Civil Engineering Reference
In-Depth Information
continued solvency of the parent company, offer additional security in the event of
latent defects. A practical advantage of a parent company guarantee is that the guar-
antor will remain liable notwithstanding any changes in ownership or structure of the
contractor (i.e. regardless of whether the guarantor remains the 'parent'), so that the
guarantee will provide the employer with some degree of protection should at some
time in the future the parent dispose of the contractor entity to a less financially sta-
ble group, or should the contractor cease trading or its assets be dissipated, whether
under a corporate reorganization or otherwise.
The obligation to provide a guarantee and/or bond will usually be specified
in tender documents and in turn made a condition of the building contract (see
Sections 23.1.5 and 23.2.2). Delivery of the guarantee or bond in a pre-agreed form
may be a suspensive condition to the building contract coming into effect or to the
first payment being made. Alternatively, the contract may specify that the employer
is entitled to make a specified retention from sums otherwise due until delivery, or
that non-delivery or a substantial change in the financial value of the guarantor will
be deemed a material breach entitling the employer to terminate the contract.
23.1.2 Nature of guarantees
In broad terms, a contract of guarantee is an undertaking by a person to secure the
performance of the obligations of a party under a contract. A guarantee may (subject
to the law of prescription and to any express limitations in the guarantee itself or in
the underlying contract) be unlimited as to time and amount.
A bond will, except in certain circumstances where it is construed as an on demand
bond (see Section 23.1.4), be regarded as a form of guarantee comprising caution-
ary obligations, see
City of Glasgow District Council
v.
Excess Insurance Company Ltd
(1986). In that case, the bond was held to be a guarantee, as opposed to an indem-
nity, and so was subject to the five-year prescriptive period under section 6 of the
Prescription and Limitation (Scotland) Act 1973.
Despite the frequent use of guarantees, few of the institutions responsible for pro-
moting standard forms of construction contract have published standard forms of
guarantee (other than for performance bonds), so it is left to the parties to devise
their own wording. In such an event it is important to ensure that the document in
question clearly states the intention of the parties and creates enforceable obligations.
For example, a 'letter of support' may not be sufficient to create a guarantee, see
Car-
illion Construction
v.
Zelf Hussain and another (the Joint Liquidators of Simon Carves
Limited (in Liquidation))
(2013).
23.1.3 Distinction between cautionary and principal obligations
A distinction may need to be drawn between a guarantee which is an independent
obligation and one which is truly a 'cautionary obligation' and thus accessory to the
principal obligation. The distinction can be important as, in the absence of express
wording, variation of the principal contract may discharge a cautionary obligation.
