In today’s turbulent economic times, prudent employers, including NHS trusts and PCTs, should ensure that contractors provide the security offered by a bond. Performance bonds protect the employer from losses arising from contractor default, delay or insolvency.

Most performance bonds oblige the NHS trust or PCT to prove the contractor’s breach or default before the bondsman will pay up.

“On demand bonds”, however, are a different species of performance bond – the bondsman must pay upon the “demand” of the beneficiary (ie, the trust) irrespective of the underlying contractual position.

Contractors have attempted to resist calls on these types of bond with court injunctions. However, the recent case of Permasteelisa Japan KK v (1) Bouyguesstroi (2) Banca Intesa Spa (2007) confirmed that a contractor has little defence against a call on such a bond other than:

  • a seriously arguable case of fraud; or
  • a "positively established" (ie, more than seriously arguable) breach of the underlying contract between the parties, which meant that the beneficiary was not contractually entitled to call on the bond.

The moral of this is that, as an NHS trust or PCT in the present economic climate, you should seek a bond from contractors. Ideally, that bond should be an “on demand” bond and care should be taken to ensure that the terms of the building contract do not restrict the circumstances in which the NHS trust or PCT may call on the “on demand bond”.