assignment parent company guarantee

Parent Guaranty

Jump to section, what is a parent guaranty.

A parent guaranty is a legal agreement in which a parent company agrees to be financially responsible for the debt of a subsidiary company. If the subsidiary fails to pay their debt, the lender can pursue repayment from the parent company instead.

Common Sections in Parent Guaranties

Below is a list of common sections included in Parent Guaranties. These sections are linked to the below sample agreement for you to explore.

Parent Guaranty Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.77 3 d284388dex1077.htm FORM OF PARENT GUARANTY , Viewed December 14, 2021, View Source on SEC .

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Bilingual attorney currently employed as a staff attorney for Legal Services of Alabama. Previous legal background includes clerkship with Judge Dorothea Batiste in the field of Domestic Relations. Legal background also includes being an associate at the prestigious firm of Shelnutt & Varner. I performed criminal defense, family, probate, and personal injury services for the firm.

Matthew grew up in Leawood, Kansas. He graduated from the University of Kansas with a Bachelor of Arts degree in Political Science and Communications in 2016 and from the University of Kansas School of Law in 2019 where he received a Business and Commercial Law Certificate. During his time as an undergraduate, he worked at a consulting firm focused on political campaigns and corporate public relations. In May of 2020, he will receive an MBA with a focus on finance from the University of Kansas Business School. Matthew is interested in several practice areas including business and commercial law, arbitration, and civil litigation. In his free time, Matthew enjoys playing basketball, using his virtual reality headset and listening to audiobooks.

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I am a skilled legal researcher and writer with a background in contract drafting and negotiation as well as litigation. I've served as an arbitrator for the past three years and have presided over nearly 400 binding arbitrations for an online dispute resolution platform. Additionally, I am a content writer and editor for the insurance division of LexisNexis. In my role as a contractor for LexisNexis, I research, draft, and edit high-quality legal reference tools on a variety of insurance topics for use by lawyers and insurance industry professionals.

hawuki attended SUNY Binghamton where he graduated with a Bachelor of Science in Marketing and Leadership & Consulting. Shawuki then went on to pursue his Juris Doctorate from Western Michigan University Thomas M. Cooley Law (WMU Cooley). During his time at WMU Cooley, Shawuki served as Justice of Phi Alpha Delta Law Fraternity, International, Vice President of Entertainment of Sports and Entertainment Law Society, and an Associate Editor of the Western Michigan University Thomas M. Cooley Journal of Practical and Clinical Law. At the conclusion of law school, Shawuki graduated with cum laude honors earning a spot on the Honor Roll and Dean's List. Professionally, Shawuki is an attorney/contract advisor and a serial entrepreneur. As the Managing Attorney of The Hilton Law Firm, PLLC, Shawuki has aided over a dozen startups and existing businesses with contractual, regulatory, administrative, and other legal matters. As a Canadian Football League (CFL) Contract Advisor, Shawuki has negotiated multiple player contracts, ensuring just compensation for his clients. Entrepreneurially, Shawuki is an owner of multiple businesses and has a wealth of business experience. Shawuki is a member of the Florida and District of Columbia Bar, Phi Alpha Delta Law Fraternity, International, Phi Delta Phi Legal Honor Society, and was recently named to the National Black Lawyers Top 40 under 40 list Florida.

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Performance bonds and parent company guarantees

• Author Derryn Rolfe

Performance bonds and/or PCGs are often required of the contractor in building and engineering projects as a means of securing the purchaser’s position, and limiting their losses, in the event of the contractor’s default. But what’s the difference?

A performance bond is an insurance policy. The contractor takes out the policy with the bondsman – either their own bank or an insurance company – that will, subject to the provisions of the bond, pay to the purchaser a sum of money to offset its losses. The wording of performance bonds varies dramatically, with certain phases being key to how easy it is for the purchaser to call upon it. Over the last 20 years the market has hardened considerably, in common with most insurances, so that the classic “on demand” bond is now rarely available. This type, as the name suggests, means that the purchaser simply must demand payment from the bondsman: clearly a high risk for the bondsman, and the reason why most bonds now require the purchaser’s losses to be proven one way or another. Exactly what level of proof is required is the point of debate between those giving and those receiving the bond. The normal wording now is “established and ascertained”, which is based on the procedures and mechanisms of the underlying contract.

