Use A Parent Company Guarantee in Construction (UK)

06/09/2023

29 min

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Using a Parent Company Guarantee (PCG) in construction contracts is an important way to protect the principal contractor in the event of a breach of contract by their subcontractor. A PCG is a surety instrument that offers this degree of protection, and it has become mandatory for all construction contracts over a certain value in the UK since the Construction Act 1996.

The PCG provides security to the principal contractor, protecting them from being left out of pocket if their subcontractor fails to fulfill their contractual obligations. As well as this, it also offers liability coverage for any damages caused by the breach, meaning that redress can be sought from the parent company rather than just from the subcontractor themselves.

Plus, if legal action is taken against them as a result of not fulfilling their contractual obligations, then any legal costs incurred by the principal contractor will be met by parent company too – taking away one more potential financial risk. Finally, having such an agreement in place also serves as deterrent against any potential subcontractors who may be tempted not to honor their contractual obligations; knowing that they and their parent company could face consequences if they don’t adhere to what’s asked of them.

At Genie AI we provide free access to our community template library - home to millions of datapoints - so anyone can draft and customize high quality legal documents without engaging with a qualified professional or paying lawyer fees. Our expert team are dedicated to helping you create robust contracts quickly and easily so you can rest assured that your project is secure from possible financial risks associated with breach of contract by your subcontractors.

With our step-by-step guide there’s no need for an account or specialised knowledge; simply read on below for guidance on how best you can make use of our library today!

Definitions

Parent Company Guarantee: A legal agreement in which a parent company agrees to be responsible for the debts, liabilities, or obligations of its subsidiary.

Subsidiary: A company that is controlled by another larger company that owns the majority of its stock.

Creditor/Beneficiary: An entity which is owed money by a debtor.

Guarantor: A person or entity that agrees to be responsible for another’s debt or obligation.

Financial Strength: The ability of a company to pay its debts and liabilities.

Financial Capacity: The ability of a company to generate enough money to pay its obligations.

Bank Guarantee: A promise from a bank to cover a customer’s debt or contractual obligations in the event that the customer fails to pay.

Letter of Credit: A written document from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.

Registration: The process of officially entering a document, such as a contract, with a government agency or official.

Credit Rating: A measure of a company’s creditworthiness, based on its ability to repay debt.

Risk Mitigation: A strategy used to reduce potential losses due to uncertainty.

Enforceable: Legally binding and able to be enforced in court.

Breach of Contract: A violation of a contract or agreement.

Definition of a Parent Company Guarantee and the Parties Involved
Benefits of the Parent Company Guarantee
Cost Savings
Credit Enhancement
Risk Mitigation
Requirements for the Parent Company Guarantee
Financial Strength
Financial Capacity
Acceptable Form of Guarantee
Process of Setting Up the Parent Company Guarantee
Obtain Consent of Relevant Parties
Negotiate Terms of the Guarantee
Prepare Required Documentation
Risks and Limitations of the Parent Company Guarantee
Loss of Control
Financial Exposure
Board Liability
Documentation and Record Keeping Requirements
Registration of the Guarantee
Copies of Financial Statements
Maintenance of Amendments and Updates
Alternatives to the Parent Company Guarantee
Bank Guarantees
Insurance Policies
Letters of Credit
Legal Considerations
Review of Applicable Laws
Assessment of Legal Risks
Contractual Rights and Obligations
Enforcement of the Parent Company Guarantee
Identification of Potential Breaches
Rights to Terminate the Guarantee
Appropriate Remedies
Review Process
Regular Evaluation of Performance
Monitoring of Financial Strength
Confirmation of Compliance with Requirements

Get started

Definition of a Parent Company Guarantee and the Parties Involved

Understand the basics of a Parent Company Guarantee (PCG)
Identify the parties involved in a PCG: the Parent Company, the Subsidiary and the Obligee
Appreciate the roles and responsibilities of each party
Know when a PCG can be used
Identify the benefits of a PCG

When you can check this step off your list:
You can check this step off your list when you have a complete understanding of the basics of a PCG, the parties involved, their respective roles and responsibilities, when a PCG can be used, and the benefits to the Obligee.

