the jurisdiction in which the performance bond or guarantee is sought and the requirements of the relevant employer, but they include simple on demand bonds, conditional on demand bonds, true conditional or default bonds and adjudicator or insolvency bonds.
The purpose of performance securities is to provide security against potential defaults, such security being procured from a robust third party. This allows the beneficiary of the bond either to enforce performance from the original contractor or provide the beneficiary with a sufficient fund to procure the appointment of a replacement contractor to complete the work.
Performance securities akin to performance bonds are also used to provide security in other instances, for example to secure advance payments, early release of retention or maintenance and defects liability.
Performance securities are often a key part of the security package which a client or contractor looks for when placing an order.
RECENT EVENTS
Given events in recent years which have created huge turmoil in financial markets and the failure of some major financial institutions, you would be well advised to consider the strength of both existing performance securities issued by those institutions and any new securities to be provided by them.
SELF PROTECTION – THE OPTIONS
So what can you do to protect yourself?
• Firstly, consider the security package being proposed on any particular project and do not rely on performance bonds solely in the future as providing substantial security whether on existing or new contracts
• Secondly, consider alternatives to performance bonds - parent company guarantees are an obvious choice but these have difficulties because the parent company in the event of any claim is not an independent party. Other alternatives might be increased use of step in rights, altered payment periods and structures, for example stage payments; increased use of retention (although this may carry with it a financing downside); division of projects into smaller packages to reduce the risk of default failure of any particular contractor utilising construction management or project management as a means of administrating projects; and postponing part payment of the price to be recovered as part of a bonus pain and gain sharing mechanism
• Thirdly, examine your existing project security packages and consider if they merit renegotiation.
Martin Collingwood Andrew Jackson Solicitors
www.andrewjackson.co.uk
e
www.windenergynetwork.co.uk
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