Finance Update — March 2014: boot camp — performance bond problems

There used to be a time when a party proffering a performance bond issued on its behalf by a bank or insurance company to secure some contractual undertaking would almost inevitably be greeted with a smile and acceptance by the party on the other side of the negotiating table. Life is not quite so straightforward nowadays.

Performance bonds are widely used in a variety of commercial agreements from construction contracts to insolvency business sales. They are relatively straightforward one- or two-page documents and the path leading to their issue is a well-trodden one with many issuers having their own standard forms.

A series of cases in the English courts has resulted in what was once a simple calculation for the proposed beneficiary of such a bond becoming rather more complicated. And in a twist for those asking their banks or insurers to put up a bond the prospects of getting their money back if there is a mistaken payment under the bond are now somewhat diminished…

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