Security in the form of guarantees (or bonds) are common practice in construction projects Qatar. With contractors, sub-contractors, suppliers and even consultants being required to provide some or all of tender, performance, advance payment, supply, maintenance and retention securities.
A guarantee is an irrevocable commitment, by the bank of the party obliged to provide the guarantee (e.g. contractor), to pay out the committed sum to the beneficiary (e.g. employer) in the event the terms of the guarantee are met.
Guarantees are either conditional or unconditional (also known as "on-demand"). On-demand guarantees usually require nothing more than a written request (or "call") from the beneficiary to the bank with a bare assertion that the event against which the guarantee was to protect has occurred. I.e. in the case of a performance guarantee - a statement that the contractor has failed to perform as he should. The bank is obliged to pay out.
Conditional guarantees usually require that the bank is provided proof of the contractor failure to meet its performance obligations before it will pay out. This is clearly much better for the contractor but good luck in negotiating the provision of a conditional guarantee in Qatar; on-demand guarantees are the norm.
Once a bank has paid out under a guarantee it usually demands the immediate repayment of the sum by contractor. Typically converting the demand to a credit facility by way of overdraft or loan on unfavourable terms.
A call on a guarantee can have a devastating impact on cashflow, affect the ability to obtain credit facilities or guarantees in the future and reduce credibility (tenderers are often required to disclose if they have ever been subject to a guarantee call).
To protect yourself (as far as possible) when providing an on-demand guarantee:
- Include a definite expiry date, do not leave it open or link it to the provision of a certificate.
- Prohibit assignment of the guarantee.
- Require an indemnity from the beneficiary against a wrongful call (there is one in a standard form FIDIC contract if not removed).
- Talk to the bank if there is a risk, ask it to notify you in the event of a call.
- Consider obtaining an injunction from the local court if you think you are at risk of a wrongful call - but be aware that these are rarely successful.