CGF- Construction Guarantee Fund Services

Bonds and Guarantees are a form of security. In other words, the financial protection that supports a contractual obligation. A bond provides security for the Employer, in the event that the contractor fails to complete the contract, and the Employer is unable to recover its losses from the Contractor.

They are an undertaking by a Bondsman or Surety to make a payment to the Employer in the event of non-performance by the Contractor. The cost of the bond is usually borne by the Contractor, although this is likely to be reflected in the Contractor's tender price.

Bonds can be 'on demand' or 'conditional', An on-demand bond is a primary obligation where the Guarantor promises to pay a certain amount, without any condition, on receipt of a written demand. While a conditional bond requires that the Employer provides evidence that the Contractor has not performed their obligations (breach) under the contract and that they have suffered a loss as a consequence.

Bonds are generally a form of Indemnity and is a primary obligation that can simply be included in a contract between two parties. It is a contract where the Indemnifier (i.e. Surety or Guarantor) keeps the Beneficiary, “harmless against loss”.

“An agreement by one person to keep the other entirely protected or immune against the kinds of liabilities set out in the contract document”.

3 – main features of indemnity:

	1.	It is an original independent obligation (i.e. the beneficiary is to be paid regardless of the recoverability or position of any other person).
	2.	There is no need for the beneficiary to show who caused the loss or why or how the loss was caused.
	3.	Beneficiary does not need to show that any loss recovered by them, needs to be passed onto 3rd parties.

In other words, it is a secondary obligation or separate contract, placing an obligation on a guarantor to ensure that the principal completes a certain task for a 3rd party beneficiary. If the principal fails to carry out that task, then it is the guarantor’s obligation to perform the principal’s task. If the guarantor fails, then the guarantor is liable in damages.

The liability under the primary contract must arise, before liability can arise under the 2nd surety contract.

Characteristics of Suretyship are:

	1. There are two contracts.
		a) A contract of guarantee, [between Guarantor and Employer]
		b) The underlying primary contract which is to be guaranteed.[Contract between Employer and Contractor]
	2. There are 3 parties.
		a) The Guarantor (Surety)
		b) The Employer (Beneficiary)
		c) The Employer (Beneficiary)

The Guarantor and the Employer (beneficiary) are parties to the contract and the guarantee. The Employer and the Contractor are parties to the underlying primary contract.

**Points to note:

	1.	The guarantor’s primary duty to the Employer, is to ensure that the principle contractor performs (by ensuring that the contractor performs or by the guarantor performing). The secondary duty, is to be liable in damages.
	2.	Under suretyship, the Contractor receives no benefit from the guarantee or bond himself. In contrast, in contracts of Insurance, the primary purpose of the insurance contract is to provide risk cover to the insured.
	3.	While the contractor takes out the bond, the benefit of that bond is for another.
	4.	The written demand stating that the Contractor is in breach of contract, from the Beneficiary to the Guarantor, is conclusive evidence of the Guarantor’s liability to pay the Beneficiary. The Guarantor is therefore, obliged to pay the Beneficiary, regardless of any argument, save for fraud, that the contractor might raise.
	5.	There are instances, such as fraud, where it may be possible for a Contractor to obtain relief against a call on the bond, in the form of an injunction against the Guarantor, restraining payment of the bond. In other circumstances, it may be possible to obtain recourse against the Beneficiary.

Deficient Demands

It is imperative that the written demand placing a call upon the bond has to conform with the conditions of the bond, i.e. not deficient. Deficient demands can arise in the following ways;

	a)	The demand was made by a successor in Title, rather than the Beneficiary, named in the bond.
	b)	The demand stated that, ‘there had been a failure to meet contractual obligations’. Here the demand did not comply with the wording of the guarantee. The demand did not allege a failure to pay, but a failure to meet contractual obligations. The latter wording was much wider in scope and the difference was of real significance.
	c)	It is not always crucial to repeat the precise words set out in the bond. For example, in the case of IE contractors v Lloyds Bank, the Court of Appeal held that, the demand stating, ‘demand for breach of contract’, sufficed, even though the bond stated that the written demand must state in substance, that ‘the claim was in respect of damages for breach of contract’.

There are various types of Bonds, used for different purposes.

The Bonds issued by CGF are as follows;

		A Bid Bond is an on-demand submitted with a tender. It ensures that a Contractor bidding on a project will enter into a contract with the Employer, if their bid is successful. The bond is partially or fully forfeited if the winning tenderer fails to execute the contract or meet other specified conditions, such as not providing a performance bond.
A Performance Bond, guarantees that the contractor will complete the contracted project to a satisfactory standard, thereby providing a guarantee to the Employer, in the event of a breach of the underlying contract by the Contractor.
		If the Contractor is to obtain an advance payment under the contract, but before carrying out any material works, then an Employer might require an advance payment bond. If the Contractor does not fulfil its obligations as per the contract, then the Employer is able to call upon the bond, in order to obtain recompense. This will normally be an on-demand, primary contractual obligation basis bond.
This bond is similar to a retention bond. They are used to cover a Contractor’s contractual obligation to the Employer, during the specified maintenance period such as rectifying defects that become apparent after practical completion has been certified. Therefore, it is much the same as the Employer holding the Contractor’s retention money during the maintenance period..
		Combined Construction Bonds can serve to replace the cash security issued in favour of the Employer. This is in fact is a unique combination of Performance Bond and Maintenance Bond, given together for the period as stipulated in the contract.
This is usually an on-demand bond and so there are primary undertakings to make payment. This is because these bonds are given instead of the Contractor’s retention monies held by the Employer (i.e. in lieu of cash). Therefore, the Employer should be able to obtain the cash immediately, if the Contractor has defaulted on his contractual promises. This bond helps improve a Contractor’s cash flow, but at the same time provides security to the Employer for the withheld retention amount.