If a bond is called for by the contract, the Contractor must supply it to the Employer at his own cost within 28 days of his receipt of the Letter of Acceptance, simultaneously informing the Engineer. The amount must be as stated in the Appendix and the form and bondsman must be agreed by the Employer.
The bond must be valid until the issue of the Defects Liability Certificate whereupon it must be returned to the Contractor within 14 days.
Before claiming on the bond, the Employer must inform the Contractor of the grounds for the claim.
Sub-clause 10.1 is a re-worded version of clause 10 of the 3rd Edition. Sub- clauses 10.2 and 10.3 are entirely new.
Part II provides two example forms of performance security and provides optional additional wording to specify the currency or source of the security. The type of performance guarantee suggested by FIDIC was the subject of scrutiny by the Hong Kong Court of Appeal in Tins Industrial v Kono Insurance (1987) 42 BLR 110, who held that the bond is indeed conditional on proof of breach and damage.
10.1 It would normally be preferable for both the form and institution providing security to be agreed prior to the issue of a Letter of Acceptance. Otherwise, the Contractor is given a period of 28 days in which to agree these matters and to negotiate with the institution and provide the bond. Four weeks will often be insufficient for this exercise. More fundamentally, if the Contractor is informed after the contract has been entered into that the Employer requires the form of bond to be, for example, "on-demand", agreement on the form may never be achieved. As commented in relation to clause 9.1 (Contract Agreement), an agreement to agree something in the future is not readily enforceable in English courts and difficult to enforce under any circumstances. Therefore the Employer runs the risk that if the form is not agreed in advance of the Letter of Acceptance, he will lose his right to security altogether. It may even be arguable that, as agreement on an important term has not been achieved, no contract exists at all. As to the Employer's approval of the institution, clause 1.5 (Notices, consents etc) states that such approval "shall not unreasonably be withheld or delayed". Again, a protracted dispute could arise out of whether a refusal of approval was unreasonable which would once again endanger the Employer's security. The sensible course is for the Employer's requirements and indeed the Contractor's proposed institution, to be defined as far as possible in the tender documents.
An effective sanction is provided by clause 60.2 (Monthly payments) which prohibits interim certification until the performance security has been duly provided. The effectiveness of the sanction is negated, however, if the form of the bond is still the subject of debate when the first interim payment is due. The Engineer may have no power to certify but the Contractor may have no obligation to perform due to the absence of a concluded contract. In English law, the Contractor would be entitled to be paid a reasonable sum for the work done in the absence of a contract.
The forms of security set out in Part II are a performance and a surety bond. FIDIC do not encourage the use of on-demand bonds because of the premium that tenderers add to their bids on account of the risk of abuse of such bonds. As the English Court of Appeal pointed out in Edward Owen Engineering v Barclays Bank (1977) 3 WLR 764; 6 BLR 58, a properly documented call on an on- demand bond must be honoured unless there is clear evidence of fraud. Other forms of bond that the Employer may seek include:-
- tender or bid bond - advance payment bond - retention money bond
- maintenance bond, to ensure compliance with Defects Liability Period obligations.
Other security provided to the Employer under the contract includes: retention, whereby up to 10% of the value of the work is not paid for by the Employer until the project is successfully completed; payment in arrears, whereby the Employer pays for works at least two months after they have been executed; the ability of the Employer to make use of the Contractor's equipment, temporary works and materials following the termination of the Contractor's employment under clause 63.1 (Default of Contractor); the right to deduct damages for delay under clause 47.1 (Liquidated damages for delay); and the insurance provisions to be found in clauses 21, 23 and 24.
10.2 This clause cannot of itself influence the terms of an existing bond but is intended to be part of the form to be agreed between the Employer and the Contractor.
In the event of a default by the Contractor such that he does not complete the works, this sub-clause would theoretically require the performance security to remain valid indefinitely. If a performance bond is paid, then it is defunct and, similarly, if the surety either completes the work itself, or by another contractor or pays the amount of the bond, the surety bond will also be defunct.
Performance security is not available to an Employer in respect of defects emerging after the issue of the Defects Liability Certificate.
The return of the bond within 2 weeks of the issue of the Defects Liability Certificate is particularly important in relation to on-demand bonds. It is not unknown for institutions to consider it necessary for the sake of their reputations
to honour on-demand bonds if they remain in the hands of an Employer regardless of a claim by the Contractor that its validity has expired or that it is too late under the contract to make a claim under it. The attitude may be that they will not become party to such disputes but will treat the bond as the equivalent to a banker's draft. Thus, it is only by securing the return of the bond to the institution itself that a Contractor can be sure that no claim will be honoured. 10.3 Again, the real significance of this clause is in relation to on-demand bonds. Given prior notification, the Contractor will be better placed to attempt to remedy the default, to dissuade the Employer from proceeding or to dissuade the institution from honouring the demand by demonstrating, for example, that the bond was invalid or had expired or that any claim against the bond would be fraudulent. Alternatively, the Contractor could attempt to obtain an injunction to prevent the payment under the bond on such grounds. However, as no period is specified or of necessity to be implied, the Employer is entitled to call the bond immediately upon giving the notice in accordance with clause 68 (Notices).
The failure of the Employer to give the requisite notice would not normally prevent payment under the bond. Unless the terms of the bond expressly required the Employer to provide proof of notification, the payer would not be concerned with the terms of this sub-clause. Such a failure would amount to a breach of contract on the part of the Employer for which he would be liable in damages. In the case of a typical on-demand bond, the Contractor would probably be unable to show any loss as he would not have been able to prevent payment unless one of the exceptional grounds referred to above existed. With other forms of security, the bondsman or insurer would consult the Contractor in any event before paying.
This sub-clause raises the issue of the respective rights and liabilities of the Contractor and Employer after the Employer has successfully called an on- demand bond where either the call was unjustified or the sum thereby recovered exceeded any loss or damage incurred by the Employer. There is no express term dealing with the matter nor does this sub-clause address the matter directly. Its relevance may be in the support that it gives to the argument that there is an implied term that the Employer will only call the bond where there has been a genuine default and will repay to the Contractor any sum received by the Employer which exceeds the amount of his loss and damage flowing from the default. An argument for such an implied term rests on the assumption that the Contractor is bound by agreement with the institution to indemnify the institution in respect of the sums paid out, as is normally the case.
The terms of clause 67 (Settlement of Disputes) are wide enough in principle to cover a dispute over a bond and the financial consequences of a call upon it. In the absence of such an implied term, it would be a very difficult question whether the arbitrator would have power to make an award directing the Employer to repay to the Contractor all or part of the sums paid out by the institution under the bond. See on this the discussion under clause 67.3 (Arbitration).
The use of the term "default" in this sub-clause reflects the use of that term in the two sample bonds in Part II. In this context, the term means any material breach of contract and it is therefore submitted that the use of the term in this clause is not limited to the defaults listed in clause 63.1 (Default of Contractor).