A Quick Overview of Parent Company Guarantees
17 May 2017
A parent company guarantee is a guarantee given by a parent company for the performance by its subsidiary. It will depend on a company having an ultimate or holding company. It may require the parent to perform the subsidiary’s obligations, to reimburse any loss caused by the subsidiary’s breach, or both.
It can also be provided by an employer’s parent company to guarantee payments to be made by the employer under the Building Contract.
The key clauses are:
Guarantee for performance by Contractor of obligations under the Building Contract
Guarantor indemnifies the Employer against all loss damages etc. due to breach by the Contractor
May cover insolvency, i.e. a requirement for the guarantor to indemnify the Employer for losses arising out of the Contractor’s insolvency
It can be on-demand which is more onerous as only a written claim is required in order to make a call under the PCG
It can be default based, so losses sustained need to be proved
Amendments to the Building contract will not invalidate the PCG
Insolvency of the Contractor will not affect the PCG
The Employer usually has a general right of assignment of the PCG
No duty to claim against the Contractor first
Generally no express expiry date but the guarantor will be liable for as long as the Contractor is liable under the Building Contract
The guarantor has no greater liability than the Contractor has under the Building Contract.
Usually executed as a deed
Whether a PCG is requested will depend on the complexity and financial value of the project and financial stability of the Building Contractor. It can be disproportionate to request a PCG for a small project.
Often a performance bond can be requested as an alternative or in addition to a PCG. Unless the project is complex, it may be unnecessary for both to be provided.
See our briefing next week for a quick overview on performance bonds.