It is very common in the UK construction industry for a client to require its contractor to provide a guarantee from its parent company, especially where the company entering into the contract has limited assets but is part of a larger group. This requirement is usually included as a term in the contract between the employer and the contractor and it is sometimes a condition of receiving payment under the contract that the parent company guarantee is in place. A parent company guarantee is often a requirement of other high value or long term contracts.
It is usual for the ultimate holding company of the contractor to be asked for the guarantee, but this is not always the case. For example, if there is an intermediate company within a group which has sufficient assets, the client might be willing to accept such a company. Moreover, sometimes this is to the advantage of the beneficiary. For example, if a contracting company incorporated in England is ultimately owned by a US corporation, the client needs to consider whether it may have difficulties in enforcing the guarantee if for any reason the parent company does not pay. The chances are that legal proceedings in the United States might be necessary. So, if in the group that owns the English contracting company, there is an English “parent” that has adequate assets, the guarantee might best be obtained from that English parent.
Our form of guarantee is fairly balanced but, compared with some guarantees requested by clients, its terms are quite constrained and do not impose on the guarantor any excessive obligations. In particular, the guarantor’s liability is no greater than that of the contractor whose obligations are being guaranteed and our wording does not include any indemnity from the parent company in favour of the employer.
Dealing with the specific clauses:
Clause 1 sets out the basic Guarantee obligation.
Clause 2 elaborates on this by stating that if the Contractor commits some breach or fails to perform its obligations, then the Guarantor must either perform its subsidiary’s obligations or pay the Employer the losses costs and expenses it incurs as a result of the Contractor’s breach.
Clause 3 goes on to make it clear that the Guarantor’s liability is no greater than that of the Contractor under the Contract. The Employer cannot recover more from the Guarantor than it could from the Contractor directly. Thus, if there is some limit on liability in the underlying Contract, the Guarantor will have the benefit of this. In addition, if under the Contract a claim by the Employer for £10,000 could be offset by, say, £5,000, which is outstanding from the Employer to the Contractor, the Guarantor can use that argument when being asked to pay under the Guarantee.
Clause 4 makes it clear that any change to the terms of the Contract which may be made without the Guarantor’s knowledge will not relieve the Guarantor of any of its liabilities under this document. This is a fairly standard requirement as, without it, the Guarantor might be able to avoid its obligations under the guarantee by claiming that the contract it is guaranteeing has been changed without its knowledge or consent.
Clause 5 deals with the duration of the Guarantee: we have inserted in italics three possible alternatives: you should select the one you prefer or amend the wording as appropriate. Our alternatives are, firstly, a general statement relating to the Contractor’s obligations; secondly, expiry of the guarantee is tied to practical completion of the Contract; thirdly, it is tied to the end of the defects rectification period. Of these, the third alternative is the most usual in the construction industry.
It is always useful to specify a cut-off point in this clause. Sometimes an Employer will require wording that the Guarantee will remain in place for so long as the Contractor has any liability under the Contract. In such a situation, the Guarantee could remain in place for several years: under English law there is a statutory limitation period – i.e. the period within which a contractor might have a liability for some defect that appears in his work or services. This is usually 6 years from completion of the services and, if the contract is entered into a deed, the period would be 12 years. So, whenever there is a clear termination point in the Contract, it is sensible to refer to it in this clause of the Guarantee, otherwise the parent company might be called on to pay under the guarantee some years after the contract has been completed.
Clause 6 deals with the method of submitting a notice.
Clause 7 makes it clear that the benefit of the Guarantee is not freely assignable by the Employer, but if the Employer assigns the contract to a third party, the Guarantee can also be assigned – the Guarantor would find it difficult to object in such circumstances under our wording.
Clause 8 deals with some UK legislation concerning third party rights and makes it clear that no third party has any rights to claim under the Guarantee.
Clause 9 specifies the governing law and it makes it clear that any dispute will be referred to the English courts. If the contract is not subject to English law, then this clause may need to be adjusted.
It is usual for a Guarantee to be executed as a deed, which requires, in the case of a company, the signature of at least one director plus a witness or two directors or one director and the company secretary. Alternatively, the company seal might be affixed in addition to the signature of a director or the company secretary.