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Last edited 29 Sep 2020
Primary obligation bonds are simple or on-demand bonds or demand guarantees, where the bondsman pays an amount of money set out in the bond immediately on demand in writing without any preconditions, including the supplier’s liability. They are generally resisted where possible because of their draconian nature.
Secondary obligation instruments normally comprise guarantees, including parent company guarantees (PCG), or conditional bonds and the bondsman is only liable where a breach of contract has occurred, for example, the contractor is in breach of contract. Contractors are more likely to provide such forms of security than the on-demand variety.
Guarantees must be in writing to be enforceable. However, it is important to recognise that the fact an agreement is described as a bond or guarantee does not necessarily mean that is what it is in legal terms. It is the content of the document that is key and so It is essential that a guarantee is clear and unambiguous.
In construction projects, it is common for there to be variations to the works during the course of a contract. Whilst these are generally permitted by the contract without discharging the guarantor from their liability, if variations are significant, it can be wise to seek consent for the variation from the bondsman.
A guarantee offered to a consumer is a ‘promise’ that problems with a product or service that occur within a specified period of time will be rectified. Typically guarantees are not paid for. A warranty on the other hand (or an ‘extended guarantee’) generally is paid for and is similar to an insurance policy.
Guarantees for domestic work given by suppliers as part of their standard terms and conditions can prove to be meaningless unless they are backed by a third party (such as an insurer), as the supplier can simply cease trading and so evade their liability (particularly where the guarantee is for a long period, or where a potential claim is very large). This is common, for example, with the guarantee of damp-proofing works for 20 years or more.
Parent company guarantees (PCG) can be used to provide protection in the event of default on a contract that is controlled by a parent company (or holding company). Typically, such a default might be caused by the insolvency of the supplier.
Collateral warranties are agreements which are associated with another 'primary' contract. They provide for a duty of care to be extended by one of the contracting parties to a third party who is not party to the original contract.
Retention is a percentage (often 5%) of the amount certified as due to a supplier on an interim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the supplier properly completes the activities required of them under the contract.
Insurance provides third-party protection against risks. Risks on construction projects can be significant, and so insurance is very common, providing protection both for the insured, and for the party to whom the insured has a liability.
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