New “Process Enhanced” Performance Bond coming soon. Should owners put on their party hats and break out the Champagne?

Probably not but time will tell.

In December 2011, the Surety Association of Canada (the “SAC”) approved a new form of performance bond that has several new provisions. In its press notice, the SAC says that the objectives of the changed language of the performance bond are:

  1. To bring a greater level of certainty and responsiveness to the claims process; and
  2. To encourage better and more frequent communication between the Surety and the owner (the “Obligee”) in the event of a contractor (the “Principal”) default.

These are, of course, laudable objectives and, to these ends, the new form includes:

  • The availability (at the Obligee’s option) of a “Pre-Demand Conference” to be held between the Obligee, the Principal, and the Surety prior to a Demand being made on the bond;
  • Some requirements regarding the Surety’s time to investigate and respond to a Demand made by the Obligee;
  • Some tightly prescribed rights of the Obligee to take limited steps to protect public safety and preserve and protect the Principal’s work under the contract from deterioration and damage;
  • A Post-Demand Conference to be held between the Obligee, the Principal, and the Surety to discuss what work (if any) under the contract should proceed while the Surety carries out its investigations; and
  • Clearer contact information for any Demand, notice, and other communications between parties to the bond.

Unfortunately, I’m rather underwhelmed by the new language. I can see the potential for modestly better communication through the claims process; however, I can also see the potential for very little practical change and benefit to the Obligee. For example, the new language requires the Surety to investigate and report its position on liability to the Obligee within 21 days of receiving all information from the Obligee and carrying out a site visit (should it decide to do one) following a Demand being made on the bond. However, the new language doesn’t impose a time limit for the Surety’s site visit to trigger the 21 day period and it goes on to say that if the Surety can’t complete its investigation and report its position on liability to the Obligee within 21 days – it can simply write to the Obligee and tell it that it needs more time (and say when it expects to be able to complete its investigation and report). So, the 21 day investigation and reporting requirement sounds OK until one considers that there is no set time within which the Surety must complete its site visit to trigger the commencement of the 21 days and, further, the Surety can, in any case, unilaterally extend the 21 days by simply writing the Obligee a letter stating as much. One can easily imagine this so-called “21 day” period commonly (and without consequence) turning into several months.

It will take some time after the new wording is put into use before its practical benefit (or lack thereof) to Obligees becomes apparent. However, based on my own past experiences representing clients that have made Demand on a performance bond, coupled with the soft language and lack of stated consequence to the Surety, I have my doubts that the new form will translate into a significantly better experience and outcome for Obligees.

Maybe throw the Champagne in the fridge but keep the cork in and the party hats can probably be left in the closet for the time being.

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