Similarly important is the co-existence of liability with the contractor and the bondsman; the Association of British Insurers (ABI) commonly-used model form of bond doesn’t include this, but the purchaser may well want to do so to avoid the necessity of pursuing the contractor for its losses as a condition precedent to going after the bondsman. The contractor, on the other hand, would wish to avoid this as a co-obligor clause may make the bond more difficult – or expensive – to obtain.

Assignment clauses are another point of negotiation, and whether the ability of the purchaser to assign the bond without the prior consent of the guarantor and contractor is important usually depends on whether or not there is an external funder for the project. A funder will always want the bond to be assignable and will often hold an executed but undated deed if assignment in escrow as part of its security package.

The ability of the purchaser to call in the bond upon the insolvency of the contractor is usually key: it is, sadly, the most common reason for needing to do so. There is still debate about the effect of a 1994 case called Perar BV v General Surety and Guarantee Co Ltd in which the Court of Appeal confirmed that insolvency is not necessarily a breach of a building contract and therefore not covered by the bond. Standard and model form contracts so usually include insolvency as a breach of the contract, but there is still a debate about the timelines of making a claim under a JCT in particular, so it is worth ensuring that it is explicitly covered.

But regardless of the details of the drafting, the point of a performance bond is to provide cash; a parent company guarantee, however, could instead (or, indeed, also) be used to require the contractor’s parent company to step in and compete the performance of the contractor’s obligations in the event of their default.

PCGs rise and fall in popularity and use, although the first requirement is, of course, that the contractor has a parent company. If it does, it is normal for the guarantee to be from the ultimate parent company, as complicated corporate structures could mean that the purchaser is holding a guarantee from a shell company with no assets. Some contractors prefer a PCG because it doesn’t affect their credit rating in the same way as a performance bond and can come at zero cost. It does sit as a liability on the books of the parent company, though, so company policy may mean that PCGs are not always free. As with performance bonds, the detail of the drafting is key to the ease with which the purchaser can get recompense. Many of the same issues apply as with bonds, but whereas bonds tend to be for a percentage of the contract sum PCGs tend to be for the entirety of it. The most important provision for the purchaser is to ensure that the guarantor cannot act against the contractor for its own losses whilst the guarantor’s liabilities to the purchaser are unsatisfied.

So which is best? Neither: they both have their place. If the purchaser definitely wants the project completed with single-point design or workmanship liability, or if time for completion is the critical issue, then a PCG is the only option. If they want cash, then a bond is probably the answer – an independent bond is safer than one from a parent company which may also go into insolvency. Asking for both is, except for major projects, probably overkill.

If you have any questions on Performance bonds or parent company guarantees, our Construction and Engineering team will be happy to help. Please get in touch for further information

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Home / Construction / Contract Management / Parent Company Guarantee

Parent Company Guarantee   (B149)

Who can use this contract.

This parent company guarantee is for use where a company entering into a contract is required by its client to provide a guarantee of performance from its parent company.

What is this contract for?

The main aim of a parent company guarantee is to give the client some security.  If the client’s contractor fails to perform or becomes insolvent, the client has can claim under the parent company guarantee.  The parent company then either to perform the contract or pay the losses incurred by the client as a result of the subsidiary’s default.

What are the main issues?

While fairly balanced, this document is drafted from the parent company’s perspective and the wording makes it clear that the parent company’s liability only arises if its subsidiary commits a breach of its contract and fails to rectify the breach.

The liability of the parent is limited so that it will be no greater than that of the subsidiary under its contract with the client.

You can use this document if you are a company acting as guarantor for a subsidiary’s contracts, and want clarity on the terms of your guarantee agreement.

