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ESSENTIALS OF CONTRACT BONDS’: THE GUARANTOR TO CONTRACT PERFORMANCE

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ESSENTIALS OF CONTRACT BONDS’: THE GUARANTOR TO CONTRACT PERFORMANCE

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CONTRACT BONDS

Introduction

There are different types of contract bonds on the commercial market. The most common types of contract bonds are; Bid Contract Bond, Payment Bond, Maintenance (warranty) Bond and Performance Bond. The purpose of this article is to enlighten readers and more particularly land owners and persons who contract themselves (e.g., developers, realtors, real estate agent, Construction Company’s etc.) under commercial agreements such as, Construction Agreement, Joint Venture Agreements, and Commodity Supply Agreement etc. Notwithstanding, the above types of contract bonds, I will shed more light on performance bond and briefly deal with the other forms of contract bonds. I am informed to write this article as a result of lots of poor construction agreements and joint venture agreements I had to modify, revoke or litigate over in court in my commercial corporate practice over the years.                                                                                                                                                                                                                                                                             

 

Major types of Contract Bond.   

A contract bond is a type of surety bond that guarantees that the obligations of parties under a contract are carried out to the letter. The following are some of the major types of contract bonds that parties can incorporate into their agreements to ensure security of the contract in terms of performance.

 

Bid Contract Bond

This type of contract bond is used to bid for projects, such that where a party wins a bid that party automatically has undertaken to perform the terms in the bid bond contract. This bond is very important and business persons should incorporate it as a term into their agreements to ensure that winners of bids strictly comply with the bid contract and standards set. This particular contract bond ensures that all materials needed for the project are dealt with or covered and that there is surety for payment when the developer breaches the agreement. Furthermore, suppliers, labourers, sub-contractors etc all need to be covered under this bond. That is, the costing associated with all of these items must be provided for and guaranteed under the bond contract so that where there is a breach the damages assessed will be paid for per the bond by the bank or the insurance company.

 

Maintenance Bond

This contract bond deals with everything maintenance as far as the project standard requirements and quality are concerned. That is, it ensures that the developer or contractor will not use sub-standard materials contrary to the specifications provided by the project committee or the project owner. The bond ensures that maintenance bonds submitted meet the standards expected. It also ensures that where portions of the project are poorly built or maintained the bond will provide funds to correct the problem.

On the contrary where this bond is not provided for, then in a situation where the project is delayed, where the need for maintenance arises there will be a problem since it has not been provided for.

 

 

Payment Bond

This is a very important bond where parties who contract to undertake projects of all kinds in both the commercial space and construction industry needs to take this seriously so as to realise the security of their projects and investments. In fact, this contract bond is beneficial to the owners of the project. It protects their interest and investment as usual. By this bond, the developer company cannot get it wrong and if it does then, the bond will deal with the damages arising. Thus, the developer will have to correct all defective structures thereof, so as to avoid the payment of the bond issued before the performance of the contract. The parties to the contract agree on what items the bond should cover and the sum.

 

 

 Performance bond

A performance bond also known as a contract bond is a surety issued by an insurance company or a bank to guarantee the satisfactory completion of a project by a contractor.[1]  The term is used to denote a collateral deposit of good faith money intended to secure future contracts.

 

In simple terms, a performance bond is a bond issued by a bank or other financial institution guaranteeing the fulfilment of a particular contract. [2] Most often, a seller is asked to provide a performance bond in order to reassure the buyer if the commodity being sold is not delivered. [3]

 If a contractor (that is, the principal or the one hired to do the project) fails to meet the terms outlined in the contract, the project owner can make a claim against the contractor’s bond, in order to recover financial damages. If the claim is valid, the surety (the company ensuring the contractors performance by providing the bond) will compensate the obligee on behalf of the principal up to the bond amount. It is important for the contractors to know that performance bonds are fully indemnified and in the event of claim, the contractor is responsible for repaying the surety the amount of claim plus expenses[4]. Contractors here also refer to real estate developers. It is very important that land owners who seek to have their parcels of land developed with strategic investors must do so through joint venture agreement. Now, the agreement must have in there a performance bond to secure performance under the contracts and the term must strictly construe the details and requirements for of the bond.  

 

Unfortunately, in Ghana, performance bonds are not regulated by any regulation as compared to the United States of America that has the Miller Act. The under-reference Act only applies to federal construction contracts. In recent times, many States have executed the Miller Act in their own way to suit State needs in order to protect contracts. It also, requires that bonds must be posted on contracts exceeding $100,000.00.

 

Importance of performance bonds to parties.

The most obvious benefit of a performance bond is the guaranteed assurance that the project in question will be completed. The surety protects the obligee or the owner from any losses if the contractor defaults or fails to perform the contract adequately. 

