NZS 3910:2013 and bonds

NZS 3910:2013 was released in November 2013 and updates the 2003 version of the most widely-used construction contract in New Zealand.  One area of significant change is the contractor’s bond.  

In NZS 3910:2003, the contractor’s bond was a performance bond. To call up the bond, it was necessary to demonstrate that one or more of the conditions set out in the 3rd schedule bond form had not been met (i.e. contractor’s compliance with contract obligations, contractor remedying all defaults, payment by the surety of the principal’s damages, or issue of a practical completion certificate).  

The NZS 3910:2013 edition removes all the above conditions from the bond form and shifts them to the general conditions. This has the effect of making the contractor’s bond less conditional and more like an on-demand bond. (Whether it is actually an on-demand bond will ultimately be determined by the court.)  Where a principal calls up an on-demand bond, even if the grounds are disputed, the surety can pay out the sum without reference to conditions in a contract. Of course, the principal would be in breach of contract if it has called up the bond wrongly, but the contractor would have to pursue the principal for this breach – it can’t go after the surety for paying out the bond.

Since the Mainzeal collapse, principals are increasingly requiring on-demand bonds from contractors, so the 2013 revision is not unusual. However, it is likely that more bonds will be called up and this will result in higher pressures on New Zealand contracting companies many of whom are under-capitalised already.

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