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Clause 4.2 Performance Security-Understanding Clauses in FIDIC ‘Conditions of Contract for EPC/ Turnkey Projects’ First Edition 1999.
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Clause 4.2 Performance Security-Understanding Clauses in FIDIC ‘Conditions of Contract for EPC/ Turnkey Projects’ First Edition 1999.

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•Performance Security is in the amount as stated in particular conditions of the contract as a guarantee towards performance of the contractor. …

•Performance Security is in the amount as stated in particular conditions of the contract as a guarantee towards performance of the contractor.
•Performance Security is valid and enforceable until the contractor has executed and completed the works, remedied any defects and has become entitled to receive performance certificate after issue of performance certificate by the employer.
•Performance Security is also linked with failure by the contractor to pay the employer an amount due, as either agreed by the contractor or determined under employer’s claim, claims, disputes and arbitration and termination by employer.

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  • 1. Understanding Clauses in FIDIC ‘Conditions of Contract for EPC/ Turnkey Projects’ First Edition 1999 Clause No. 4 The Contractor Sub-Clause No. 4.2 Performance Security    Summary Performance Security is in the amount as stated in particular conditions of the contract as a guarantee towards performance of the contractor. Performance Security is valid and enforceable until the contractor has executed and completed the works, remedied any defects and has become entitled to receive performance certificate after issue of performance certificate by the employer. Performance Security is also linked with failure by the contractor to pay the employer an amount due, as either agreed by the contractor or determined under employer’s claim, claims, disputes and arbitration and termination by employer. Content of the FIDIC Clause in Brief The Contractor shall obtain (at his cost) a Performance Security for proper performance, in the amount and currencies stated in the Particular Conditions. If an amount is not stated in the Particular Conditions, this Sub-Clause shall not apply. The Contractor shall deliver the Performance Security to the Employer within 28 days after both Parties have signed the Contract Agreement. The Performance Security shall be issued by an entity and from within a country (or other jurisdiction) approved by the Employer, and shall be in the form annexed to the Particular Conditions or in another form approved by the Employer. The Contractor shall ensure that the Performance Security is valid and enforceable until the Contractor has executed and completed the Works and remedied any defects. 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. The Employer shall not make a claim under the Performance Security, except for amounts to which the Employer is entitled under the Contract in the event of: (a) failure by the Contractor to extend the validity of the Performance Security as described in the preceding paragraph, in which event the Employer may claim the full amount of the Performance Security, (b) failure by the Contractor to pay the Employer an amount due, as either agreed by the Contractor or determined under Sub-Clause 2.5 [Employer's Claims] or Clause 20 [Claims, Disputes and Arbitration], within 42 days after this agreement or determination, (c) failure by the Contractor to remedy a default within 42 days after receiving the Employer's notice requiring the default to be remedied, or (d) circumstances which entitle the Employer to termination under Sub-Clause 15.2 [Termination by Employer], irrespective of whether notice of termination has been given. The Employer shall return the Performance Security to the Contractor within 21 days after the Contractor has become entitled to receive the Performance Certificate. Increasing the Amount of Performance Security during the Execution of the Contract Clause 11 ‘Defect Liability’, Sub-Clause ‘Removal of Defective Work’ (To understand the provision in FIDIC related to increase amount of Performance Security) If the defect or damage cannot be remedied expeditiously on the Site and the Employer gives consent, the Contractor may remove from the Site for the purposes of repair such items of Plant as are defective or damaged. This consent may require the Contractor to increase the amount of the Performance Security by the full replacement cost of these items, or to provide other appropriate security. Pg. 1/3 Compiled by Divyanshu Dayal. dayal1005@gmail.com Portfolio-FIDIC