While a performance bond is not for the principal’s direct benefit, there are some benefits from having a performance bond.

 

  1. It is easier to win bids. Non-bonded contractors are typically excluded from bidding on bonded projects by the obligee [5]

 

  1. The surety will pay for losses in the event the other party fails to fulfil the contract because of bidding errors or in the event the party goes bankrupt but the other party will be reimbursing with these funds later.[6]

 

  1. Performance bonds ensure that only qualified contractors are bidding on projects of the appropriate size and technical requirements they are qualified for, which ensures that projects that are started have as much higher likelihood of being seen through completion, free of defect.[7] This makes the whole process smoother for everyone.

 

Performance bonds for commodities

Generally, performance bonds are used in commodity contracts, where a seller is asked to provide a bond to reassure the buyer that the commodity being sold is not in fact delivered, the buyer will at least receive some compensation for the lost costs.[8]  A buyer of a commodity ask the seller to provide a performance bond, this protects the buyer from risk of the commodity, for any kind of reason, not being delivered. If the commodity is not delivered the buyer receives compensation for the losses and damages caused by the non-completion of the transaction.[9]

 

Performance bonds in the protection of real estate and construction contract

In a real estate and construction setting, a performance bond is a guarantee for the satisfactory completion of the real estate project. It will require having a collateral or investment to back up the requirements of the surety agency. Performance bonds are common in construction and real estate development. In such cases, the owner or investor may require the developer to assure that contractors or project managers procure performance bonds, in order to guarantee that the value of the work will not be lost in the case of an unforeseen negative event.[10]

 

[1] Reding Tom. (2021, June 6th). Performance Bond. https://en.wikipedia.org/wiki/Performance_bond  (accessed January 16th, 2022)

[2] Oxford languages.

[3]Chen James. (2020, December 8th). Performance Bond.

https://www.investopedia.com/terms/p/performancebond.asp (accessed January 17th, 2022)

[4]   Surety First Insurance Services. (2006). Performance Bond Guide.

https://www.californiacontractorbonds.com/contract-bonds/performance-bond/ (accessed January 18th, 2022).

[5]  Surety First Insurance Services. (2006). Performance Bond Guide. https://www.californiacontractorbonds.com/contract-bonds/performance-bond/ (accessed January 18th, 2022).

[6]  Surety First Insurance Services. (2006). Performance Bond Guide.

https://www.californiacontractorbonds.com/contract-bonds/performance-bond/  (accessed January 18th, 2022).

[7]  Surety First Insurance Services. (2006). Performance Bond Guide.      https://www.californiacontractorbonds.com/contract-bonds/performance-bond/ (accessed January 18th, 2022).

[8] Chen James. (2020, December 8th). Performance Bondhttps://www.investopedia.com/terms/p/performancebond.asp (accessed January 17th, 2022)

[9]Chen James. (2020, December 8th). Performance Bond. https://www.investopedia.com/terms/p/performancebond.asp (accessed January 17th, 2022)

[10] Chen James. (2020, December 8th). Performance Bond.         https://www.investopedia.com/terms/p/performancebond.asp (accessed January 17th, 2022)

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Christian Lebrecht Malm-Hesse

Christian Lebrecht Malm-Hesse Esq. holds a Bachelor of Laws Degree (LLB) from the University of London (2012). Mr. Malm-Hesse completed Ghana School of Law in 2016 and whiles there Mr. Malm-Hesse founded the Ghana School of Law Moot Court Honour Society in 2016. He was called to the Ghana Bar that same year as a Barrister and Solicitor of the Supreme Court of Ghana. He is a member of the Ghana Bar Association since 2016 and World Trademark Review. As a versatile young Lawyer, he has advised on corporate and bank transactions. Mr. Malm-Hesse writes commercial articles to international journals and believes in legal industry, hard work and quality work to client satisfaction. Mr. Malm-Hesse is currently with K-Archy & Company Legal & Management Consultants. By virtue of his exposure in legal practice, Mr. Malm-Hesse can boast of an impressive background and sound knowledge in Commercial law; Real Estate transactions; Immigration; Corporate Practice; Intellectual Property; Investment and Securities; Project Finance Advise; Banking; Litigation; and Shipping. Mr. Malm-Hesse has keen interest in technology law and transactions. He spends considerable time where necessary to hold seminars and address the business community on the aforementioned practice areas. Mr. Malm-Hesse further foundered Debate Ghana Association(2010) which now operates under the name Centre for Legal Resource Ghana (NGO). Amongst Its objects include legal aid services to the under-privilege citizens and in Ghana.

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