Doubts raised on the validity of construction and payment guarantees

Abstract

It has become common practice in the building industry for contractors to provide employers with a construction guarantee. These guarantees, which are defined as being on call or on demand, usually provide that a certificate issued by the agent or the principal agent will provide conclusive proof that the employer is entitled to call in the guarantee (Fenster, 1998). In a number of recent decisions, such a conclusive proof provision has been the subject of judicial scrutiny, and there is now an ever-increasing doubt as to the validity of these guarantees. The Joint Building Contracts Committee (JBCC) 1991 suite of contracts was the first in South Africa to introduce the concept of construction and payment guarantees that provided the requisite cover available on call from approved financial institutions. In the process the construction guarantee replaced the performance guarantee (surety) that prevailed in addition to the retention fund in construction contracts. Various standard forms, which embodied the terms and conditions of the guarantees, were prepared for this purpose by the JBCC. These terms and conditions had been negotiated by the JBCC with the legal/ technical committees of the banking and insurance institutions and were fully approved by them. However, for some time now concerns have been raised regarding the difficulties experienced in getting all banks and/or their property finance divisions to comply with the JBCC guarantees. Because the construction and payment guarantees are so closely linked to the terms and conditions of the JBCC principal and nominated/selected subcontract agreements, changes made to the pro forma guarantees or agreements, which disturb the risk of the guarantor, could very well render the guarantee null and void. This article will report the interpretation of construction and payment guarantees as held in recent court decisions, the findings of an investigation conducted on perceived problems being experienced by the South African construction industry with regard to these guarantees, and will present what is considered to be best practice to ensuring the continued effective use thereof.