Use of Performance Bonds Increasing in Tanzania

A report by Clyde & Co Partner Tenda Msinjili and Associate Amreen Ayub suggests that use of performance bonds in Tanzania is on the rise. In the East African country, performance bonds are being frequently used in public-private partnerships (PPPs) where a government agency or authority as beneficiary seeks expertise from a supplier from the private sector.

Regulation 29 (4) of Tanzania’s Public Procurement Regulations (GN No. 446 of 2013) provides that performance bonds may be issued in a variety of forms, including via “irrevocable letter of credit issued by a reputable commercial bank, or a confirmation letter from a reputable commercial bank in case an irrevocable letter of credit is issued by a foreign bank” or “bank guarantee confirmed by a reputable local bank or bonded by a foreign bank in case the successful tenderer is a foreigner”. A performance bond can also be a “surety bond called on demand issued by any reputable surety or insurance company.”

Following the lead of various law cases from England which have determined that a guarantor must honor a performance guarantee according to its terms and pay on demand without requiring proof of actual default by the supplier, the Tanzanian case of Tanchi Brothers Construction Company Limited versus Amana Bank Limited (Miscellaneous Commercial Cause No. 28 of 2020), maintained this stance. The Tanzanian court further provided that “a bank will be restrained from performing its obligations under an unconditional bank guarantee where there is proof of fraud of which the bank has notice”.

Msinjili and Ayub added that a guarantor may also be excused from paying the security amount stipulated in a performance bond where “the Supplier carries out an act which is inconsistent with the rights of the Guarantor or omits to do an act which it is bound to do.”

On formulation of performance bond terms, Msinjili and Ayub advise that terms “be framed to protect not only the Beneficiary in case of default of the Supplier but also the Guarantor to ensure full indemnification for amount rightfully paid in accordance with the terms of the Performance Bond.”

Asked by DCW if it is common for performance bonds issued by Tanzanian banks in the form of a bank guarantee to be issued subject to ICC practice rules such as URDG758, Ayub stated so but added that “application of the Rules is limited to matters upon which the parties to a contract are free to agree upon. This means that the Rules only apply in respect of the terms that are not specifically provided under Tanzanian law i.e. the Law of Contract Act, Cap 345 R.E. 2019.”

Where a performance bond is to function as an independent undertaking, Ayub indicated it is advisable that the terms of performance bond provide that it is subject to ICC practice rules. “The Rules are a voluntary instrument which lack the force of law and therefore, the contract must expressly provide for the application of the Rules for them to apply”, said Ayub.