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Bonds and Guarantees and Contractors

             Bonds and guarantees are relatively complex instrument that attempt to set out the obligations between two parties that are consequential upon the actions or inactions of another party. A bond is usually contained in a document given by a third party in support of the obligations of another party, containing a promise to pay money immediately or on a future date. It thereby provides an assurance to the beneficiary that the contracting party will perform its obligations and security if it does not. Performance bonds are most likely to be called in the event of a contractor going insolvent or (less frequently) in the event of a dispute between the employer and the contractor. The obligation to pay money is commonly capped at 10% of the contract sum until completion of the works and then at 5% until the rectification of defects notified in the warranty period is complete. These sums and periods are, however, a matter of negotiation.
             A guarantee is given by a third party (a guarantor) to provide an undertaking to a beneficiary that the guarantor will answer for the debt or default of a third person (the principal debtor). The principal debtor remains primarily responsible for payment or performance of the relevant obligation. Clause No: 4.2 (Employer's Equipment and Free-Issue Material).
             From FIDIC 1999 Red Book.
             The Contractor shall obtain (at his cost) a Performance Security for proper performance, in the amount and currencies stated in the Appendix to Tender. If an amount is not stated in the Appendix to Tender, this sub-clause shall not apply.
             The Contractor shall deliver the Performance Security to the Employer within 28 days after receiving the Letter of Acceptance, and shall send a copy to the Engineer.  .
             If the terms of the Performance Security specify its expiry date, and the Contractor has not become entitled to receive the Performance Certificate by the date 28 days prior to the expiry date, the Contractor shall extend the validity of the Performance Security until the Works have been completed and any defects have been remedied.

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