Construction Law/Return of seized bank guarantee
QUESTION: Dear Sir,
I am chief construction supervision Engineer and working as a representative of project manager. It is ADB funded project and is being implemented in Middle East. The contract was signed in accordance with the FIDIC and ADB guidelines.
I have one problem regarding the continuing the construction work under the liquidated damage provision.
According to the contract, the Contractor has agreed to submit bank guarantee for performance and Advance payment till end of the next month of the contract completion date. As usual, it was done in preliminary stage. The contractor could not complete the whole works within the intended completion date and requested for the time extension under the different logics. The engineer agreed on the logic and recommended for time extension. The employer has approved it and made first time extension after getting the concurrence from the ADB. When the time extension was signed, contractor had submitted the bank guarantee along with the validity period till the extended completion date only. Due to complexity in the extension work within the country, employer had accepted it and granted the time extension.
Now the problem is that the contractor could not complete the whole work within the extended completion date and there are no any reasons to provide another time extension. The contractor was informed several times verbally and in writing about the consequence of non completion of the contract work within the extended time period. But the contractor could not able to proceed as the instruction of the engineer and not acted as Minutes of meeting signed among three parties (eg representative of Employer, Engineer and Contactor). When the extended period was about the completion, the employer requested to concerned bank that provided the guarantee before the weekly holidays to seize both bank guarantees.
Now the contractor is arguing to provide permission to complete the work under the clause of liquidated damages. Is it possible to allow him? I guess it is possible because employer has already seized the banks guarantee. Now the guarantee money in cash are belonged to the Employer and he has no risk losing anything if contractor will not complete the works within the limit of Liquidated damage period.
If we can allow contractor to continue and complete the whole works within the liquidated damage period then what will be happened with the banks guarantee money that already seized by the employer for advance payment and performance when the contractor will complete the works within the liquidated damage period.
These two are my questions, I will be very much thankful to you if you answer me before Sunday.
Vijay Raj Upadhyay
ANSWER: Dear Vijay
Welcome for your query;I am trying to reply as per conditions of FIDIC ADB (MDB version) contract agreement conditions, there are the tools to get the work completed within contract period. If Extension of Time for completion granted as per provisions of contract clause 8.4 and work could not completed even after expiry of extended period of contract. then the remainder work should be completed under sub clause 8.7 of FIDIC ADB conditions.
"If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to notice under Sub-Clause 2.5 [Employer’s Claims] pay delay damages to the Employer for this default. These delay damages shall be the sum stated in the Contract Data, which shall be paid for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking-Over Certificate. However, the total amount due under this Sub-Clause shall not exceed the maximum amount of delay damages (if any) stated in the Contract Data."
Employer may ask to extend the bank guarantees for such dates of completion of work. If contractor fails to perform the work according to commitments according to Minutes of Meeting then employer may ask to seized the bank guarantees. In fact Employer has initiated the termination of contract and keep him self safer to recover the money paid as an advance and liability of the contractor in case of termination.
Now contractor may ask to the Employer for permission to complete the work under Delay Damages clause and Engineer can evaluate the Employer's Claim under clause 2.5 of FIDIC ADB. There are two situations:
1. Employer has to give the notice of termination of agreement to the contractor.
2. Employer may allow to the contractor to complete the work under clause Delay Damages 8.7 with additional securities from the contractor in the form of New Bank Guarantees against the performance security.
In fact; if the performance security bank guarantee expired then contract agreement can not be in forced till the renewal of bank guarantee from the date of expiry of such bank guarantees.
Your second question regarding the seized bank guarantees; at last after completion of work, after recoveries of the Employer's Claim under clause 2.5 and Engineers determination for such claim and claim of Delay Damages rest of the money should be return to the contractor by the employer.Time is not essence of the contract agreement, the performance is the essence of the contract agreement.
I hope this will help to you.
With best regards
---------- FOLLOW-UP ----------
QUESTION: Dear Sir
I asked for the continuation of contract, is it possible? but I get the answer as if the contract is ongoing and completion date is going to be finished and answer on the required procedures after the termination. In such case, I received the exact answer, thanks for that. But I am still unsatisfied with the answer. I need suggestion on the situation whether the contractor needs to prepare new Bank guarantee for contract amount or needs to renew the old guarantee for extended liquidated damage period. In case of new Bank Guarantee, what we can do with the seized bank guarantee. Can we return them when the contractor will prepare the new bank guarantee with coverage for the liquidated damage period?????.
Thanks for quick response.
Vijay Raj Upadhyay
Your follow up question is;
"suggestion on the situation whether the contractor needs to prepare new Bank guarantee for contract amount or needs to renew the old guarantee for extended liquidated damage period. In case of new Bank Guarantee, what we can do with the seized bank guarantee. Can we return them when the contractor will prepare the new bank guarantee with coverage for the liquidated damage period."Answer is as below:
If contract agreement agreed by the Employer and contractor to continue for completion of work then performance bank guarantee needs to prepare again with extended period of contract ( the extension of period may be under Delay Damages clause). The seized bank guarantee amount to be returned to the contractor.The bank guarantee seized by the Employer which was submitted by the contractor for advance payment may be returned to contractor if the contractor pay back the payment as per schedule given in the contract.
I hope above is sufficient to clarify your queries.
With best regards