Invoking Guarantees

Dear Francis,

It depends on the Conditions of Contract, but in general the Gurantee is in exchange for the down payment that the Owner has given you to complete the mobilization. In case or special projects, the amount will be higher to cover the initial costs.

We also allow the reduction of the Guarantee with the same amount that the down payment is recoved in the interim payments.

Conditions of Contracts are written in a balanced way. Unless one party has done damages to the other, then they need to start with communication first.

If the client used this option without sufficient reason, then you can take him to court for the damages that they have done to you. The deicison to cash the Guarantee is not simple decision. Enough proof should exist for poor performance.

With kind regards,

Samer

Dear Samer,

Thanks for your response, your opinion is correct w.r.t to the Adv Payment Guarantee. My query is regarding the Performance Guarantee which usually will cover the full contract amount which contractually the client will give back once you’ve completed your defects liability period.But in case of any disputes clients usually invokes it......This is the case I’s asking.

Thanks

Dear Francis,

If you are using FIDIC, then Clause 4.2 "Performance Sercurity" will show you the exact cases under which the client is allowed to take action.

Please let me know if you do not have them.

With kind regards,

Samer

Thanks Samer,

I’ll go thro the copy I’m havin and let you know, if there is any query.

Cheers

Francis,

The main thing to look for is whether the guarantee is given in the form of an unconditional, (on demand), or conditional bond. Hopefully if you are the contractor, the latter.

Dear Andrew,

The forms are part of the standard FIDIC Condition of Contract. Usually, the Consultant preparing the Contract Documents does not change the wording.

The wording goes like this:

"At the request of the Principal, we (bank) hereby irrevocably undertake to pay you, the Beneficiary/Employer, any sum or sums not exceeding in total the amount of ------- upon receipt by s f your demand in writing and..."

With kind regards,

Samer

Samer,

FIDIC Cl 4.2, (Red Book as example), - states the conditions that an Employer can call on the Performance Security.

It’s form - bond, guarantee, escrow account or other.... should be stipulated in the Particular Conditions or as otherwise agreed with the Employer.

Whatever its form, it should reflect the conditions of 4.2 in it’s wording and therefore be conditional.

Often the Employer insists on an unconditional, (pay on demand), bond however which means the Employer can cash it in at any time for any reason - not good, but sadly often has to be provided if you want to get the job!

Yes the Employer would be in breach of contract if he cashed it in for a reason other than those in Cl 4.2 if he is going down this route, doubt he cares about what the contract says anymore.

The wording you have stated appears to be that of an unconditional bond unless there’s more after the and ....

Dear Andrew,

Yes, it is unconditional, It is part of FIDIC RED Book. This is the standard that we are following here. Changing any word in the Form will need Contractural and Legal advice.

The Client will ask for something solid again the down payment that they give the Contractor.

With kind regards,

Samer

Thanks Samer and Andrew for your valuable insights into this topic. Here we’ve a situation where, client is intimidating to invoke the guarantee, in case we don’t extend the same to cover the unapproved time prolonged. We have served a notice of handing over to the client and 28 days have elapsed.

Dear Francis,

You need to send a notice to the client reminding him that the 28 days periods have elapsed. And that the Works indicated in your letter are considered to be handed over.

Please make sure that you have proof that your letter has reached the client 28 days ago.

If your Client representative is also your client, then it would be advisable to communicate with the person who signed the agreement/ Contract with a copy to the Engineer. Inform them that you have completed your works to the best of your knowledge and that the Engineer is not responding. The Engineer will have a Contract with the Client. If the Engineer is not doing his/her job, the Client must know about that.

With kind regards,

Samer

Francis,

I would also alert your lawyers as to what the Employer is thinking.

If the Employer does try to invoke the guarantee incorrectly they will need to act very quickly, (injunction or similar), to stop him so they should be kept up to date with everything.