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A performance bond (also called performance guarantee) is a bond issued by a bank whereby the bank assumes the obligations to a buyer or other beneficiary analogous to those assumed by a confirming bank to the seller under a documentary credit.
A bank which gives a performance bond is required to honour the bond according to its terms and the bank must pay according to the bond, on demand, if so provided, without any need for proof or conditions. A performance bond is said to be virtually equivalent to a promissory note payable on demand and has more of the attributes of a promissory note than of a guarantee.
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Drafting a building contract/schedule of amendments鈥攃hecklist Once the procurement route and form of building contract has been selected (see Practice Note: Choosing the right procurement method鈥攃onstruction projects) the employer should consider the following matters and incorporate the appropriate drafting in the building contract particulars and schedule of amendments. This Checklist assumes that the parties are using a standard form of building contract, such as a JCT form, and that the employer is proposing the first draft including the completed contract particulars and a schedule of amendments, which amends the standard terms. This list is not exhaustive, however, and there may be other project specific matters/risks that need to be taken into account: Contractual matters 鈥 Carry out due diligence on the contractor The employer needs to carry out due diligence on the contractor at the outset to determine whether its financial position is acceptable. Confirm the contractor鈥檚 company number and name at Companies House. 鈥 Obtain consultants鈥 details Confirm the full details of the consultants engaged by the employer; some...
Calling on a conditional bond鈥攃hecklist This Checklist sets out the key issues to consider when making a call (claim) on a conditional bond (sometimes known as a default bond). The call is made to the surety, who will often be an insurance or surety company. In this Checklist, we assume that the bond was provided by a contractor to its employer, but similar principles would apply where, for example, a contractor calls a performance bond provided by its sub-contractor. Is the bond on demand or conditional? The wording of the bond should make this clear, although the name it gives itself is not determinative. Consider: 鈥 Who is the surety? An on demand bond is often backed by a bank, whereas a conditional bond is backed by an insurance or surety company. 鈥 Is the contractor a party? The contractor does not need to be a party to an on demand bond, but may be party to a conditional bond. 鈥 What is the surety鈥檚 liability? If the obligations of...
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This Practice Note, Performance bonds in international supply contracts, sets out an introduction to some common types of performance bonds used in international supply contracts such as pre-qualification bonds, tender (or bid bonds), advance payment bonds (APB), maintenance bonds, completion bonds, retention bonds, customs bonds and facility bonds. Performance bonds are used on many projects in order to provide security to the customer against the supplier's non-performance. The Practice Note also considers how trade sanctions and embargoes may affect the performance of contractual obligations in international contracts for which a bond may be required.This Practice Note does not consider letters of credit which are most commonly used in international supply contracts to provide a secure method of payment under the sales contract between the buyer and seller, as protection for the supplier against the creditworthiness of the buyer. For guidance on letters of credit, see: Letters of credit鈥攐verview and Practice Note: Characteristics of commercial letters of credit.This Practice Note also does not consider parent company guarantees鈥攚here the parent company to...
Characteristics of commercial letters of credit Commercial letters of credit (also known as traditional letters of credit or L/Cs) are used in relation to the movement of goods in the context of international or domestic trade. They are often used as a method of payment under contracts of sale because they are a useful tool where a seller has concerns over the creditworthiness of its buyer or the jurisdiction in which its buyer is located. They are sometimes referred to as documentary letters of credit or documentary credits. By contrast, standby letters of credit are a different type of letter of credit. They serve a different purpose. They are used in similar circumstances to on demand guarantees or performance bonds to provide a means for securing payment or other obligations. They are a form of quasi-security. For information on standby letters of credit, see Practice Note: Characteristics of standby letters of credit and Q&A: What is the difference between a standby letter of credit and a letter...
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Performance bond
Project lawyers鈥 completion documents list鈥攐nshore wind farm and ground-mounted solar projects鈥攖emplate PROJECT DETAILS PROJECT NAME: [insert name of project] CLIENT: [insert name of client] [Insert name of firm] PROJECT LEAD: [insert name of client/lead partner] PROJECT PARTIES PROJECT PARTY DETAILS Account Bank(s) [insert name of Account Bank] (Company Registration No. [insert number]) whose registered office is at [insert registered office of Account Bank] Agent [insert name of Agent] (Company Registration No. [insert number]) whose registered office is at [insert registered office of Agent] Architect [insert name of Architect] (Company Registration No. [insert number]) whose registered office is at [insert registered office of Architect] Arrangers [insert name of Arrangers] (Company Registration No. [insert number]) whose registered office is at [insert registered office of Arrangers] Civil Design Consultant [insert name of Civil Design Consultant] (Company Registration No. [insert number]) whose registered office is at [insert registered office of Civil Design Consultant] Construction Contractor [insert name of Construction Contractor] (Company Registration No. [insert number]) whose registered office is...
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If a contractor is insolvent, can its sub-contractor claim outstanding payments directly from the employer? If the main contractor becomes insolvent, its sub-contractor will want to know if it can obtain payment from any other source, in particular from the employer. The sub-contractor's first step should always be to check whether the terms of its sub-contract provide any assistance in such a situation. In doing so, the sub-contractor should also check the terms of the main contract if, as is often the case, it has been incorporated into the sub-contract. If a copy of the main contract was not physically attached to the sub-contract at the time of execution, the terms of the sub-contract may entitle the sub-contractor to ask for a copy from the main contractor. This Q&A looks at the possible routes by which the sub-contractor may be able to obtain payment in these circumstances. Collateral warranty If the sub-contractor has provided a collateral warranty to the employer, it may contain 'step-in' rights which allow the...
What is the difference between a standby letter of credit and a letter of credit? This Q&A considers the differences between a standby letter of credit (SBLC) and an ordinary letter of credit (CLC), sometimes also referred to as a commercial, documentary or trade letter of credit. For the nature of a CLC or SBLC, see Practice Notes: 鈥 Characteristics of commercial letters of credit, 鈥 Commercial letters of credit鈥攕tructure and parties 鈥 Characteristics of standby letters of credit 鈥 ICC standard rules and practices for use with standby letters of credit鈥擴CP and ISP Summary The principal difference between a SBLC and a CLC is the type of event that will trigger a payment under the letter of credit. A CLC payment is normally triggered where the seller of goods or services in an international sale or supply agreement has performed its obligations and the buyer pays through a CLC opened at the inception of the agreement as an agreed method of making payment of the price....
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Arbitration analysis: In this decision, the Paris Court of Appeal (the Court) dismissed the Central Bank of Iraq (CBI)鈥檚 request to annul the arbitral award on multiple grounds. First, the court found that CBI鈥檚 claim that the recognition and enforcement of the award in France would violate French international public policy was inadmissible. It held that the allegations (such as fraud and misappropriation of public funds) pertained solely to private contractual disputes rather than actual matters of international public policy. Consequently, CBI was deemed to have waived its right to raise these irregularities by failing to do so in a timely manner during the arbitral proceedings. Second, the court dismissed CBI鈥檚 claim that the sole arbitrator would have violated due process and the principle of equality of arms. The court found that CBI had been given ample opportunity to participate in the proceedings but chose not to do so. It also found that the sole arbitrator had reasonably addressed CBI鈥檚 late request to reopen the proceedings, ensuring CBI had a...
Construction analysis: The Commercial Court (Comm) applied a strict interpretation of the terms of an on-demand bond, which in particular prohibited the issuer from resisting payment pending further investigation or enquiry into the circumstances of the claim. This was despite the fact that the contractor on whose behalf the issuer had issued the bond had brought separate proceedings alleging that the employer/beneficiary owed them money for completing works under the contract.
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