What detailed terms does the contract contain?

The main points cover:

• notice of liability
• notices between parties
• third party rights
• governing law

For more information on each of these sections, see our Explanatory Notes  which you will  receive when you download the document from our website.

For information on signing documents see our Contract Signing page

When I download the document, can I change it and/or use it more than once?

Yes, all ContractStore’s templates are in MS Word and you can use the contract on more than one project. For more information, watch the video on this page of our website or see our FAQs

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Contract Author – Giles Dixon

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Building Blocks: What is a parent company guarantee?

What is a parent company guarantee? If you want to know more read on.

A parent company guarantee (“PCG”) is a guarantee given by a party’s parent company to the other party to the contract. It is a form of undertaking by the parent company to answer for one of the group company’s liabilities under the main contract.

In this blog post, we take a look at PCGs in a construction context.

PCGs are a type of performance security, they are used by parties to a contract as a means of protection against non-performance by the other.

In a construction context, where the main contract is an agreement between an Employer and a Contractor, there are two types of PCGs:

• PCG from the Contractor's parent company

A PCG from the Contractor’s parent (or ultimate holding company) protecting the Employer against any default by the Contractor.

If the Contractor defaults (usually because of failure to complete the works due to insolvency), the Employer is able to call upon the Contractor’s parent to remedy the breach so that the Contractor’s obligations under the contract are met. Typically, this is either arranging for the works to be completed, or the payment of monies to enable the Employer to appoint another contractor to complete the works.

PCGs are often required by Employers where there is doubt about the Contractor’s solvency, and where the contractor is part of a financially stable group.

Finally, it is worth noting that there is no industry standard form PCG. It is for the parties to appropriately record when a PCG may be relied on, and what the parent company may be required to do.

2. PCG from Employer's parent company

These are known as “payment guarantees” – the Employer’s parent will only be guaranteeing the employer’s payment obligations under the main contract.

In practice, payment guarantees are rare on UK projects.

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Parent company guarantees

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.

When would a PCG be used?

In construction, parent companies most commonly give guarantees to bolster the financial credibility of their subsidiary companies. If one of its subsidiaries has entered into a commercial contract with a third party, that third party may want to ensure the performance of the contract and will look to other companies within the same group to give a financial or performance guarantee in respect of those obligations. It gives an extra level of comfort in respect of the obligations which that subsidiary company has undertaken to perform. See Practice Note: Parent company guarantees (PCGs) in construction .

PCGs are commonly used by employers to give them protection in the event of contractor default. This protection will cover the employer if the contractor breaches the building or engineering contract or, in most circumstances, upon the contractor's insolvency. In construction, PCGs are commonly issued by the

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Parent Company Guarantees

Dean Suttling

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• parent-company-guarantees

Suppose you have concerns about a company you may be entering into a contract with; perhaps it’s their ability to fund the project or the size of their workforce in a new region. How can you manage this risk if they are part of a larger group of companies?

You could explore a Parent Company Guarantee (PCG) to provide you with additional security. PCG terms are variable unless a standard form is used, but, in many cases, these are varied to suit the client’s needs. Understanding the obligations of a PCG and how parties seek to limit these obligations will allow you to navigate through the terms and reach an agreement that is reasonable and matches your requirements in the event a PCG needs to be called upon.

What are they used for / what is the purpose?

A PCG is a legally binding commitment from a parent company. The parent guarantees that the performance of the party the client contracted with will meet their contractual obligations. The responsibilities are often back-to-back, i.e., the parent company carries no greater or wider obligations than those placed on the contractor but can at times be greater.

Range of liability

Liability for the parent company will need to be backed against an obligation in the main contract; therefore, the PCG provides a secondary liability or contingency for the employer to call upon. Unlike on-demand performance bonds, where the client can contact the issuer and trigger payment on demand through the unilateral presentation of documents, under a PCG, liability must be established first, usually by acknowledgement between the parties that a breach has occurred. The PCG can be invoked only once ascertained under the contract, and the parent company steps in to meet the contractors’ obligations.