  • 2. Understanding Clauses in FIDIC ‘Conditions of Contract for EPC/ Turnkey Projects’ First Edition 1999 Guidance for Performance Security The amount of the performance security shall be ten percent 10% of the contract price stated in the contract agreement. If the performance security is in the form of a bank guarantee, it shall be issued either (a) by a bank located in the country, or (b) directly by a foreign bank acceptable to the employer. If the performance security is not in the form of a bank guarantee, it shall be furnished by a financial entity registered, or licensed to do business, in the country. Forms of Performance Security Demand Guarantee: Performance bond or other type of guarantee payable to the employer on demand, often without the presentation of other documents and without the need to show the demand is in compliance with the terms of the underlying contract. In effect, it is a substitute for a cash deposit. Under UK law, a demand guarantee is independent of the underlying contract and is separate from the counter-guarantee (if any) given by the employer’s bank to the contractor’s bank. Under US law also a demand guarantee enjoys similar protection and is called a standby letter of credit. Surety Bond: Formal, legally enforceable contract between the contractor and the employer and a third party (the surety, such as a bank, bonding company, or insurance company) whereby the surety guarantees payment of a specified maximum sum, or to otherwise compensate (indemnify), the employer against damage or loss caused by the actions (or a failure to perform. Notes:  It is quite common for the employer to require an ‘on demand’ guarantee. It is however recommended that a ‘surety bond’ as should be used. ‘On demand’ guarantees are quite a dangerous instrument due to the fact that in principle the beneficiary becomes entitled to call for payment despite lack of any reason or justification to do so, whereas a ‘surety bond’ can only be drawn if and when a substantial claim exists which remains unsatisfied.  The intention behind this security is to have the financial responsibility of the surety standing behind the contractor’s completion obligations. Thus it is critical to pay as much attention to the language of the performance bond as to the language of any significant contract. The FIDIC model forms of securities require that the surety indemnify the employer for the consequences of default or breach of contract. It is critical to carefully scrutinize the extent of liability under the performance security, in particular because Subclause 4.2 includes an indemnity to the contractor if the employer was not entitled to make the claim. Applied Clauses of the Performance Security/ Bond for EPC Contracts (FIDIC or Mixed) (References to the clauses are removed) Performance Security means the bonds and the parent company guarantee. Performance Bond means the bond in the form set out in annexure (Performance Bond), issued by a bank or financial institution reasonably acceptable to the employer with a credit rating of no worse than [A+] (Standard and Poor’s) or [A1] (Moody’s). The performance bond shall be the equivalent of 10% of the contract price (or any replacement thereof pursuant to clause). In the event of a variation under (Variations and Adjustments), which results in an increase or decrease in the contract price by an amount equal to or greater than 5% (either by itself or when aggregated with all variations since any previous adjustment to the amount of the bonds), the maximum amounts available under the bonds pursuant shall be increased or decreased accordingly, and the contractor shall deliver a replacement bond to cover such increased or decreased maximum amount issued by an entity meeting the requirements as previously approved by the employer, such approval not to be unreasonably withheld or delayed and otherwise on the same terms as the replaced bond. Such replacement bond shall be delivered duly executed to the employer no later than 30 days following the variation. All fees, taxes and expenses Pg. 2/3 Compiled by Divyanshu Dayal. dayal1005@gmail.com Portfolio-FIDIC
  • 3. Understanding Clauses in FIDIC ‘Conditions of Contract for EPC/ Turnkey Projects’ First Edition 1999 associated with procuring, preparing, completing and stamping (if applicable) each of the bonds and the parent company guarantee shall be paid by the contractor. If the contractor fails to provide an extension to a bond or replacement bond, the employer shall have the right to call the outstanding balance of the bond and use and apply the same as security for compliance by the contractor with its obligations and liabilities under the contract. The employer shall be entitled to make deductions against any amounts so held in respect of any claim for which it would have been entitled to call against an extended or replacement bond (had the contractor provided the same), but shall otherwise return to the contractor the remaining balance of such amounts (without any interest). Event of Performance Security in Sequence of Contract Activities as Per FIDIC Schematic (only symbol to be considered as time-line) Signing of the Contract Agreement < 28 Days Issue of Performance Security by the Contractor < 42 Days Time for Completion Tests on Completion Issue of Taking Over Certificate Remedying of Defects Commencement Date  Pg. 3/3 Compiled by Divyanshu Dayal. dayal1005@gmail.com Portfolio-FIDIC Defect Notification Period Issue of the Performance Certificate Within 21 Days Return of the Performance Security by the Employer

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