International Construction Law Review
PRE-ARBITRAL ADR TECHNIQUES AND CONDITIONAL LETTER OF CREDIT PERFORMANCE GUARANTEES
DONALD L MARSTON
Osler, Hoskin & Harcourt LLP, Toronto, Canada
Introduction
The tragic events of 11 September 2001 and, more recently, the Enron collapse have fuelled speculation that contractors, owners and developers may face difficulties in obtaining the same availability of bonding for construction projects. The extent to which that speculation may prove accurate remains to be seen. However, if some sureties are indeed negatively impacted by such events, then construction industry participants, be they contractors, developers or owners, may need to give thought to alternative security arrangements, such as letters of credit or guarantees.
When letters of credit are used as performance security on construction projects they are typically referred to, in many countries outside North America, as performance guarantees. In some countries they are sometimes even referred to as “performance bonds”, a characterisation that can create confusion for North American project participants new to the international construction marketplace.
Traditional letters of credit as performance guarantees
Letter of credit security, although long used in many parts of the world as “performance guarantee” security on construction projects, is a much less common form of project security in North America and elsewhere where sureties provide performance bonds. Surety bonds are typically available at lesser cost and far less impact on contractors’ financing arrangements. Notwithstanding the widespread use of performance guarantees on the international scene, the prospect of increased usage of unconditional and irrevocable letter of credit security on major projects would be an unwelcome prospect for many, if not most, North American contractors.
On the other hand, should bonding protection become less available, from the perspective of a developer or owner the prospect of increased usage of unconditional and irrevocable letter of credit performance guarantee security would be likely to be a favourable prospect, particularly when the letter of credit is callable “on demand”. Typically a demand notice, when presented to a bank or other lending institution, is required to be
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