EM Law are experts in advising clients on bank guarantees and surety bonds. Our lead construction lawyer is Anna Rabin who has extensive experience in advising clients on a wide range of construction law matters.
Bonds and guarantees are the two most common forms of security taken by employers on construction projects and, from a legal perspective, have much in common.
Construction contracts commonly require provision of bank guarantees. Guarantees are common in the UK construction market because they are economic and they are usually readily available. The guarantor promises to be directly answerable for the payment of a debt owed by one person to another or the fulfilment of a person’s contractual obligation owed to another in the event of the debtor’s default.
A bank guarantee can only be called upon if a breach of the primary contract has been demonstrated, and the loss has properly crystallised but has not been settled by the original contracting party. A guarantee is similar to simple contracts in that all the requirements for a contract must be present, such as an intention to create legal relations, consideration, etc. In addition, a guarantee must be in writing to be valid.
Both in the UK and internationally, clients use bonds alongside construction and engineering contracts to protect against non-performance by the contractor.
A surety bond is a three-party contract comprised of the surety, the contractor and the client. The surety guarantees to pay the direct loss suffered if a legal or contractual obligation has been breached by the contractor. This breach usually occurs if the party responsible for these obligations becomes insolvent. Payment must be made notwithstanding protests by the contractor and without any requirement on the part of the client to establish a breach of contract or that any damages have in fact been suffered. The contractor has no defence against a call on such a bond other than proven fraud and there can be no effective challenge to the client’s demand.
The requirement to provide a bond typically arises from a provision of the building contract and is often a pre-condition to the employer entering into the building contract. The bond is usually attached to the contract and is in a form which is satisfactory to the employer.
Bonds and guarantees are separate forms of security but it is important to remember that the fact an agreement is described as a bond or guarantee does not necessarily mean that is what it is in legal terms. It is the content of the document that is key and so it is essential that a guarantee is clear and unambiguous.
For any questions you may have concerning bank and surety bonds contact Anna Rabin.
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