Welcome to the new issue of Grow Your Knowledge Newsletter where you get free, ready to use, actionable, clear information regarding FIDIC Contracts and Construction Claims.

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Today at a Glance;

➤   Term of the Week

➤   One Tweet

➤   Performance Securities

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TERM of the WEEK 

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ONE TWEET 

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Happy Thursday.

You should care about performance securities.

Underperformance in a project is a great risk for you.

A risk that you should overcome properly.

But, how?

Using performance securities as powerful risk transfer tools is an option.

You transfer the underperformance risk to the contractor.

It can take many forms, such as;

➤ Performance bonds

➤ Parent company guarantee

➤ Financial institution guarantee

➤ Letter of credit

For a well-functioning security, you should consider the;

➤ Amount

➤ Validity

➤ Form of the security

➤ Country and the entity issuing the security

Additionally and more importantly, you should clearly understand;

➤ The rights and limitations to call on and use it

If you use it properly, it will be a precious tool for covering the costs of rectifying any claimed defects in the Contractor’s work.

Fortunately, 2017 FIDIC Red Book provides an appropriate structure for the performance security process.

Let’s elaborate more.

Step #1:  The Value of the Performance Security

The amount of the Performance Security is stated in the Contract Data and usually specified as a percentage of the Accepted Contract Amount.

1.1 Revising the Amount of the Performance Security

If any cumulative increase or decrease of the Contract Price by more than twenty percent (20%) of the Accepted Contract Amount in accordance with Clause 13 [Variations and Adjustments] arises;

In case of an Increase

The Contractor is to increase the amount of the Performance Security by a percentage equal to the cumulative increase whenever the Employer requests.

In case of a Decrease

With permission of the Employer, the Contractor may decrease the amount of the Performance Security by a percentage equal to the cumulative decrease.

Step #2:  Approval by the Employer

The Employer is to approve various details regarding the Performance Security.

2.1 The Form of the Performance Security

The form of the Performance Security should be approved by the Employer. Performance Security may be;

√     In the form annexed to the Particular Conditions

Annex C: Demand Guarantee

Annex D: Surety Bond

√    In another form agreed by the Employer.

2.2 Issuer of the Performance Security

The Employer is to approve;

√   The Entity

√   The Country

issuing the Performance Security.

Step #3:  Submission of the Performance Security

The Contractor is to submit the Performance Security to the Employer;

√ Within 28 days after receiving the Letter of Acceptance [1].

√ In the amount and currencies stated in the Contract Data.

√ With a copy to the Engineer.

Step #4:  The Employer’s Entitlement to Make a Claim

The Sub-Clause 4.2.2 provides that the Employer is not to make a claim on the Performance Security except in the circumstances listed out at items (a) to (e).

• Failure by the Contractor to extend the Performance Security beyond the expiry date if the Works are not completed at date.

• Failure by the Contractor to pay an amount to the Employer under Sub-Clause 3.7 [Agreement or Determination] [2] or Clause 21 [Disputes and Arbitration], within 42 days after the date of agreement/determination or decision/arbitral award.

• Failure by the Contractor to remedy a default within 42 days of being notified of the defect in accordance with Sub-Clause 15.1 [Notice to Correct].

• When an Employer can terminate the contract under Sub-Clause 15.2 [Termination for Contractor’s Default].

• Failure by the Contractor to repair defective and damaged Plant out of the Site in accordance with Sub-Clause 11.5 [Remedying of Defective Work off Site] and return it by the date of expiry for the relevant duration stated in the Contractor’s Notice.

Step #5:  Receiving any Amount under the Performance Security

The amount received under the Performance Security is to be considered;

In the Final Payment Certificate in accordance with;

Sub-Clause 14.13 [Issue of FPC]

In case of termination of the Contract; in payment due to the Contractor in accordance with;

Sub-Clause 15.4 [Payment after Termination for Contractor’s Default]

Sub-Clause 15.7 [Payment after Termination for Employer’s Convenience]

Sub-Clause 16.4 [Payment after Termination by Contractor]

Sub-Clause 18.5 [Optional Termination]

Sub-Clause 18.6 [Release from Performance under the Law]

Step #6:  Validity of the Performance Security

The Performance Security has to be valid and enforceable until the issue of the Performance Certificate and compliance with Sub-Clause 11.11 [Clearance of Site].

By the date 28 days before the Expiry Date of the Performance Security, if the Contractor is not entitled to receive the Performance Certificate, the validity of the Performance Security is to be extended by the Contractor.

Step #7:  Return of the Performance Security

The Employer shall return the Performance Security to the Contractor [3] :

(a)   Within 21 days after the issue of the Performance Certificate and the Contractor has complied with Sub-Clause 11.11 [Clearance of Site]; or

(b) Promptly after the date of termination if the Contract is terminated in accordance with Sub-Clause 15.5 [Termination for Employer’s Convenience], Sub-Clause 16.2 [Termination by Contractor], Sub-Clause 18.5 [Optional Termination] or Sub-Clause 18.6 [Release form Performance under the Law].

See you next week.

[1] The Contractor is to submit the Performance Security to the Employer within 28 days after both Parties have signed the Contract Agreement in the FIDIC 2017 Silver Book.

[2] Sub-Clause 3.5 [Agreement or Determination] in the FIDIC 2017 Silver Book.

[3] The same Sub-Paragraph letters are used as in Sub-Clause 4.2.3 [Return of the Performance Security] of the 2017 FIDIC Red, Yellow and Silver Books.

 

 

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