Contract Performance Bonds

Wednesday, February 12th, 2014


We have recently advised a client on the potential use of contract performance bonds. This very broad subject is in the psyche of project buyers in particular, but not unknown in other facets of procurement.

Case law is extensive, specifically in the dimension of ‘first call’ bonds, also referred to as ‘On-demand’ bonds. An on-demand bond puts the bondsman under a primary obligation and as such is independent of the underlying contract. The alternative to the on-demand bond is a ‘conditional’ bond. As the name suggests, they are conditional in that there has to be sufficient proof by the employer of the default of the contractor and of the damage having been suffered by the employer before the bondsman is obliged to make payment under the bond.

Is everyone with us so far??

The above is standard input on most courses dealing with the subject matter.

What is uncommon is instruction and guidance on the use of ‘Adjudication Bonds.’

They have more or less become the norm on PFI/PPP projects. Payment by the bondsman is conditional on an adjudicator’s decision. Buyer beware! The outcome of the adjudication may only be an interim decision. Unless the adjudicator’s decision is final and binding it could be varied by the outcome of litigation.

The devil is in the detail, every time.

There needs to be provision for a Maximum Sum. A demand must be accompanied by either a certified copy of a decision issued in adjudication proceedings or of a judgment of a court in respect of an action under or in connection with the Contract or a certified copy of an agreement or written notice relating to the Contract signed on behalf of both the Employer and the Contractor under which the Contractor agrees to pay the Employer an amount which is not less than the amount claimed by the Employer.

The procurement profession is in urgent need of guidance on the use of Adjudication Bonds.

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Brian Farrington is one of the world’s longest established procurement and supply chain consultancy and executive training specialists. 33 of the current FTSE100 have retained our services, as well as leading organisations in the UK, North America, southern Africa and Asia. Established in 1978, we have proven expertise and experience in procurement, risk and negotiation.

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