The Civil Engineering Contractor May 2019 | Page 38

THOUGHT LEADERS
event — usually insolvency or breach
of contract by a contractor — does not
need to be proven by the beneficiary
(the contractor’s employer). Upon
receipt of a compliant demand from
the beneficiary, the guarantor is
obliged to pay, irrespective if there
is a dispute relating to the contract
between the employer and the
contractor.
Despite standard forms of
contract being used, such as FIDIC,
NEC, JBCC, or GCC, each employer
may have its own specific contract
requirements for guarantees and
insurances. Generally, the more
onerous and complex a contract
is, and the more risk-averse an
employer is, the more likely that an
employer will specify the need for
a demand guarantee in the tender
requirements.
On top of the onerous nature of
demand guarantees, they may also
prohibit a guarantor from informing
the contractor that there has
been a claim on such a guarantee.
For a contractor whose demand
guarantee has been called up, the
phrase ‘pay now, argue later’ plays
true. When there are contractual
disputes, demand guarantees can
be used as a strong-arm tactic to
force a favourable outcome for an
employer. This could sometimes be
grossly unfair towards a contractor.
The only defence that a contractor
could raise against such a demand,
is a proven fraud.
In contrast, a conditional
guarantee or a suretyship creates an
obligation on the guarantor to answer
for any failure of the contractor.
Due to the accessory nature of
the suretyship, the guarantor’s
obligations closely correspond to
the contractor’s obligations. The
guarantor may therefore become
liable to complete the construction
works, deliver material, or repay
a cash advance. In similar vein,
the guarantor can use the same
defences under the construction
36 | CEC May 2019
contract as that of the contractor.
This implies that a guarantor could
step into the shoes of a contractor to
resolve a contractual dispute first to
determine whether there is indeed
a valid claim against a guarantee
or not. Conditional guarantees or
suretyships are therefore much
fairer towards a contractor.
The advice to contractors is to
clearly understand the guarantee
requirements at tender stage or at
commercial negotiation stage of
a contract and to avoid onerous
demand guarantees if possible.
Guarantees are legal contracts and
if a contractor has any doubts, they
should seek advice from their legal
counsel or guarantor.
Current appetite for this
business
Each industry goes through
economic cycles. The civil
engineering industry in South Africa
is currently in a slump. This is clear
from the latest Bureau of Economic
Research’s Civil Confidence Index
of 18, which level was last seen in
the early 2000s. The press is also
full of stories about the embattled
contracting sector as well as weak
output of new projects, particularly
from the government.
Liquidity is severely constrained
in the current conditions, from the
top all the way down. Employers
exploit the buyer’s market and
pressurise contractors with longer
payment terms or keener prices.
Employers often hide behind
contractual disputes as an excuse
to pay late, or not at all. This puts
pressure on contractors’ liquidity,
resulting in contractors paying
their subcontractors and suppliers
late, with some of the latter being
forced to approach the courts for a
favourable outcome. This could be
time-consuming and expensive and
put further pressure on profitability.
The worse the cycle, the more
guarantee claims one can expect
due to the higher incidences of
contractors’ failure. The appetite to
do guarantee business in the current
environment is therefore a lot lower
than it would normally be. Guarantors
generally become more conservative,
resulting in higher premiums,
additional security requirements,
and reduced guarantee facilities. The
best advice to contractors in the
current circumstances is to keep their
guarantors very well informed about
the state of their businesses. nn
Peter Suremann spent the first
12 years of his professional
career as a civil engineer
with the South African
National Roads Agency SOC
Limited (SANRAL), where
he specialised in traffic and
transportation engineering
projects to improve road
safety and traffic capacity. He
gained vast experience in the
management, maintenance, and
upgrading of road networks.
During this time, he
completed an MBA before
making a career change into
the financial services industry,
where he has been for the
past 12 years. He is currently
an underwriting manager in
the Construction Guarantee
business of Lombard Insurance
Company. Suremann holds
a B Eng degree in Civil
Engineering, a B Eng (Hons)
in Traffic and Transportation
Engineering, and an MBA. He
is registered as a professional
engineer with the Engineering
Council of South Africa
(ECSA) and is a member of
the South African Institution
of Civil Engineering (SAICE).
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