Standard wording or amendment?

For PCGs to be legally enforceable, they must comply with the Statute of Frauds Act. Therefore, they must contain an offer, acceptance, consideration, and the intent for the parties to create a legally binding agreement.

In terms of standard forms, there is the ABI Model Form of Guarantee . First published in 1995, the Association of British Insurers (ABI) issued its first common form of a guarantee bond, but it is based on performance instead of being on-demand. By reference to the above, the breach will need to be established first before the guarantor can be held against their obligation to discharge their duties to cover the costs of such a breach. The wording in the bond around guarantees includes the following:

“The Guarantor guarantees to the Employer that in the event of a breach of the Contract by the Contractor the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the damages sustained by the Employer as established and ascertained pursuant to and in accordance with the provisions of or by reference to the Contract and taking into account all sums due or to become due to the Contractor.”

Be wary of non-standard versions or standard versions that have been amended as the obligations may be more significant. For example, a guarantee is the parent company’s promise to ensure an obligation is performed, whereas indemnity is provided to ensure the obligation is fulfilled. However, the critical difference is that where PCGs end when the contract is terminated or deemed invalid, an indemnity survives such actions, making the liability for an indemnity over a PCG greater.

In terms of amended PCGs, it is common practice to see hybrid versions. The employer seeks to create both a guarantee and an indemnity, and in these cases, caution should be applied and a thorough review undertaken.

What about if the works vary?

As noted above, PCGs and the obligations placed on the parent company are all based on the underlying contract. If the PCG is called upon, the parent company may argue that the works have varied and are do not represent the same project or obligations they originally entered. In this instance, the PCG could be void.

The way around this is to ensure the terms in the PCG cover this point off by allowing the variation of the works and such variation to be extended into the obligation coverage of the PCG. Wording such as “the PCG is deemed to include and expressly allow for amendments, variations, and instructions under the header contract without affecting the PCG” are commonplace to mitigate this risk.

Notification of Breach

When reviewing the PCG, make sure there is a notification procedure that includes the address the notice is to be sent, the format it should be notified, and most importantly, the particulars you are to report.

In legal terms serving a valid notice is imperative if your claim is accepted and therefore recognised. You do not want to find yourself in the position where a deadline passes between the alleged breach and serving of the notice.

When do the parties get paid?

Payment is not always a one solution answer. The terms of the PCG might read that payment is due upon the breach being established, which would operate on similar terms to an on-demand bond. Alternatively, payment through a PCG is conditional on the terms of the underlying header contract being met. After the breach has occurred, the parties will need to address the situation, calculate, and then demonstrate loss before recovering the losses under the terms of the PCG.

Notwithstanding the above, the issuer of the PCG, if they can operate under the same terms of the underlying contract, will have the same right to challenge the breach and who is responsible, should the incident in question be ambiguous.

What periods do they cover?

What party you represent will determine the end date included in the PCG. For a contractor, your preferred position will be practical completion on the basis completion has been awarded, and therefore from this perspective, the obligations are complete.

However, from an employer’s perspective, the end of the defect’s liability period will be the point that you will acknowledge the obligations have been met, save for any latent defects that might be found post-completion and defects certificate being issued. Therefore this is the date you will be seeking in the PCG.

Checking the parent company’s financial standing

If a PCG is offered, it goes without saying you need to investigate the company and review its finances objectively. If the guarantee needs to be called upon, you do not want to find the company has no assets and in the event of your breach notice decides to wind itself up, the PCG is in effect worthless.

Doing your due diligence is critical if you genuinely back off the liability you think you are.

An interesting case from 2019 concerning PCGs occurred between Rubicon Vantage International Pte Ltd and Krisenergy Ltd. Rubicon commissioned an FSO facility (floating storage and offloading facility) to Kris Energy (Gulf of Thailand) Ltd (“Kegot”). The latter was a subsidiary company of Krisenergy.

