Reading a bond before you accept it

A bond is a short document, usually two or three pages. Almost everything that matters about it is in those pages, and the differences between one bond and another are not cosmetic.

The trigger

What has to happen before the surety pays. An on-demand bond requires a demand. A conditional bond requires breach and loss, established.

Read the operative clause and ask what a demand would have to say. If it has to state that the contractor is in breach and that the employer has suffered ascertained loss of a stated amount, that is a claim to be proved, not a form.

The amount, and what it attaches to

Usually a fixed sum, expressed as a percentage of the contract sum at the date of the bond. It does not normally grow with variations, so on a heavily varied job the proportionate cover falls.

Check whether the sum reduces on practical completion. Many do, mirroring retention, and an employer holding full cover after completion holds more than it is entitled to.

The expiry

Three common forms: a fixed calendar date, practical completion, or the end of the rectification period. A fixed date is the dangerous one, because a job that runs late runs past it.

Where the bond expires on a defined event rather than a date, check who certifies that event and whether the surety requires notice.

The obligations it secures

Some bonds cover performance of the works only. Others extend to defects, to damages, or to sums due on termination. A bond that covers performance but not liquidated damages will not respond to a claim for damages, however clearly they are owed.

The surety

Rated, regulated and the entity you expected. A bond from an unrated overseas surety is a document rather than security, and the time to notice is before it is accepted in place of something better.

Small print worth finding

• Notice requirements. Some require notice of default within a period of it arising.
• Variation clauses. Whether changes to the underlying contract discharge the surety. Standard wording usually preserves it; non-standard wording may not.
• Governing law and jurisdiction, particularly with an overseas surety.
• Assignment, if the employer may sell the development.

The ten minutes

Trigger, amount, expiry, obligations covered, surety. Five things, one read-through, at the point the bond is provided rather than the point it is needed.