– On demand bond: unlike a performance/ adjudication bond, this does not require proof of breach or loss, but is payable on demand, provided that the formalities for making the demand have been complied with. Again, liability under an on demand bond is normally limited to a percentage of the contract price – Advance payment bond: where the client agrees to pay the contractor in advance (for example, for the pre-ordering of long-lead items), it may require specific security by way of a bond, in case the contractor does not apply the money as intended –– Retention bond: it is common for the client to retain an agreed percentage of interim payments due to the contractor until practical completion, when half of this retention is released. The remainder is retained as security for the cost of rectifying snags or defects, in the event that the contractor does not return to site to do so; any remaining balance is then released at the end of the rectification period. An alternative to retention is a retention bond, which is provided to secure the amount that would otherwise have been retained by the client. As it is an alternative to cash withheld, a retention bond is normally an on demand bond Guarantees Parent Company Guarantees (PCGs) are often used by a client – in conjunction with one or more bonds – to protect against a contractor’s default. A contractor, on the other hand, may seek a PCG to ensure that payments due to it from the client are made.
Unlike a bond, a PCG is not normally limited to a specific amount, being a guarantee (a secondary obligation) of the entirety of the primary obligations in question (but benefitting from any defences and limitations applicable to the underlying contract). Collateral warranties/third party rights The “privity of contract” doctrine under English common law provides that a contract cannot confer rights or impose obligations on any person except those who are party to the contract. In a construction project, there are often many parties with different interests in that project, who may not enter into a contract with those designing, constructing or managing the project. A collateral warranty is a separate contract under which a professional consultant, a contractor or sub-contractor warrants to a third party (normally a purchaser, tenant or funder) that it has complied with the terms of its professional appointment, building contract or sub-contract. Therefore, collateral warranties provide a means by which a third party can recover a loss that it suffers from the party who is responsible for that loss by creating a contractual relationship between them. Alternatively, third party rights, introduced by the Contracts (Rights of Third Parties) Act 1999, circumvent the privity of contract doctrine as they enable a third party to enforce a term of a contract if the contract expressly provides for it to do so or the relevant term purports to confer a benefit on it.
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