The terms of entering the contract were that Kegot was required to procure a PCG from their parent company, Krisenergy. In terms of the PCG, no standard form was used.

In 2015, Rubicon issued invoices to Kegot for $1.8m, claiming the costs were for works on the FSO facility before delivery. Kegot disputed the invoices and the liability to pay them. What ensued was legal wrangling for three years before Rubicon then served a notice against the parent company for the total amount. Krisenergy did not pay presumably as they also disagreed on the liability. What followed was a second demand being issued against the PCG for the same amount plus interest.

The payment dispute centred on the terms of the guarantee, specifically whether it was on-demand or conditional. The interpretation of the clauses referred to in regards to this. Krisenergy believed that as a bank or financial institution did not issue the bond, the on-demand part was not applicable.

The ruling was that it was accepted by both parties the guarantee was in fact, or at least in part, an on-demand guarantee and taking a ruling from a previous case (Marubeni Hong Kong v Mongolian Government [2005]), it was considered, upon a review of the terms of the guarantee, that if the amounts were not in dispute then Krisenergy would be liable to pay the sum demanded within 48 hours of notification but notwithstanding this, if the amounts claimed were in dispute then it was still responsible for paying the amount demanded but up to a cap of $3m.

There were alternative arguments regarding the serving of notices being enforceable. Even though notices were served correctly but disputed, the responsibility to pay was acknowledged but the amount claimed (quantum) was in dispute. However, these were rejected by the court presumably because the terms, once interpreted by the court, were not subject to these points and the amount demanded was therefore payable.

Alternatives

Alternatives to PCGs include performance bonds which can be on-demand or conditional. Conditional bonds are broadly similar in establishing that the contractor has not performed or met the obligations under the contract, following which loss must be considered once proven.

On-demand bonds, however, are as they say, on-demand. The employer can notify the issuer that a breach has occurred, there are little to no preconditions to meet, and they can trigger the value of the bond to be paid out. These are less common in the UK construction industry, and if you can source one, they are likely to be prohibitively expensive versus the likelihood that you will need to call upon it and therefore, PCGs provide a low-cost solution to reduce project risks.

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About Dean Suttling

A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.

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Does your guarantee do what you think it does? Plan ahead with our checklists

Readers of our insight Top Five Considerations for Every Guarantee will have seen that planning guarantee provisions before drafting can bring both cost and time benefits . However, in the heat of a transaction, parties may turn their focus to the main deal documents (e.g. sale, development or loan agreements) which carries the risk that equal emphasis isn't given to the content of guarantees.

Ultimately, if a transaction goes sour and as many court cases have shown, that lack of emphasis can lead to litigation and potentially, parties either being unable to recover under a guarantee, or discovering that their liability under one was far greater than expected.

If you want to be certain that you can rely on a guarantee, it's crucial to understand what that guarantee says and allows you to do before it is signed. And if you are the guarantor, understanding what liability could come your way and when, is crucial to avoid any nasty shocks in the future.

So how can you go about ensuring that a guarantee covers what you expect? One way is to consider some key commercial questions at an early stage, so that the correct terms can be drafted into the document. Heads of terms are usually considered for key documents and given the importance of guarantees, it makes commercial sense to consider a similar approach for them too.

To assist, we have produced two checklists. One for guarantee beneficiaries and one for guarantors. These provide many of the key considerations in a parent guarantee type situation and are also useful in other scenarios, as many of these considerations are common across different types of guarantee.

Whilst no checklist can be completely exhaustive, we hope that you find these useful. However, if you are unsure how to approach a guarantee, please contact one of our experts who would be happy to assist.

Part A: Guarantee checklist - Beneficiary

This checklist considers some of the key areas to consider when approaching a parent company guarantee from the guarantee beneficiary's perspective. References to 'Principal Debtor' mean the person/entity whose obligations are to be guaranteed.

Considerations

Which obligations do you need guaranteed?

Payment obligations only?

Performance obligations only?

Payment and performance obligations?

Under single contract or multiple contracts?

Will it include any amendments to those obligations/contracts?

