Bonds creating security for contractor performance are typically seen forming part of the contractual framework underpinning a construction project.
A performance bond is one such type of bond, essentially amounting to a contract of guarantee entered into between the two parties to an underlying construction contract - generally referred to as the “Employer” and the “Contractor” - and a third-party surety, whereby the surety agrees to pay a sum of money to the Employer in the event of breach of the underlying construction contract by the Contractor.
Every bond is different and any assessment of what should be paid to the Employer in these circumstances will depend on analysis of the bond wording itself. Generally speaking, a surety is required (subject to a specified monetary cap) to reimburse losses and/or damages sustained by the Employer that are attributable to breach of the underlying contract by the Contractor, having regard to any sums due (or to become due) to the Contractor. As such, when assessing whether a surety is required to make payment pursuant to a performance bond, it is usually necessary to examine the terms of the underlying construction contract.
In this regard, it is common for performance bonds - in both Ireland and the UK - to stipulate that losses and/or damages sustained by an Employer should be “established and ascertained” pursuant to the terms of the underlying construction contract. Naturally, terms will vary from contract to contract and there is no conclusive answer to the question of what it means to establish and ascertain losses and/or damages in this context. However, there has arguably been a divergence in approach when this issue has been considered by the respective courts of the UK and Ireland. We consider these contrasting approaches next.
