Parent company guarantee PCG

A parent company is a company that controls another ‘subsidiary’ company. Subsidiaries can be created by acquisition, or by spin-off from the parent company.

A parent company guarantee (PCG) is a form of security that may be required by clients to protect them in the event of default on a contract by a contractor that is controlled by a parent company (or holding company). Typically, such a default might be caused by the insolvency of the contractor.

Parent company guarantees can be particularly useful where a small contractor is part of a large, financially stable group of companies. The guarantee is given by the parent company to the client, and in the event that the contractor defaults on their obligations, the parent company is required to remedy the breach, meeting all the contractor’s obligations under the contract (and/or covering loss and expense incurred by the client).

This has the benefit of a continuing obligation to complete the project, and liability for latent defects for up to 12 years following completion, but there is some risk to the guarantee depending on the financial state of the parent company, for example if the contractor is unable to perform their obligations because the entire group has become insolvent.

There is no industry-standard form for parent company guarantees, so the parties should take care to ensure that the wording adopted properly reflects their specific requirements. Parent companies should ensure that they have the same rights, obligations and limitations under the guarantee as the contractor has under the main contract.

The guarantee should also make clear the precise nature of the guarantee and whether there is a cap, the conditions under which a claim can be made, to what extend the main contract can be varied without affecting the guarantee, whether and under what circumstances it can be assigned to a third party and the requirement for the provision of notices.

Parent company guarantees may also be required by contractors from the parent companies of sub-contractors.

Performance bonds are commonly-used alternatives to parent company guarantees. Performance bonds tend to be issued either by an insurance company or by a bank and can be 'on demand' or 'conditional', with conditional bonds requiring that the client provides evidence that the contractor has not performed their obligations under the contract and that they have suffered a loss as a consequence. Bonds may be more secure than parent company guarantees, but they are likely to have a limited duration and do not provide for completion of the contract, only for recovery of losses up to a certain value. See performance bond for more information.

On-demand bonds are primary obligation bonds, where the bondsman pays an amount of money set out in the bond immediately on demand in writing, without any preconditions. Parent company guarantees are generally secondary obligation instruments where the guarantor is only liable where a breach of contract has occurred. See Bonds v guarantees for more information.

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