Do you want an indemnity in the event that the underlying Principal Debtor obligations become invalid, illegal or unenforceable and you sustain loss as a result?

In what circumstances do you want to be able to call on the guarantee?

Payment default by the Principal Debtor?

Any default by the Principal Debtor?

Do you want to be able to claim under the guarantee if the Principal Debtor hasn't defaulted first?

Will the guarantee have a liability cap?

If yes, what amount?

When are you willing to release liability under the guarantee?

Upon the occurrence of a specific contractual trigger(s)?

Only when you are satisfied that all Principal Debtor obligations have been performed/liabilities have been paid?

Will the guarantee have a longstop date?

When do you want to be able to make demand under the guarantee?

• At any time; or
• Following actual default by the Principal Debtor?

What evidence will you produce to make a demand?

Copy of the demand made on the Principal Debtor?

Other confirmation?

Are there any other liabilities that you currently/may in the future owe to the Guarantor?

If yes, do you want to restrict the ability of the Guarantor to be able to set-off those amounts against amounts owed to you under the guarantee?

Is there any risk of any amounts due under the guarantee being reduced/withheld due to withholding tax or other tax reasons? [1]

If yes, do you require appropriate tax language to ensure that amounts are grossed-up/paid in full?

Are there any cross-jurisdictional considerations?

If yes, do you need a currency indemnity [2] ?

How do you wish to be able to serve notice (post, courier, e-mail, fax?) [3]

Do you need the benefit of the guarantee to be assignable?

Governing law

What law will govern the guarantee?

Where is the guarantor based?

In which jurisdictions do you need to be able to bring proceedings? [4]

If the guarantor is based outside of England & Wales, do you require a legal opinion? [5]

If the guarantee is governed by laws other than English law, do you require a legal opinion?

Part B: Guarantee checklist - Guarantor

This checklist considers some of the key areas to consider when approaching a parent company guarantee from the Guarantor's perspective. References to 'Principal Debtor' mean the person/entity whose obligations are to be guaranteed.

What obligations are you willing to guarantee?

Are you willing to indemnify the guarantee beneficiary for loss it sustains if the underlying Principal Debtor obligations become invalid, illegal or unenforceable?

In what circumstances do you want the guarantee beneficiary to be able to call on the guarantee?

Do you want the guarantee beneficiary to be able to claim under the guarantee if the Principal Debtor hasn't defaulted first?

When do you want your liability under the guarantee to be released?

Automatically on the occurrence of specific contractual trigger(s)?

When do you want the guarantee beneficiary to be able to make demand under the guarantee?

What evidence do you need the guarantee beneficiary to produce to make a valid demand?

Can an amount be claimed if it is disputed under the Principal Debtor contract?

Are there any other liabilities that you currently/may in the future may be owed by the guarantee beneficiary?

If yes, do you want to be able to be able to set-off amounts owed by you under the guarantee against those amounts?

If any amounts due under the guarantee have to be reduced/withheld by you due to withholding tax or other tax reasons, do you want to be liable for gross-up of those? [6]

If yes, are you willing to provide a currency indemnity [7] ?

How do you require notice/demands to be served under the guarantee (post, courier, e-mail, fax?) [8]

Can the benefit of the guarantee be assigned by the guarantee beneficiary?

What will the governing law of the guarantee be?

Where can proceedings be brought? [9]

[ 1 ] If you are unsure, you should consider taking appropriate professional advice. [ 2 ] Currency indemnities are often included where amounts, claims and awards in relation to agreements may need to be made in different currencies. [ 3 ] Where parties are based in different jurisdictions, notice provisions will need to work in each jurisdiction. [ 4 ] Consider whether you need the flexibility to bring proceedings in different jurisdictions. [ 5 ] Obtaining a legal opinion may provide you with day one comfort that the guarantor has the capacity to enter into the guarantee and/or that a judgment obtained in relation to the guarantee will be enforceable in the guarantor's jurisdiction. [ 6 ] If you are unsure of your tax position, you should consider taking appropriate professional tax advice. [ 7 ] Currency indemnities are often included where amounts, claims and awards in relation to agreements may need to be made in different currencies. [ 8 ] Where parties are based in different jurisdictions, appropriate notice provisions should be considered. [ 9 ] Bear in mind that the cost/complexity of defending proceedings in different jurisdictions may vary.

