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NEC ECC: Parent company guarantee without option clause
This is based on an NEC 4 ECC contract with main option A.
The Contractor has not provided the collateral warranties and it were made an obligation under the Z clause to provide this (the collateral warranty included provisions for the client to step-in as the contractor if the contractor becomes insolvent). However, the contractor provided a parent company guarantee when there was no option clause in place for this and the contractor wanted to provide this as an alternative.
I was wondering if the parent company guarantee could still be accepted by us (but the Contractor is made aware that this cannot be used as an alternative to the collateral warranties but we are happy to accept this anyway if he is ok with it) and notifying the default to still get the collateral warranties? This would mean if the contractor becomes insolvent, the parent company can step in, also, if the parent company became insolvent too, then we could exercise the step in right under the collateral warranties?
I wanted to know if this is possible in this scenario.
Mar 5, 2019
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If there is no requirement to provide a Parent (Ultimate Holding) Company Guarantee under the contract (Secondary Option X4) then any agreement between the Client and the Contractor would sit outside of the contract, unless this was provided under a supplemental agreement (deed of variation).
A collateral warranty is quite different and serves a different purpose, usually providing a warranty to a third party, so is often between a subcontractor and the Client or the Contractor and a funder / lender or end user.
If by exercising 'step in rights' under the collateral warranties you mean between the Client and the Subcontractor then that may not be quite so straightforward either, as you, the Client, may have made payments to the Contractor for subcontracted work which the Contractor has not paid to the Subcontractor. The Subcontractor would most likely want to be paid this money and assured of future payments before commencing any work with you, the Client, directly.
If you are concerned with the possibility of the Contractor becoming insolvent, as implied by the question. then a guarantee / warranty would not necessarily provide the best option anyway and you might be better with some form of bond or just by monitoring the signs that suggest a company is in financial difficulty and taking appropriate action where necessary.
Mar 5, 2019
The specific question was can we accept the parent company guarantee without an option clause in place as the contractor has provided this and then still advise the contractor to provide the collateral warranties as required in the z clause.
And, is it possible to have the parent company step in and if it becomes insolvent, we could step in using the step in from the collateral warranty?
giving it a sort of extra guarantee?
I am not asking for alternatives but rather is this possible?
Mar 5, 2019
Without any provision under the contract you would need to either have a separate agreement or include such words within the PCG to tie this to the contract, further providing 'valuable consideration' etc, as the requirements for creating contracts in general also applies to a guarantee.
The PCG would not replace the obligation to provide a collateral warranty as a sort of 'trade off', as the warranty obligation is specific and remains. It is advisable to make this point clear before entering into discussions relating to a PCG, as, from what you have said, it seems that the Contractor may believe this 'trade off' to be the case.
I can't comment on the operation of the collateral warranty as I don't know who it is between and what it specifically relates to, although if the main contractor becomes insolvent then the parties under this agreement (assuming one is not the main contractor) would still have rights and obligations under this agreement.
Remember that all actions are 'governed' by clauses 10.1 and 10.2 so you need to be clear and compliant in what you do.
Mar 6, 2019
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