As part of the performance security package for construction
projects, project finance lenders (as well as project owners,
landlords and government authorities) often require performance
bonds from the construction contractor as security for the
performance of the contractor’s obligations. However, certain
misconceptions prevail about performance bonds among those outside
the construction industry. In this bulletin, we highlight a few key
issues that we have encountered on recent project finance
transactions, including: failure to negotiate and modify the
‘standard form’ of bond, issues overlooked during
construction, the surety’s right to an investigation after a
claim for default, cross-default scenarios and the requirement for
lenders to ‘step-in’, the surety’s options in
curing a default, and limits to the scope of surety’s
obligations.
