International Construction Law Review
THE USE AND ABUSE OF FIRST DEMAND GUARANTEES IN INTERNATIONAL CONSTRUCTION PROJECTS
PHILIP DUNHAM
Partner, Dechert LLP, Paris 1
INTRODUCTION
From the 1950s onwards, the construction industry has been marked by the owner (or employer) being increasingly the party in a position of strength in relation to contractual negotiations and allocation of risks. This phenomenon has enabled international construction owners to insist, inter alia, upon their contractors providing first demand guarantees as a form of security for due performance of their works.2 Since the 1970s, the provision of these guarantees has thus become a common feature of international construction projects.
Unlike traditional forms of contractor performance bonds, first demand guarantees may be enforced by simple demand (or call) without the owner being required to adduce proof of substantive default under the construction contract. Such “unconditional”3 first demand guarantees only require the call to be submitted in accordance with any specified requirements of form. Owners have largely tended to favour such unconditional guarantees with one author reporting, in 1992, that “simple and pure on-demand guarantees in the strict sense, with no frills and no qualifying conditions, have represented 90% or more of all of the guarantees issued so far. Such bonds are therefore properly described as being ‘virtually promissory notes payable on demand’.”4
These unconditional first demand guarantees, however, are controversial and have given rise to numerous disputes both in arbitration and/or litigation.
Doubts have been expressed in this regard whether, despite the superficial attractions of such guarantees, international construction owners have
1 philip.dunham@dechert.com. Thanks are due to José Caicedo for his assistance in preparing this article which is based on a paper presented at the ICC/FIDIC conference on “International Construction Contracts and the Resolution of Disputes” held in Monaco on 24 and 25 January 2008.
2 Contractors, in turn, often insist upon any subcontractor(s) providing similar guarantees in respect of the subcontracted work.
3 These unconditional guarantees are also regularly referred to as “sight”, “confirmed”, “irrevoca ble” or “on demand” guarantees. They are to be contrasted with conditional first demand guarantees providing, for example, for the submission of a certificate to be issued by a third party attesting the contractor’s non-performance.
4 J Dohm, “Enjoining Payment of Demand Guarantees” (1992) 8 IBLJ 887 at 888.
[2008
The International Construction Law Review
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