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Parent company guarantee from contractor's parent company

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What’s the (parent company) guarantee?

• Using your device

Parent company guarantees (PCGs) are often used in relation to construction project to bolster the financial reliability of a building contractor. With contractor insolvencies continuing to make the headlines and reports from KPMG that construction industry insolvencies are rising at a quicker rate than other UK industries, it seems a good time to question the value that PCGs can bring to projects, and look more closely at the protections they can offer. 

Guarantee vs indemnity

Understood in its purest sense, a PCG is a contractual promise to ensure the guaranteed party performs their obligations under a contract. A guarantee is a contractual arrangement that creates a secondary obligation to ensure fulfilment of a primary obligation. The guarantor’s obligations are contingent and dependant on the underlying contract. So returning to a construction scenario where a guarantee is given in respect of building contractor, the guarantor will have no greater liabilities than those of the building contractor in the building contract. Furthermore, the guarantee will end if the underlying building contract is terminated, becomes invalid or ends. 

A guarantee is different to an indemnity. An indemnity creates a primary obligation to ensure the fulfilment of an obligation given by one party to another. An indemnity is independent of the underlying contract and, therefore, generally survives the termination, invalidity or ending of the underlying contract. 

Developers often seek to ensure PCGs are on terms that offer something more than a pure guarantee and seek to create both a guarantee and indemnity from the guarantor. Contractors, on the other hand, will look to ensure the drafting confines the obligations of the parent company to those of a pure guarantor. Recent experience reveals some nervousness in the market from contractors, which has resulted in a shift away from the availability of parent company indemnities for a large number of projects.

Against this background, it is important to be aware of the issues that can arise in enforcement of pure guarantees and ensure that care is taken to ensure PCGs offer the protection and value intended by the parties. With this in mind, here are our top five issues to consider.  

1. Cover off the formalities

Guarantees are contracts and, therefore, must contain all the necessary components of a contract – namely offer, acceptance, consideration and intent to create legal relations. In a construction scenario, the parent company guarantor will rarely be entitled to any payment or direct benefit under the building contract, such that there is a valid argument that a parent company cannot give good consideration in respect of any guarantee it may offer. To overcome this difficulty, ensure a PCGs is executed as a deed, since deeds, unlike simple contracts, do not require the exchange of consideration to be enforceable. 

Section 4 of the Statue of Frauds 1677 requires guarantees to be in writing and signed by the guarantor or a person authorised by the guarantor. It is interesting to note that the courts have taken a progressive view as to what constitutes in writing and signature by the guarantor, such that an exchange of emails may well suffice ( Golden Ocean Group Ltd -v- Salgaocar Mining Industries PVT Ltd and another [2012] EWCA Civ 265). However, to be on the safe side, and to avoid costly and unnecessary disagreement, it is recommended that all the terms of a guarantee should be set out in a printed signed document. 

2. Check the capacity of the parent company

The company/organisation giving the PCG needs to have the requisite capacity to offer the guarantee or else the provisions of the contract will not come into effect and the guarantee will be void and unenforceable. Whether an organisation has capacity to give a guarantee depends on the terms of its constitution. For most limited trading companies, the giving of guarantees will be sufficiently ancillary to their core purpose, such that the issue of capacity will not arise. However, it is always worth double-checking an organisation’s constitution, especially if you believe provision of a guarantee is not ancillary to the core purposes of that organisation. This scenario may arise where the organisation giving the guarantee is not a limited company, is based outside of the jurisdiction, or is a not for profit/charitable organisation. 

