STANDARDS AND PITFALLS IN ADMINISTRATING PERFORMANCE GUARANTEES IN CONSTRUCTION CONTRACTS

Abstract

Performance guarantees are used to protect project owners against the contractor’s weak performance. Various international forms of general conditions, such as FIDIC and others, necessitate the use of this financial instrument in every construction contract. However, when circumstances lead employers to call on the performance guarantee, ambiguity prevails around the legal principles, as well as the contractual procedures to be followed when using this form of security.

Furthermore, employers’ entitlement to receive money under the guarantee is not well defined, and the limitations of contractors’ non-performance are not clearly specified especially in the case of first demand performance guarantee.

In addition to this, different interpretations may rise between parties due to a possible lack in drafting the performance guarantee itself, or due to a contradiction in the terms and conditions of guarantee.

This thesis sets out a reference containing a comprehensive overview and recommendations to be considered by contracts’ practitioners while dealing with performance guarantees, assisting them in avoiding potential pitfalls.

This is achieved first by understanding the available information provided in literature review, standard forms of conditions, and laws concerning the performance guarantee. We also address the language and different wording used in drafting the letter of guarantees. Finally, we investigate real-life situations where the performance guarantee is called by the beneficiary.

Major findings show that agreement between parties on the terms of use of guarantee is of significant importance in the early stages of contract negotiation. Moreover, attention to country laws, and consistent guarantee terms, are critical while drafting a new performance guarantee.