REALWorld Law


Security documents

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?

United States

United States

Common forms of bonds that protect various parties to the construction process are performance bonds, payments bonds, and lien bonds. A contractor can post a performance bond whereby a surety guarantees to the owner that the contractor will complete the construction work. A contractor also can post a payment bond whereby a surety guarantees that the contractor will pay its subcontractors and suppliers. A lien bond protects the owner’s property from mechanics liens.

The contractor’s surety, however, not only shares some of the obligations of the contractor but also has the right to assert some of the contractor’s defenses. For example, if the owner does not pay the contractor and, in turn, the contractor does not pay the subcontractor, then the surety can assert owner’s lack of payment as a defense to the obligation to under the bond to pay the subcontractors.

A guarantee by a parent or holding company may be desirable, if the assets against which a party to the contract would make a claim are held by that parent or holding company.