3. Get the scope right

As with all contracts, there is considerable flexibility in the scope and application of any guarantee. In the construction industry, guarantees are commonly understood to cover losses in the event of a default or breach by the contractor. But that begs the question, what failures will amount to a contractor default, and will that always trigger an entitlement to call on the PCG? For example under clause 8.4 JCT Design and Build 2016, the employer can give the contractor a notice of default and if the contractor continues the default for 14 days from receipt of the notice, the employer may give a further notice to terminate the contract on or within 21 days of the expiry of the 14-day period. At what point, therefore, does the guarantor become liable for the default of the contractor? Is it at the point the default occurs, following receipt of the employer’s notice, at expiry of the 14-day period, or following receipt of a termination notice by the employer? The answer to this will not be clear unless the position is agreed and set out in the provisions of the PCG. 

As previously indicated, the rule of thumb is that the guarantor’s liability is the same and no greater than the liability of the guaranteed party under the underlying contract. Consequently, the guarantor will generally be able to rely on any defences, including any counter claims available to the building contractor in the underlying contract. While this is arguably fair and reasonable, it can create some difficulties in enforcement of the guarantee, especially if the employer or guarantor disagreed over the validity of the defences or counterclaims raised. Therefore, depending on your perspective, it may be prudent to contractually exclude or limit the ability of the guarantor to raise defences or counterclaims and/or to postpone the guarantor’s rights to raise such claims until after the guarantor has discharged its obligations under the PCG. But take care and, if necessary, obtain legal advice to ensure the provisions do not fall foul of the Unfair Contract Terms Act 1977.

4. Insolvency is not a breach of contract

The JCT Design and Build 2016 entitles the employer to terminate the building contract and recover for certain losses in the event the contractor goes insolvent. Insolvency is not, therefore, a breach of contract and as such express provisions needs to be included in the PCG to ensure the guarantor is obligated to guarantee the losses which an employer may sustain in these circumstances 

5. Understand how the PCG can be enforced

Given a guarantor’s liability under a guarantee is contingent on the underlying contract, any changes to that underlying contact can have the effect of releasing the guarantor from their obligations. This is particularly important in construction contracts, in which variations and instructions under the building contract are commonplace. Make the intent of the parties clear in the PCG, by ensuring it expressly allows for amendments, variations and instructions under the building contract without affecting the enforceability of the guarantee. 

Perhaps surprisingly, a guarantor is not necessarily liable to pay an amount awarded against a contractor by any judge or arbitrator ( Re Kitchin [1881] 17 ChD 668) and The Vasso [1979] 2Lloyd’s Rep 412) unless the guarantor is a party to those proceedings. The concern of the courts is that in circumstances where the guarantor is not party to proceedings, the contractor might neglect to defend or represent the guarantor’s interests properly or make admissions to which the guarantor does not agree to be bound. In Beck Interiors Limited -v- Dr Mario Luca Russo [2009] EWHC B32, the court confirmed the principle extended to adjudication decisions. 

This raises certain legal, practical and financial considerations for any person looking to enforce a PCG, since making a guarantor party to any proceedings before a PCG can be enforced is likely to increase the cost and complexity of those proceedings and, in the case of adjudication, may well not be possible in any event. These practical and procedural difficulties can be overcome by ensuring the PCG contains an express provision whereby the guarantor agrees to be bound, by any adjudication, arbitration or court decision, notwithstanding that it may not have been a party to the proceedings. Alternatively, the PCG could provide a conclusive evidence or ‘pay now, argue later’ clause which would require the guarantor to pay over sums in certain specified circumstances, subject to a right to disprove those sums are in fact owed. However, be aware the inclusion of these provisions is likely to be controversial, and care must be taken to ensure the enforceability of these clauses. As ever, if in doubt take legal advice.  

While the overall value of PCGs is perhaps more complex and limited than their name might suggest, their value should not be discounted. Guarantees are flexible tools that can accommodate the relative bargaining power and risks of the parties in any building transaction. As such, their value lies within the detail of the drafting and a good understanding of the circumstances and methods by which they can be called on.  

• Construction law

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