Construction Law/Performance Guarantee after termination
I am chief construction supervision Engineer and working as a representative of project manager. It is an ADB funded project and is being implemented in Middle East. The contract was signed in accordance with the FIDIC and ADB guidelines.
Before the expiration of the performance guarantee, advance payment guarantee and insurance validity period, we requested to the contractor to renew them but the contractor failed to renew before the due date and the employer asked to concerned bank to return all money to government’s account.
Due to this and many other contract clauses, we recommended terminating the contract. The employer has terminated the contract under the contract clauses after fulfillment of all the option eg. 1) Time extension and 2) liquidated damage.
Now contract has been terminated.
In this situation, what about the performance guarantee. Can employer seize it completely or it can be returned back after the finalization of valuation of remaining works to be completed. What about the bank guarantee for advance payment. Can it be returned back also? What about the materials and equipments. Can we allow contractor to get them back before the completion of the work. What about the wages of the persons for the security of the contractor’s camp, who will pay for those works till the end of the new contract for remaining works? These are my queries. Except bank performance guarantee, clauses for other conditions are mentioned in the contract but for the performance guarantee nothing is mentioned in the contract. Although the bank guarantee itself says that failing in the completion of the contract by the contractor, employer can ask to bank for the guaranteed amount to furnish and bank is liable to act in immediate effect.
These are my questions, I will be very much thankful to you if you answer me before Sunday.
Dear Vijay Raj Upadhyay
It is my pleasure to listen you. I am trying my best effort to reply you. I am sorry to delay in replying as per your expectations to get the answer before Sunday.
As you explained in your question that agreement has been terminated after fulfilment of contractual obligations of the contractor for time for completion and delay damages under the provisions of contract.
Now the performance security/guarantee "The Employer shall not make a claim under the Performance Security, except for amounts to which the Employer is entitled under the Contract.
The Employer shall indemnify and hold the Contractor harmless against and from all damages, losses and expenses (including legal fees and expenses) resulting from a claim under the Performance Security to the extent to which the Employer was not entitled to make the claim.
The Employer shall return the Performance Security to the Contractor within 21 days after receiving a copy of the Performance Certificate."
From above it is clear that Employer can not seize the guarantee completely. Bank guarantee of advance payment can not be back. The agreement has already terminated, hence the performance guarantee was meant for performance of work done by the contractor.
The material and equipment's "The Employer shall after termination give notice that the Contractor’s Equipment and Temporary Works will be released to the Contractor at or near the Site. The Contractor shall promptly arrange their removal, at the risk and cost of the Contractor. However, if by this time the Contractor has failed to make a payment due to the Employer, these items may be sold by the Employer in order to recover this payment. Any balance of the proceeds shall then be paid to the Contractor."
It is clear that up to deployment of new contractor on the work risk and cost shall be recovered from the contractor. If contractor will pay all the dues as per provisions of contract then employer may release the material and equipment's. Wages of security persons will be recovered from the contractor.
Banks will be liable to pay the money as per conditions mentioned in the corresponding guarantees.
I hope this will help to you.
With due regards