I recently attended a seminar held by Lewis Silkin LLP on construction security, focusing on bonds and parent company guarantees.
Key points arising from the seminar include:
When taking security
The employer should obtain security early, ideally before work starts. This should include a comprehensive suite of collateral warranties.
All parties should ensure they understand their obligations under the parent company guarantee. For instance, does the parent company guarantee:
- Require the contractor’s performance of the contract?
- Require the guarantor to complete the contractor’s works?
- Provide for a third party to complete the contractor’s works?
When relying on security
Check whether the contractor is in default, as the guarantor will only be liable if he is.
The employer should consider whether the guarantor has to answer for the default of the contractor and has a duty to complete the works before another contractor is appointed.
Other things to remember
Do not inadvertently release the guarantor from its obligations by:
- Renegotiating the scope of works with the contractor or otherwise varying the underlying building contract without first obtaining the guarantor’s consent, if required. Consider whether this would extend to any agreement to make direct payments to sub-contractors.
- Reaching a settlement with the contractor.
- Employing a new contractor when the guarantor has a duty to complete the works.
If the employer is assigning the benefit of the building contract, he must ensure any security is also assigned to the same beneficiary.
On the bright side, if the contractor is still able to provide security, this may be a sign of its solvency.
