Computer Systems Acquisitions and the Use of Performance Bonds©
| DOI | https://doi.org/10.1108/eb047696 |
| Date | 01 March 1987 |
| Pages | 45-47 |
| Published date | 01 March 1987 |
| Author | Alan S. Wernick |
| Subject Matter | Information & knowledge management,Library & information science |
Computer Systems Acquisitions
and the Use of Performance Bonds©
Alan S. Wernick
A performance bond typically guarantees
that a contractor, such as a computer
vendor or software developer, will perform
the contract. It usually provides that if
the contractor defaults in his performance
and fails to fulfill his contractual
promises, the surety can itself complete
the contract, or pay damages up to the
limit of the bond. One myth about perfor-
mance bonds is that they obviate the need
for the library to litigate in the event of
a default by the vendor. Performance bonds
will not insure the library against having
to resolve a dispute. Also, a failure to
follow the terms and the law involving the
performance bond could release the surety.
Yet the proper positioning of the perfor-
mance bond could provide needed resources
and negotiating leverage to the user in the
computer system acquisition process.
Performance bonds are not a panacea for the
user acquiring a computer system, but performance
bonds can reduce the user's risk in the acquisition
when properly applied. There are two types of
contractors' bonds generally available: the performance
bond, and the labor and material payment bond.
Often these bonds will be combined into one instru-
ment. This article will discuss in general terms
the performance bond, its use in computer system
acquisitions, some of the advantages to its use
and some of the risks attendant to its use. Another
document, the irrevocable letter of credit supplied
by the vendor, serves a similar function as the
performance bond, but is beyond the scope of this
article. (The irrevocable letter of credit will be
discussed in a subsequent issue of Library Hi Tech.)
This article is not meant to be a substitute for
legal counsel.
Who are the parties to a performance bond
in a computer system acquisition transaction? Typi-
cally, there will be a principal (or obligor), a bene-
ficiary (or obligee), and a surety. For example,
the principal may be a software developer, or a
computer hardware vendor. The beneficiary will
be the user, such as a public library, who is acquiring
a computer system along with custom software.
The surety is typically an insurance company.
A performance bond typically guarantees that
a contractor, such as a computer vendor or software
developer, will perform the contract. It usually
provides that if the contractor defaults in his perfor-
mance and fails to fulfill his contractual promises,
the surety can itself complete the contract, or
pay damages up to the limit of the bond. The
performance bond that binds the surety is a con-
Wernick, a member of the bars of Ohio, New
York, and the District of Columbia, is a private
attorney practicing in Columbus, Ohio. His prac-
tice concerns primarily computer and high tech-
nology law with an emphasis on the legal and
business needs of the data processing industry.
He is the founding chairman of the Computer Law
Committee of the Ohio State Bar Association, and
a member of the Advisory Board of several com-
puter law publications, including the Computer Law
Strategist, the International Computer Law Adviser,
and the Computer Law and Security Report.
© copyright 1987 by Alan S. Wernick
ISSUE 19 45
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