Bonds

Most solicitor firms have their own bespoke form of bond.

However, this page concentrates on some of the key clauses in the Association of British Insurers ('ABI') Model Form of Guarantee Bond. (The ABI say that this form of bond was drafted to address the criticism of archaic wording in bonds by the House of Lords in Trafalgar House Construction v General Surety Guarantee Company [1995] 3 WLR 204, HL and to meet the commercial needs of users identified by the Latham Committee.) While the ABI's attempt to produce a clear, modern form of bond has been welcomed by the industry and used or considered widely since its publication, it has been subject to some criticism some of which is discussed below.

ABI model form of guarantee bond 

The ABI first published its form of bond in 1995. It was revised in 2002 to incorporate the Contracts (Rights of Third Parties) Act 1999.

The form of bond is a default bond. Although there was no need to do so (as the bond is between the bondsman and the employer), in this form of bond the contractor joins as a party to it.

While the ABI recognise that the bond may need to be amended to incorporate project-specific amendments, in its guidance note to the bond the ABI say that the bond is suitable for use without amendments. This statement is arguable.

Operative provision

Clause 1 is the main operative provision in the bond, but this  may require amendment as it does not include a provision to address the concerns raised in Perar BV v General Surety that insolvency may not constitute default by the contractor for the purposes of entitling the employer to call on the bond. Despite this, the ABI's guidance note says that:

'the employer ... [can] ... recover all direct loss and expense which is caused by reason of automatic determination of the contractor's employment on insolvency'.

As Perar demonstrates, this is not correct.

Second, in the event that the contractor's employment is determined, whether due to his/her breach or insolvency, the mechanism in most standard form contracts to 'ascertain' or quantify the employer's loss results in the loss being quantified as a 'debt', not 'damages' as referred to in the ABI clause above.

As 'debts' and 'damages' are 2 distinct legal principles, to avoid a potential dispute, the author believes that it would be best practice if the provision in the bond was amended to make reference to both 'debts' and 'damages'.

Subject to the determination of the contractor's employment as outlined above other methods of 'ascertaining' the damages due would include:

1. a final certificate becoming conclusive; or
   
2. an adjudicator's decision; or
   
3. a court judgment/arbitrator's award.

Expiry

The expiry provisions of a bond are paramount. The expiry provisions in the ABI form of bond are at clause 4.

The expiry of a bond can be by reference to an act (that is, the issue of the certificate of practical completion) or a date (that is, the date when practical completion takes place). In Keating on Construction Contracts the authors submit that, subject to the express provisions guaranteeing the performance of the underlying contract, the bond extends to any latent defects for which the contractor may be liable. While a bondsman will want their liability under the bond to expire as soon as possible, the employer inevitably will want the bond to remain in force as long as possible. Therefore, while the duration of the bond will be dictated by the commercial power of the negotiating parties, typically the bondsman's liability under the bond will expire no later than the issue of the certificate of making good defects (in such circumstances, to avoid a dispute as to whether, as a question of fact, the bond has expired, the contractor should make sure that the appropriate certificate is issued).

Clause 4 states that the bond will be released and discharged on expiry 'save in respect of any breach of the Contract which has occurred and in respect of which a claim in writing containing particulars of such breach has been made upon the Guarantor'.

The authors of the Manual of Construction Agreements note in update 7 that the effect of the wording of clause 1 is that in the event of a dispute as to the amount of damages claimed the amount of damages is not 'established and ascertained' until 'determined by judicial proceedings'. As the employer cannot make a valid clause 4 'claim ... upon the Guarantor' until the damages are 'established and ascertained' in the event of a dispute there is a real risk that the bond could expire during the course of judicial proceedings.

Such a position is undesirable. In order to preserve his/her claim, it should be sufficient for the employer to provide the bondsman with notice of a potential claim before expiry. An amendment to this effect may be prudent.

Assignment

Clause 6 deals with assignment. It permits assignment on the prior written consent of the guarantor (that is, bondsman) and contractor only. In practice, a funder will usually require unlimited assignment of the bond.

Adjudication

Note that, unlike some bespoke forms of bond, the ABI bond does not expressly include a provision to refer a dispute to adjudication. Since, the bond is not a 'construction contract' for the purposes of the Housing Grants Construction and Regeneration Act 1996, the right to refer a dispute to adjudication is not implied. Therefore, if this right is required, include express provisions to this effect in the bond.