An introduction to performance bonds
1. Bonds are frequently used in commercial contracts to protect against non-performance by one party of their obligations under the contract. They should be distinguished from ‘bonds’ in the context of debt finance. Put simply, a bond enables a party to claim a sum of money from a third party who provided the bond, if the other party to the contract does something which causes the first party to suffer a loss (e.g. breach of contract). 2. The issuer of the bond (‘surety’) becomes responsible for the fulfilment of a contractual obligation owed by one party to the other, if the first party defaults. Performance bonds (‘PBs’) are issued by surety companies, insurance companies and banks. Their purpose is to support the performance of contracts, especially for the provision of construction services. This article will focus on PBs in the construction sector as this is where they are most common. Structure of a performance bond 3. PBs create binding obligations between the parties and t...