Benefits of the Parent Company Guarantee

A Parent Company Guarantee can be beneficial to both the contractor and the client by reducing the risk of non-payment
It can also help to ensure that the contractor is paid in a timely manner and will receive the full amount of payments due to them
It can also help to ensure that the contractor’s subcontractors are paid on time, which can help to reduce the financial burden on the contractor
The Parent Company Guarantee can also be used to secure the payment of any sums due from the contractor in the event that the contractor fails to fulfill its obligations
The Parent Company Guarantee can also help to incentivise the contractor to perform its obligations and may help to reduce the chances of a dispute occurring between the parties
The Parent Company Guarantee can also help to protect the client against the risk of the contractor becoming insolvent or entering into administration
Finally, it can help to ensure that the contractor is able to complete the works in accordance with the contract, reducing the time and money spent on disputes or rectification work.

You’ll know that you can check this off your list and move on to the next step when you have a full understanding of the benefits of a Parent Company Guarantee.

Cost Savings

Research and compare the costs of a parent company guarantee versus a traditional bank guarantee
Look into whether there are any additional fees associated with the parent company guarantee
Analyze the structure of the guarantee to ensure it meets the requirements of the contract
Calculate the savings that can be achieved by using a parent company guarantee
Consider any additional benefits that may be associated with a parent company guarantee
When you have completed the research and calculations, you should have a clear understanding of the potential cost savings associated with using a parent company guarantee.

Credit Enhancement

Obtain a parent company guarantee from the company’s parent company or group.
Ensure the parent company guarantee is tailored to the construction project and the specific requirements of the project.
Ensure the parent company guarantee complies with the terms and conditions of the contract.
Confirm that the parent company guarantee is acceptable to the main contractor and other parties involved in the project.
Make sure the parent company guarantee is in place before the start of the project.
When you have obtained a parent company guarantee that is acceptable to all parties involved in the project, you can check this off your list and move on to the next step of risk mitigation.

Risk Mitigation

Identify the risks associated with the construction project.
Discuss the risks with the contractor and determine suitable risk mitigation strategies.
Consider any insurance requirements outlined in the contract.
Negotiate and agree on a suitable parent company guarantee that meets the requirements of both parties.
Ensure the parent company guarantee is included in the main contract.
When the requirements have been met, you can move on to the next step.

Requirements for the Parent Company Guarantee

Obtain a copy of the parent company’s financial statements from the last two years
Have a professional accountant review the financial statements to assess the parent company’s financial strength
Ensure that the parent company has a minimum net worth of £1 million
Check if the parent company is registered with Companies House in the UK
Make sure that the parent company has sufficient assets and unencumbered cash flow to cover the potential liabilities of the construction project
Once all of these criteria have been met, you can proceed to the next step of the guide.

Financial Strength

Request a copy of the parent company’s latest audited financial statements from their accountant.
Review the statements to assess the parent company’s financial strength, including their liquidity, assets, and available capital.
If the parent company’s financial strength is satisfactory, you can move on to the next step, Financial Capacity.

Financial Capacity

Identify the parent company’s annual turnover and the turnover of the group to which the parent company belongs
Ensure the parent company has a balance sheet that is free of material adverse features
Collect audited accounts of the parent company and the group to which the parent company belongs
Ask the parent company to provide a financial capacity guarantee letter
When the guarantee letter has been received, the financial capacity step is complete and you can move on to the next step of Acceptable Form of Guarantee.

Acceptable Form of Guarantee

Understand the terms and conditions of the guarantee and make sure you are comfortable with them before signing any documents.
Make sure the guarantee is written in a legally binding form and signed by the parent company’s authorised signatory.
Obtain a copy of the guarantee and keep it safe.
Check that the guarantee includes all the specific details required, such as the amount of the guarantee and any time limits that apply.
Ensure that the parent company has the necessary financial capacity to cover the amount of the guarantee.

You can check this step off your list and move on to the next step once you have obtained a copy of the guarantee and checked that it is legally binding and includes all the necessary details.

Process of Setting Up the Parent Company Guarantee

Have the parent company draft a written document guaranteeing the performance of the contractor.
Get the document signed by a director of the parent company.
Have the contractor sign the document.
Have the beneficiary (the party receiving the guarantee) sign the document.
Have all parties involved in the guarantee keep a copy of the signed document.
Once all parties have signed the document, the parent company guarantee is in place and you can move to the next step.

