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Risks of not having a Performance Bond

What are the risks of not having a Performance Bond

In the event a contractor went into insolvency and there was no bond in place, the developer will be liable to pay all costs to deal with the insolvency. These costs will likely include sourcing a new contractor to complete the works and any premium this will attract. The developer will not be able to pursue the contractor as the company will be in the process of liquidation.

Performance Bonds are common. The main forms of contract in the construction industry already make allowance for using Performance Bonds.

For example, the NEC Engineering and Construction Contract has a Secondary Option Clause that can be selected, “X13 – Performance Bonds”. If required, this clause would be selected in Contract Data Part One and included as a requirement in the tender pack. Note the Project Manager has discretionary acceptance over the insurer or bank selected to provide the bond.

The JCT form of contract contains in Section 7, Clause 7.3.1, and by way of a reference to Contract Particulars, the need for a Performance Bonds is stated. It operates on a similar basis to the NEC ECC whereby the Employer (developer) can dictate the terms

Taking out Performance Bonds

The requirement for a contract bond should be stated in the tender documents such that a contractor can make enquiries before entering into contract. The contractor pays for the full costs of the bond and, as noted above, will likely include this is his tender return. An example in practice would be in the NEC ECC, optional clause X13: Performance Bonds. If this was selected in the tender documents the contractor will need to provide the bond by the Contract Date or within four weeks of the Contract Date.

Performance Bond case law

There is a lot of case law that exists around the wording using in bonds and whether they are conditional or on-demand bonds. This is why using the Association of British Insurers (ABI) model form or another standard form can be advantageous and is recommended.

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