Bonds, guarantees, warranties and third party-rights

Question 1

What is a bond?

Answer 1

Bonds are a means of protection against the non-performance of the contractor.

Undertaken by a bondsman to make a payment to the client in the event of non-performance of the contractor.

Question 2

What is a performance bond used for?

Answer 2

Commonly used as a means of insuring a client against the risk of a contractor failing to fulfil contractural obligations to the client.

Question 3

How are bonds instigated and implemented?

Answer 3

1. Employers will request a performance bond from the contractor.
2. The contractor in turn obtains it from bank/insurer in favour of the employer.
3. The bank/insurer obtains a counter-indemnity from the contractor/parent company of the contractor.

Question 4

What are the two types of performance bond?

Answer 4

• On-demand bond
• Default bond

Question 5

What is the sum usually payable to the bondsman?

Answer 5

Usually 10% of the contract sum.

Question 6

What can the compensation from the perfomance bond be used for?

Answer 6

The compensation can enable the client to overcome difficulties that have been caused by non-performance of the contractor.

E.g. finding a new contractor to complete the works.