SAC Performance Bond
History & Objectives
Why use it?
History & Objectives
In 2008, the Surety Association of Canada began holding discussions and focus group sessions with owners, contractors and consultants across the country. The purpose of this exercise was to understand what both obliges and principals were looking for and to make surety bonds more responsive to their needs.
A common theme from owners was the need for more responsiveness, clarity and certainty when making a claim under a performance bond. While performance bonds are not a cash-on-demand solution, owners and consultants still expected more. One owner’s representative put it in an interesting light when he freely admitted that a bond provides much better and more comprehensive protection than any alternative form of security but then added: “When I make a claim on the bond, I need to know what I can expect and when I can expect it.”
SAC took this comment and designed a bond form with two objectives:
- Bringing a greater level of certainty and responsiveness to the surety claims process; and,
- Encouraging better and more frequent communication between the surety and the owner in the event of a contractor default.
It’s important to note that while the new bond form requires bonding companies to be more diligent in its claims response and administration, it doesn’t expand the coverage beyond that offered under the standard bond that was developed by CCDC. It takes the core features of the CCDC bond and adds several measures to improve and clarify the bond claim process.
Why use it?
Successful Track Record
The core components of the SAC performance bond mirror those set out in the CCDC standard. The language has undergone judicial review and legal precedents have been set to the point that the meaning and intent of each clause has been clearly established. This clarity eliminates unnecessary litigation and reduces costs.
Like CCDC, SAC has made a deliberate attempt to balance the needs of all parties to the construction process. Representatives of all sectors of the construction industry ranging from design professionals, to contractors, bonding companies and construction buyers provided input making this a balanced and fair approach while still addressing the key concerns of all parties to the bond.
Again, taking the cue from the CCDC document, the language of SAC bond is very concise and clearly states the rights and obligations of the contractor, owner and bonding company in the event of the contractor’s default.
More Responsiveness and Accountability
SAC introduced several new features into its performance bond like the pre-demand conference, surety response time, emergency remedial measures, post-demand conference and contact coordinates.
The Pre-Demand Conference
The new bond provides a mechanism which allows bonding companies to become involved in a facilitating role before an actual default takes place. Should the owner encounter issues with the contractor’s performance that have the potential to escalate into a demand under the bond, they can request a meeting between the parties to attempt to resolve these issues. The bonding company then has 15 business days to arrange such a meeting (or teleconference). This does not involve a formal “claim” under the bond; but is simply an attempt at default prevention. The rights of all parties remain unaltered and are not affected by participating in any Pre-Demand Conference.
Surety Response Times
Once an owner makes a demand under the SAC performance bond, the surety has to meet certain response milestones within a series of specified time frames. For example, within 5 business days of receiving the original demand, the surety is required to acknowledge its receipt and request the information it will need to conduct its investigation. Once the surety receives this information/documentation, it then has 21 business days to complete the investigation and/or report back to the owner.
Surety’s Investigation: Emergency Remedial Measures
The current CCDC language does not afford the surety the right to conduct an investigation of a claim by the owner; even though such an investigation is a practical and legal necessity. The SAC performance bond establishes this right but sets out ground rules and time frames for a surety’s conduct during this phase. When an owner declares a default and terminates the contract, there are often urgent construction-related problems that must be resolved immediately. For example, site conditions that can jeopardize public safety simply can’t wait for the surety to complete its investigation and indeed courts have firmly established that an owner has the right (or even the obligation as some would argue) to undertake necessary emergency work. To whatever extent that these issues were caused by the default of the contractor, the costs of addressing them will usually be compensable under the bond. The SAC bond sets out the ground rules under which any such action can be claimable.
Surety’s Investigation: the Post-Demand Conference
Once the emergency (safety and site preservation) issues have been taken care of, the owner and the surety still face the challenge of preventing or minimizing work stoppages while the investigation is taking place. Having the job shut down during this period can be an expensive proposition for all concerned as impact costs, damages and penalties can accumulate during the time of inactivity.
This concern is addressed by requiring the surety to convene a Post-Demand Conference with the owner within 10 business days of receipt of a demand under the bond. On the agenda will be any issues to be addressed during the period of the surety’s investigation; e.g. remedial work, information required, status of the job, etc. This section also maps out the way to allow the owner to initiate measures to keep the job going without losing their rights under the bond. The inclusion of a Post-Demand Conference not only addresses the issue of non-emergency remedial work, it fits in perfectly with the spirit and intent of the bond.
- It provides the parties with the flexibility that will allow them to customize a solution that meets the needs of each particular default and doesn’t try to impose solutions that may not fit the situation at hand.
- It sets out the rules of engagement for undertaking the remedial work and will allow an owner to proceed.
- It will ensure buy-in from all parties as everyone will be involved in arriving at a solution.
- Most importantly, it will facilitate dialogue between surety and owner which is never a bad thing.
Contact Coordinates for Participating Parties
The SAC document introduces a section to provide contact coordinates for all three parties to the bond for purposes of notification and communication. This has often been a source of frustration for all parties in claims situations.
The Surety Association of Canada is always happy to meet with owners to discuss and review the bonding options and provide suggestions as to how to use surety products to meet your unique performance security needs. Please contact the SAC office at (905) 677-1353 or by email at surety [at] suretycanada.com with any questions or concerns.