JCT Section 7: Performance Bonds, Guarantees, Collateral Warranties and Third Party Rights

Performance Bonds and Guarantees

JCT has come of age with the addition of provisions for performance bonds or guarantees from the Contractor to the Employer.

The mechanics surrounding this in the contract are relatively simple.

There’s a new clause, 7.3.1 and 7.3.2 in section 7, and a reference to it in the JCT Contract Particulars. It is now necessary for the Employer to indicate whether it requires a performance bond or a guarantee from a bank or other approved surety, or whether it does not require either.

JCT does not go as far as recommending a particular form of bond or guarantee, it leaves that to the parties to agree. It is also a little unclear as to what exactly has to be provided and how much the Employer can dictate.

• The Employer should identify (it normally does anyway), what the format of the performance bond or guarantee it wants is. 
• The Contractor has to provide the performance bond or guarantee in the terms required by the Employer unless otherwise agreed by the Employer, but the terms should be substantially in the forms of the documents identified in the JCT Contract Particulars.

Until now, of course, an Employer has often required a performance bond or a parent company guarantee as part of the security to be given by a Contractor. Whether they go for both or, as tends to be the trend, just ask for a parent company guarantee, in lieu of a performance bond, will depend upon the Employer’s preference; the nature of the project and the size and financial standing of the Contractor.

There are plenty of contractors for whom providing a parent company guarantee is not an option because they do not have a “parent”, or the trading company is the group’s only significant revenue generator. In our experience, fewer and fewer employers are requiring performance bonds because of two factors; a) the added cost to the Employer; and b) they are often difficult to call on.

There’s a slight sting in the tail in the new JCT wording. The bond or guarantee have to be “substantially in the form of the document identified by the Contract Particulars”. Theoretically contractors could be obliged to provide what the Employer wants in the first place. No doubt though contractors will propose their own preferred wording and the Employer will use that or agree a compromise.

JCT stops short of suggesting a form of bond or guarantee, for example the ABI performance bond, which contractors often propose, only for it to be rejected or heavily modified as it is difficult to call against. This can be compared with the JCT’s advance payment bond and retention bond, where JCT clearly feel on “safer” grounds to present their own templates for such bonds.

Collateral Warranties

Turning to collateral warranties and third party rights, JCT has introduced a new procedure designed to smooth the administration of third party rights and collateral warranties. It introduces a “Rights Particulars” form to be completed, stating who is going to require either collateral warranties and/or third party rights in a project. A model form of the Rights Particulars can be found at the back of the JCT Guide.

The intention to tidy up the procedural aspects of putting this in place is laudable. Whether the Rights Particulars is necessary is a matter of opinion.

Additionally, JCT have made amendments to the third party rights provisions, bringing in net contribution clauses to the third party rights, on the basis that in the D&B version under clause 2.11 an Employer’s consultant could be jointly liable with a Contractor if the Contractor is not responsible for the Employer’s Requirements.

There is also now a separate provision (clause 7E in the D&B form) requiring either third party rights or collateral warranties from sub-contractors. A well advised Employer invariably wants sub-contractor collateral warranties or third party rights from key trades in case the main contractor is not able to meet any claim. JCT presumes that the JCT model sub-contract conditions will be used, or something equivalent, by the main contractor to pass down the warranty or third party obligation to the sub-contractor.