Obtain Consent of Relevant Parties

Send a consent request letter to the Parent Company and other relevant parties, outlining the terms of the Parent Company Guarantee
Ensure that all relevant parties have received the consent request letter and are in agreement with the terms
Keep copies of all responses to the consent request letter
When all relevant parties have provided their consent to the Parent Company Guarantee, you will have completed this step and can move on to the next step of negotiating the terms of the guarantee.

Negotiate Terms of the Guarantee

Discuss the required terms of the guarantee with the parent company, such as the scope of the guarantee and the duration of the guarantee.
Negotiate the terms and conditions of the guarantee with the parent company, including the amount of the guarantee, any exclusions or qualifications, and any other relevant details.
Get the parent company to sign off on the agreement.
Once all parties have agreed to the terms of the guarantee, you will be able to check off this step and move on to the next step.

Prepare Required Documentation

Gather all the necessary documents required for the parent company guarantee, such as the project contract, invoice, and terms of agreement
Ensure all documents are signed and dated correctly by both parties
Compile all paperwork into a single document and submit to the parent company
Obtain proof of receipt from the parent company and keep a copy of all documents for your records
You will know you can move on to the next step when you have received proof of receipt from the parent company.

Risks and Limitations of the Parent Company Guarantee

Understand the nature of the guarantee being offered. Consider the risks, liabilities and limitations associated with the guarantee.
Analyse the impact of the guarantee for both the parent company and the contractor.
Determine any guarantees that may be contingent upon certain requirements being met.
Ascertain the length of the guarantee period and any limitations or exclusions.
Ensure that the Parent Company Guarantee is compliant with any applicable laws or regulations.
Understand any financial implications or liabilities associated with the guarantee.

Once you have done this, you can move on to the next step: ### Loss of Control.

Loss of Control

Ask the parent company to sign a deed of accession to its parent company guarantee, which will allow you to use the guarantee in construction projects
Make sure that the deed of accession contains provisions that will prevent the parent company from changing or withdrawing the guarantee without prior written notice
Ensure that the parent company’s guarantee is limited in scope and that it does not extend to the entire construction project
Confirm that the parent company is not liable for any losses or damages that may occur due to the construction project
Obtain a copy of the parent company guarantee from the parent company and review it to make sure that it meets your requirements

You’ll know you can check this off your list and move on to the next step when you have obtained a copy of the parent company guarantee from the parent company and reviewed it to make sure that it meets your requirements.

Financial Exposure

Research the parent company and ensure that it is financially secure and stable.
Obtain a guarantee from the parent company that they will cover any financial losses that may occur due to the construction project.
Ensure that the guarantee is written into the construction contract so that it is legally binding.
Confirm that the guarantee is sufficient to cover any potential losses or damages that may occur.

You will know you can move on to the next step when you have gathered the necessary financial information and received the parent company guarantee in writing and it has been added to the construction contract.

Board Liability

Ensure that any parent company guarantees are properly noted in the contract.
Obtain all necessary board resolutions and obtain a copy of the parent company’s memorandum.
Ensure that the parent company’s guarantee is correctly addressed and that the parent company is a registered entity.
Confirm that all the documents have been signed, witnessed and dated by all parties.
Contact the parent company to confirm that the guarantee is still in effect.
When all documents have been obtained and the guarantee is confirmed, this step can be checked off the list and the next step can be completed.

Documentation and Record Keeping Requirements

Ensure all paperwork relating to the guarantee is kept in an easily accessible and secure location.
Maintain an accurate record of all communications between you, the parent company and any other third parties such as contractors, lenders, etc.
Keep track of all financial transactions related to the guarantee and its associated activities.
Ensure all relevant parties are informed of any changes in financial commitments or statuses.
Have all relevant parties sign off on any changes to the guarantee or its associated documents.

Once all of the required paperwork and records have been properly kept and maintained, the step will be completed.

