Bonds, Warranties, PGC, 3rd Party Flashcards
What is a PGC?
- A Parent Company Guarantee
- A form of security to protect the client/employer from contractor defaulting.
- Parent company can step in should the original contractor default.
- Useful where small contractor part of a large financially stable group of companies
In what circumstance might a PGC be needed?
Where a small company is part of a large group of companies and there are concerns that the small company may default on their obligations under the contract.
The parent company would have to remedy or cover any loss or expense incurred to meet all the Contractor’s obligations.
What are Third Party Rights?
- Contracts (Rights of Third Parties) Act 1999
- Act allows parties to enforce terms of contract that they are not party to.
- Gives parties access to various remedies if contract terms are breached.
- An example could be between the Employer, Contractor and the contractor’s Design Consultant.
Advantages of Third-Party Rights
Time and Cost
Certainty
Sub-Contractors
Dis-advantages of Third-Party Rights
Lack of flexibility
Need to be careful drafting
When might third party rights be used instead of collateral warranties?
If a lot of collateral warranties are required and it involves a lot of administration and cost.
Third party rights are easy to get in place because no document is required.
What is a Warranty/Collateral Warranty?
- Contractual agreement which runs alongside another agreement.
- Gives the employer a direct link to any sub-contractors used. The Employer/client can by-pass the Contractor.
- Helps if a Contractor goes insolvent or employment is terminated.
Are there any alternatives to the collateral warranty?
Alternative to the collateral warranty is the Contract (Rights of Third Parties) Act 1999.
This allows the parties to obtain the benefits from contracts which are entered into by others.
Can you provide a working example of how a collateral warranty could be used
If the employer places a contract with a contractor, the contractor then places several subcontracts with suppliers who do the works. The employer only has a contractual relationship with the contractor.
A collateral warranty would give a direct contractual relationship with the suppliers so it can enforce obligations that the sub-contract owes. the employer could then instruct the Supplier to carry out works if the Contractor went insolvent.
What are three ways that benefits can be transfered under a building contract?
- Collateral Warranties
- Third Party Rights
- Assignment
What are the different types of bond?
- Performance Bond
- Retention Bond
- Off-Site Materials bond
- Advanced Payment bond
- Tender Bond
What is a Performance Bond?
o Security provided by contractor to developer
o Insurance company makes payment to developer where contractor has defaulted.
o Used when: Employer wants to protect commercial exposure, recession coming, contractor is new or un-approved.
o Value of a performance bond typically 10% of contract sum.
o Alternative to a performance bond is a PCG.
What is a Tender Bond?
A guarantee (typically a bank guarantee), for a specified price or a specified percentage of the tender price, issued on behalf of a seller to guarantee that the seller will not withdraw his bid from the tendering process before a binding contract is concluded
What is a Off-Site Materials bond?
a Bond in respect of Off-Site Materials and/or Goods and is requested by an Employer to cover their exposure should materials not be delivered to site as agreed in the Contract.
What is a Retention Bond?
- Retention bonds are way of avoiding problems associated with retention recovery.
- Amounts that would otherwise have been held as retention are instead paid, with a bond being provided to secure the amount.
- Only if practical completion is not achieved by the subcontractor or if they prevent a certificate of making good defects from being issued will the retention bond take effect. The contractor is then able to ‘call’ on the retention bond.
