Performance Bonds As Deeds: Signed, Sealed And Delivered?

Performance Bonds as Deeds Deeds play a central role in construction and engineering projects. Many construction and engineering contracts, and similar contracts such as collateral warranties, are entered into as deeds. The primary advantage of doing so is to secure the benefit of a longer limitation period (12 years) than if the contract were not a deed (6 years). Rights under deeds therefore last longer.

Deeds also perform a special role when it comes to performance bonds. A performance bond, when issued in the form of a deed, binds the bondsman or guarantor even though there is no counterparty to the deed. Performance bonds are commonly issued with no counterparty, but the bond will name a beneficiary who is entitled to enforce the instrument. The beneficiary will be legally entitled to enforce the bond against the bondsman because the bond is in the form of a deed. If, however, there is an irregularity concerning the bond so that it does not constitute a deed, the bond will not be enforceable.

What this means is that if the formalities for executing a deed have not been followed in relation to a performance bond, it will not be legally binding. A recent case from Australia, discussed below, considered the issue of when a performance bond will (or will not) be valid if expressed to be a deed. The case is relevant to English law, as Australian law and English law are largely the same in this area.

The Formalities for Deeds

There are two simple formalities for a document to operate as a deed:

The document must clearly indicate that it is intended to operate as a deed. This is usually done by the document stating, for example, that it is "executed as a deed"; and The document must be validly executed (e.g. by 2 directors, or under a company's seal) and delivered. Under English law, a document executed by a company is presumed to be "delivered" upon it being executed, unless a contrary intention is shown. If, however, a document is not "delivered", it does not take effect as a deed. Segboer v AJ Richardson Properties

In this case:

A contractor arranged for a bank to issue an unconditional performance bond (or "guarantee", as it was referred to) in favour of a developer as security for the contractor's obligations under its building contract with the developer. The performance bond was issued by the bank as a deed. The bank kept the original of the bond. The developer was faxed a copy. The developer called on the bond, and (following legal...