HFW''s Matthew Blycha discusses the thorny issue of meeting demands under performance bonds
Getting your hands on monies owed
Performance bonds are often explicit in noting that they are payable on demand and without regard to the performance or non-performance of the contractor under the contract. However, they are often less clear about how, in practice, demands are made and how and when monies are to be paid. For instance, performance bonds often specify demands are to be made “in writing on the bank”.
Does this mean a demand needs to be made on the bank’s head office, or will the local branch suffice? Does the demand need to specify that the contractor has breached the contract, and, if so, what level of detail is required? Is a demand to be physically delivered to the bank or can a demand be made by email? Does the original performance bond need to be presented when making a demand? Can payment be made by cheque and should the original performance bond be released in return for payment by a cheque?
Where the performance bond is silent or unclear on these issues most employers will take steps to ensure their demand is viewed as valid and in compliance with all contractual requirements. These steps can involve locating the original guarantee, having the employer’s representative and/or one or more directors sign the demand letter, and hand-delivering the guarantee and accompanying demand on a bank’s head office. This process can take time.
It is not suggested that performance bonds be drafted to address each of the procedural issues that could arise in the context of making a demand. However, including a template notice of demand along with the performance bond is sensible. This template can include who can make a demand on behalf of the employer, where demands are to be sent, when payment is to be made and how funds are to be transferred.
Addressing these issues can ensure that, once the difficult decision to call on a performance bond is made, the actual process of receiving payment is a mere formality.
