The provision of collateral warranties, bonds and parent company guarantees is a regular occurrence on construction projects.
These can be either standard industry forms such as the JCT suite of collateral warranties, or bespoke contracts.
I can assist with all aspects of drafting and negotiating collateral warranties, bonds and guarantees including: choosing the right type of security, the form of document (e.g. whether standard industry form or bespoke), the risk allocation, the adequate co-ordination between the provisions of the main contract and the draft of the security document etc.
I have a good understanding of what is both necessary and practical in the sector at any given time and I can provide the necessary documentation and accompanying advice to ensure that documentation is realistic and provides the intended protection without being unnecessarily onerous.
There is no one-size-fits all approach, and sometimes a combination of measures may be appropriate to provide performance security under a construction contract .
The larger the contractor you are dealing with, the easier it will be for them to provide security.
The options for smaller contractors are often more limited, because banks are unwilling to afford them the same accommodation as larger, more established companies, and also because they have tighter cashflow constraints.
I offer legal Expertise on:
- Collateral Warranties
- Advance Payment Bonds
- Performance Bonds (on-demand or adjudication bonds)
- Retention Bonds
A collateral warranty is a contract which is collateral to (or sits alongside) an underlying or primary contract.
In construction, a collateral warranty is typically collateral to either a building contract, consultant’s appointment or sub-contract.
The warranty creates a contractual link where there wouldn’t normally be one, thereby enabling a third party, such as a purchaser or tenant, who owns or occupies recently completed buildings, to have a direct contractual relationship with a construction team member.
That third party can then rely upon the undertakings or covenants contained in the collateral warranty in order to bring an action in contract against the warranting party (the warrantor) if there has been a breach.
Most collateral warranties refer to the duties and obligations set out in the underlying contract and the warrantor warrants to the third party that it has performed those duties and obligations in accordance with the underlying contract.
Bonds or guarantees are used on many construction projects in order to provide security to the employer against contractor non-performance.
There are several types of bond including performance bonds, retention bonds and advance payment bonds.
Parent Company Guarantee
A parent company guarantee (PCG) is a guarantee given by one contracting party’s ultimate or intermediate holding company in favour of the other contracting party to secure the performance of that party’s obligations under the contract.
In construction, PCGs are commonly issued by the contractor’s holding company in favour of the employer to guarantee performance of the contract by the latter.
Almost invariably contracts are signed by subsidiary companies. Therefore, on most projects, contractors are required, at tender, to provide a PCG by their parent.
Recourse against the parent is thereby provided if the contractor defaults.
For further information or to discuss a matter, please Contact me.