The names Bond, Performance Bond

A word of warning in relation to Performance Bonds which arises out of development project we have recently been advising on.

As a condition of providing a Performance Bond in favour of an Employer, some Sureties require the Contractor to enter into a Deed of Assignment in relation to any amounts owing to the Contractor under the Building Contract.

A couple of key points arise:

•Many Employer’s amend their Building Contracts (e.g. clause 7.1 of the JCT05 DB) so that the Contractor cannot assign the benefit of the Contract (i.e. the right to receive payment) without the prior written consent of the Employer. This is sensible practice but the wording of the amendment should be drafted carefully to ensure that it has the desire effect;
•If consent is not obtained, the general position is that any purported Deed of Assignment will be invalid;
•In any event, written notice of the Assignment must be given the Employer. At that point, the terms of the Deed of Assignment should be checked carefully as it might actually require payments under the Contract to be made direct to the Surety. This is likely to be completely impractical given that the Contractor requires cash flow to pay for the Works. If the Deed of Assignment is effective, the Employer should ensure that it is not in breach of this requirement as it could end up paying out twice for the same Works;
•The terms and definitions of the Deed of Assignment should be considered as they may lead to ambiguity as to what is required of the parties

COMMENT: Appropriate advice should be sought if there is any doubt as to whether a Deed of Assignment is effective, and if so what the implication of its terms are. As noted above, an Employer may risk having to pay out twice for the same Works. In addition, it could scupper what would otherwise be a legitimate claim under the Bond.