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Performance Guarantees In Construction Contracts.

Article Excerpt
Key Point

If parties wish to impose limitations upon the circumstances in which a performance guarantee may be accessed, it is necessary to take care to include clear and specific language.

The Federal Court has recently reviewed the circumstances in which a court will prevent a party from calling on a performance guarantee. The case of Clough Engineering Limited v Oil & Natural Gas Corporation Limited [2008] FCAFC 136 reinforces the general principle that courts are reluctant to interfere except in limited circumstances, such as fraud.

A performance guarantee is a form of financial security provided by a person to secure the performance of the contractual obligations of another. It usually provides for a monetary amount that may be called upon by the beneficiary of the guarantee in the event of a contractor's failure to perform its obligations under the contract.

Why require a performance guarantee? Commercially, there are two major reasons why a party to a contract may require a performance guarantee. These are:

to provide security when...

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