In international project, what may be caused if the wording for a bank guarantee is incorrect?

Introduction

In the international project, there may be much difference in aspects of geography, culture, language and legal environment. The Principals, Contractors, Sub-Contractors, Suppliers and other participants tend to obtain some surety from third party, usually the bank to secure the relevant party’s fulfillment. Bank guarantee is generally regarded as one of the most importance.

There are a variety of bank guarantees, among them are bid bond, performance bond, down payment bond, detention bond and customs bond. A little difference on how to word the documents possibly leads to a great change in its meaning and effectiveness. Hereunder I’ll take one case as an example to cast the light.”

Case Review：

A company named Power Gas Company (referred to as Party A), desirous of a professional engineering company to provide design service for its project, engaged with a well-known company named Great Designer Group (referred to as Party B). As per the agreement between them, Party B “shall provide a Performance Security in the form of “performance bond” in the amount of 5% of the Subcontract Price. And it shall be guaranteed and undertaken irrevocably and unconditionally in same currency of Subcontract Price.” When the draft form of guarantee is sent to Party B for check, Party B propose that a clause should be added that: “If the performance bond is presented to the bank for payment in case of any breach, the Contractor shall be informed at least 10 days ahead”, and Party A agreed to add this clause because they thought it’s reasonable.

It turned out that Party B failed to duly fulfill its obligations in compliance with the agreement, and Party A presented the performance bond to the bank asking for the guaranteed compensation. But the bank rejected Party A’s claims on the ground that an unconditional bank guarantee shouldn’t be furnished with any conditions and would become an conditional bank guarantee if any conditions were included.

Notes:

Construction guarantees typically take one of the two forms, namely an on-demand or call guarantee, which is unconditional, and a suretyship guarantee, which is conditional. The right of the holder and the obligations of the guarantor under these two guarantee differ:

In on-demand guarantees, the guarantor takes the first primary obligations, equivalent to an indemnity to the Employer.The guarantees operate independently of the degree of performance or non-performance of the principal contract. They are effectively the equivalent of a promissory note payable on demand. But there is any conditions taken into the guarantee, then the effect of the on-demand payment and dependence may change.

Suretyship guarantees are conditional on a particular event(or events), commonly on the satisfactory performance of the contractor. These guarantees are accessory to the principal agreement, and there can be no obligation where the principal obligation they refer to is not valid or effective.