There have been a couple of recent decisions concerning bonds under construction contracts. They remind us it’s important to know what kind of bond you are dealing with.
- The NZS form of bond
This is a conditional bond. It requires the contractor to acknowledge the amount is due and owing or that the amount claimed has been finally proven as due via a Court process – both unlikely (and expensive).
- An on demand bond
The preferred form of bond – on a call being made in accordance with its terms, the bond sum is paid.
- A hybrid bond
Where the engineer’s certificate triggers payment. This is a good compromise also.
In Clark Road Developments Limited v Rohits Civil & Infrastructure Limited & China Construction Bank (New Zealand) Limited CIV-2017-404-2558  NZHC 2844, a principal’s bond had been issued by the bank. The bond was security for the contractor for payment by the principal. There had been late payments. Two payments had been dishonoured so the contractor ceased work and made a call upon the bond.
The argument was made the bond was conditional, not on demand. The bond provided that the bank, as surety, agreed irrevocably and unconditionally to pay the contractor up to $600,000 if demanded. Payment was required forthwith on demand without the bank having regard to default under the construction contract. The bond was expressed to be null and void in various circumstances. These included if the principal had paid the contract price and all monies due under the contract, to the contractor.
The High Court rejected that argument and I agree. The wording to my mind, describes an on demand bond not a conditional bond. An argument was also made that the bond was null and void, at the time of the call on the bond. This was expressed to occur if the contract price and all monies had been paid under the contract. Based on the factual assessment, it was decided this was not the case.
The Court of Appeal recently decided a different bond case Richina Pacific Limited & AAI Limited (Vero) v Samson Corporation Limited CA449/2017  NZCA 132. The judgement was delivered on 21 March 2018. Vero gave a performance bond on a project in Parnell. There were issues with the project and ultimately that came to a head in September 2012. The engineer issued a practical completion certificate. This excluded various parts of the works that had been problematic, including a car stacker worth almost 15% of the contract value. The certificate added that the bond would not be released until the listed items were completed.
The main question on appeal was whether the bond was discharged when the practical completion certificate had been issued in September. The bond provided it was null and void if the contractor fulfilled its obligations by practical completion. There was not a dispute as to whether or not the works had ever been completed and it was agreed that this had not occurred. However the contract had not expressly separated the works. As a result, it anticipated one practical completion certificate for the project.
The court found that the September practical completion certificate did not bring the obligations of the contractor to an end because:
- further work was anticipated to be done,
- the Contractor expressly agreed that the bond stayed in place after the issue of the certificate and in fact had paid to extend the bond,
- the contract had a mechanism for separate practical completion certificates (using the separable portion clauses). Even though that was not expressly drafted into the contract as applicable to this project the fact that that was a possible process and there was no set way to activate that during the work, meant that the steps taken were sufficient for this mechanism to apply
Vero also tried to argue the partial completion and the retention release that followed, was beyond the scope of the ‘no indulgence’ clause and therefore void. That clause provided the bondsman is not released from liability by:
- an alteration to the terms of the contract or the works to be completed,
- allowance of time,
- forbearance or waiver by the principal or engineer.
The Court disagreed with this argument. It decided that the actions taken were permitted by the contract, therefore not outside the scope of the ‘no indulgence’ clause. As a result, the appeal was dismissed. The principal was successful in retaining the bond worth almost $2 million.
The on demand bonds proved to be of value to those that requested them, despite payment being resisted by the issuers of them.