A brief overview of ten tactics when negotiating bonds and guarantees on a UK construction project. This handout covers: - knowing whether it is a bond or guarantee - checking surety, construction party and underlying contract - ensuring secondary liability only - reviewing procedures for bringing a claim Sarah Fox, of 500 Words Ltd, developed this tool as part of a workshop helping lawyers to understand the differences between on demand bonds, indemnities and (parent company) conditional guarantees. She has spent 15 years designing developing and delivering workshops for those who want to avoid the pitfalls of construction documents. If you want to know if your document is on-demand read http://500words.co.uk/is-it-on-demand/ If you want to know the truth about insolvency and bonds read http://500words.co.uk/bonds-and-insolvency/ If you want to know about indulgence clauses and whether you can amend a bonded contract read http://500words.co.uk/amending-bonded-contract/ and also http://500words.co.uk/indulgence-clauses/

1. 10 TACTICS WHEN NEGOTIATING
BONDS AND GUARANTEES
Guide
SARAH FOX
500 Words Ltd
(2018)

2. © 500 Words Ltd, 2018
Page 1
CAN YOU BRING A CLAIM?
Making Bonds and Guarantees Work for Your Clients
Use this guide to steer discussions and negotiations on a bond or guarantee
TACTIC 1 Know whether it is a
bond or a guarantee
(1) Different rules of interpretation apply.
(2) Different consequences for client and surety.
Cases: Trafalgar House, McAlpine, CIMC Raffles
TACTIC 2 Bond: check surety Employers should seek assurance that the surety is a
“sound, reliable and responsible corporate body and be
satisfied that if there is a need to call the [guarantee] the
[surety] will comply promptly” (HMT CUP 48)
Cases: Edward Owen, OTV Birwelco
TACTIC 3 Bond: check
construction partner
A surety under a bond is bound to pay when there is no
fraud. Any remedy for incorrect or abusive payment is
between employer and contractor.
Cases: Doosan v MABE, Themehelp, Tech-System v WYWY
TACTIC 4 Guarantee: check the
underlying contract
As a guarantee only gives secondary liability the underlying
contract acts to limit or exclude the surety’s liability. If there
is no contract when the guarantee is signed or no valid
contract then there is nothing to guarantee.
TACTIC 5 Guarantee: delete
wording relating to
primary liability
Your guarantee should not include: indemnify, primary
obligor, unconditionally, first written demand, without proof
TACTIC 6 Guarantee: delete
insolvency as a trigger
for making a claim
Insolvency does not lead to damages recoverable under the
bond – the failure to complete does.
Cases: Perar v general, Northwood v Aegon
TACTIC 7 Guarantee: use contract
to calculate damages
Most guarantees refer to recovering sums as ‘ascertained
under the contract’ and this is the correct determination for
a guarantee where there is secondary liability
Case: Paddington Churches v Technical
TACTIC 8 Guarantee: check
indulgence clause
The rule in Holme v Brunskill is overridden by including a
clause stating that the surety will not be discharged by
variations. It does not apply to variations permitted by the
contract
Cases: Topland v Smith, CIMC Raffles
TACTIC 9 Guarantee: check extent
of indulgence clause
Not all variation prejudice the surety but it is better to have
a wide indulgence clause than argue after the event
Cases: Hackney Empire
TACTIC 10 Both: check procedure
carefully to see it’s
practical
Whether it is a bond or guarantee, procedural requirements
in the document are applied strictly. Failure to follow means
your client’s claim may fail. For on-demand bonds provided
that the recipient complies with any procedural
requirements in the instrument as to the documents
required,1
then the surety is required to pay.
Case: East Ayrshire Council v Zurich

3. © 500 Words Ltd, 2018
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Alternatives
There are alternatives to using bonds and guarantees. You could:
1. Use tender process properly. Select a skilled contractor with financial capacity to complete the
project, irrespective of unforeseeable economic changes;
2. Use the main agreements effectively. The project should be encouraged to work together to
meet agreed objectives while providing fair payment for all. These agreements allocate the key
risks on the project;
3. Use insurance. Insurance policies eg project insurance can help cover some of the additional
costs from risks occurring. Insurance-backed bonds are merely another form of security.
This note provides only a brief flavour of the real difficulties, both practical and legal, with drafting,
revising and negotiating bonds and guarantees to protect a client’s interests on a project. For more
information about surety contracts see this video.
Author of the 500-Word Contract™
Sarah Fox is a construction contracts specialist, who has written, adapted and reviewed all manner
of construction contracts from 5-page letters of intent to over 50,000-word multi-million pound
construction contracts. What she thinks you need, particularly when time is tight, is a really simple
contract… a 500-Word version.
Footnotes
1
Where the instrument provides for a ‘bare demand’ without any accompanying information, this is
known as ‘clean’ or ‘suicide’ credit. Generally, the employer is required to provide a written
statement asserting the contractor’s default.