The A to Z of construction law - Our instant course in legal concepts continues by asking when is a guarantee not a guarantee and how should hazardous materials be handled in contracts?
G is for guarantee
Guarantee is one of those terms that can often be used in the wrong context. Some bonds are really guarantees, some product guarantees are really insurance contracts and parent company guarantees are, sometimes, actually guarantees.
At its simplest, a guarantee is a contract in which the person giving the guarantee answers for the debt or default of someone else and, to be enforceable, it must be in writing or evidenced in writing.
Under a parent company guarantee a holding company usually guarantees the performance of a subsidiary. Employers need to check that the parent company has the assets to stand behind the guarantee (as some “parent” companies are only shells that sit between the subsidiary and the ultimate parent company) and the legal capacity to give the guarantee. A parent company guarantee may operate as an indemnity, which creates problems if the guarantor is not bound by proceedings against the subsidiary.
“On demand” bonds operate as an indemnity: so the person issuing the bond has to pay if a contractor fails to perform under its building contract, without the employer having to sue the contractor and prove breach of contract. “Default” or “conditional” bonds are more common and usually operate as a guarantee, where the guarantor’s obligation to pay depends on the employer establishing that the contractor is liable under the building contract.
A 10% performance bond is usually a guarantee, whereas an advance payment bond may be a bond or a guarantee depending on its wording.
Some suppliers offer product guarantees, the lifespan of which varies from product to product, but which may last beyond the limitation period of the original supply contract (six or 12 years) and be an additional benefit. A product guarantee given directly by a supplier will probably become worthless if that supplier becomes insolvent, but if backed up by insurance it may remain in force even if the supplier is no longer trading. Where insurance-backed, a product guarantee may operate as an insurance contract and be voided in the same way as other insurance contracts, such as where material facts are not disclosed.
Guarantees should always be in writing – but never take them at face value.
H is for hazardous
There are so many construction agreements that look to avoid or ban materials that are described as “hazardous”, “deleterious” or “prohibited” that it seems the use of such clauses must be a fundamental requirement when drafting construction agreements.
Is this really the case?
The intention is usually to avoid hazards such as exposure to harmful products. The obligations usually appear in primary agreements such as building contracts and professional appointments and then get repeated in associated collateral warranties.
Originally, materials were added to lists of banned materials when their hazardous nature become apparent. The lists grew and often referred to materials whose use was already prohibited by legislation, British Standards and so on.
The list approach came under scrutiny in 1995 when a calcium silicate brickmaker won a product defamation action against a council which put its bricks on a deleterious materials list, even though the bricks were perfectly suitable for use in many situations. Surprisingly, construction documents are still being prepared using lists.
A new approach was taken in 1997 with the publication of Good Practice in the Selection of Construction Materials, which gave general and specific guidance on how potentially hazardous materials could be used safely. Construction agreements now often refer to the guide as a benchmark, but it is more than 10 years old, refers to British Standards at the time of its publication and does not give guidance on materials such as composite panels, which have been used in buildings badly damaged by fire in recent years.
After years of being amended by users to include a hazardous materials clause, some standard contracts now include them in their published form (JCT05 and PPC2000) while others do not (NEC3). The question, really, is: do the hazardous materials clauses add anything to the duties of the designer or the obligations of the contract? Probably not.
Michael Conroy Harris is a senior legal manager at Eversheds