Guarantees in construction contracts

In the construction industry, as with many other industries, guarantees are used as security for the payment of compensation and to secure the performance of the obligations of the employer and/or the contractor in the underlying building contract. In construction contracts, it is far more common to secure the performance of the obligations of the contractor, and accordingly, only these are considered for purposes of this article.  Such a security, has the purpose of protecting the employer against failure by the contractor to perform its obligations in terms of the construction contract. There could be various circumstances where an employer in a construction contract may require the contractor to put up security for due performance in terms thereof.

There may be certain restrictions applicable to guarantees, and for this purpose, it is necessary to briefly differentiate between a “surety guarantee”, where the guarantor’s obligation to pay is dependent upon a breach of the construction contract or another liability of the contractor in terms thereof; and an “on-demand guarantee”, which is payable merely upon demand by the employer stating that an event triggering payment in terms of a guarantee has occurred, and usually presenting the document to the guarantor, without having to establish the contractor’s breach.

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