Registration of the Guarantee

Get a written guarantee from the parent company
Submit the guarantee to the counterparty
Ensure that the details of the parent company and other necessary information are included in the guarantee
Make sure the guarantee is signed by the authorised representative of the parent company
Obtain a copy of the registration form from the counterparty
Fill out the registration form completely and accurately
Attach the guarantee to the registration form
Submit the registration form and guarantee to the counterparty
When the counterparty has accepted the registration form and guarantee, you will receive a confirmation that the guarantee has been registered
Keep the confirmation in a secure place as proof of registration
Once the confirmation is received, you can move on to the next step.

Copies of Financial Statements

Obtain copies of audited financial statements of the parent company from the board of directors
Ensure the financial statements are dated within the past 12 months
Provide copies of the financial statements to the contractor or lender
You can check this step off your list once you have provided copies of the financial statements to the contractor or lender.

Maintenance of Amendments and Updates

Obtain a copy of the parent company guarantee from the contractor and review it for accuracy and ensure that any updates or amendments are noted and recorded
Ensure that any changes made to the parent company guarantee are signed by both the contractor and guarantor
Check that the terms and conditions of the parent company guarantee are suitable for the construction project
Make sure that all parties involved are aware of any and all changes made to the parent company guarantee
Notify the contractor of any amendments made to the parent company guarantee and obtain their agreement

You will have completed this step when all changes to the parent company guarantee have been noted, recorded, and agreed upon by all parties involved.

Alternatives to the Parent Company Guarantee

Research and consider other forms of security such as a bank guarantee or a performance bond
Speak to a solicitor to discuss the different security options and their advantages/disadvantages
Once you have identified the best security option for your specific project, you can proceed to the next step: Bank Guarantees.

Bank Guarantees

Ask your bank if they offer a guarantee bond – if they do, they will need to understand the project and issue the guarantee
Provide the bank with your contract and any other relevant information
Put together a formal guarantee application and send it to the bank – you will need to provide details on the project, the contractor, and the completion date
The bank will review the application, and if they agree they will issue the guarantee
Once the guarantee is in place, the bank will be liable for any payments due in the event of a contractor default
You will know the step is complete when the bank has issued the guarantee and it is in place.

Insurance Policies

Research and select an insurance policy that meets the requirements of the contract.
Ensure that the policy covers the contract’s duration, any additional risks, and is sufficient for the contract’s value.
Have the insurance company write an insurance certificate to provide evidence of your policy.
Submit the certificate to the principal contractor.
Once the principal contractor has verified the insurance certificate, you can check this off your list and move on to the next step.

Letters of Credit

Contact the lender and ask them to provide the letter of credit, specifying the amount and details of the guarantee
Receive the letter of credit and ensure that it meets the requirements of the contract
Provide the lender with all necessary documents, such as evidence of insurance, financial statements, and other documents required by the lender
Have the lender issue the letter of credit to the contractor, specifying the terms of the guarantee
Monitor the letter of credit throughout the construction project and make sure that the contractor complies with the terms of the guarantee
Once the project is complete and the contractor has met all the terms of the guarantee, the letter of credit can be released and the guarantee fulfilled
You will know it is time to move on to the next step when the letter of credit has been issued and the contractor has met the terms of the guarantee.

Legal Considerations

Research the applicable law and regulations for the construction project and parent company guarantee
Ensure that the parent company guarantee is in compliance with all applicable laws and regulations
Obtain legal advice if needed to make sure the parent company guarantee is valid
Check that the parent company guarantee is registered with the appropriate legal authority
When all legal considerations have been met and the parent company guarantee is valid and registered, this step can be marked as complete.

Review of Applicable Laws

Research applicable laws to determine the legal requirements for entering into a parent company guarantee.
Consult with legal counsel to ensure all relevant laws are met.
Read the parent company guarantee agreement carefully to ensure it is compliant with the legal requirements.
Have the parent company guarantee agreement reviewed by legal counsel to ensure it meets all legal requirements.
When you are confident that all applicable laws are met, you can move onto the next step.

Assessment of Legal Risks

Carefully assess the legal risks that may arise from using a parent company guarantee in construction
Conduct a review of applicable laws and regulations in the jurisdiction in which the guarantee is being used
Identify any potential liabilities and risks associated with the parent company guarantee
Consider the potential liabilities and risk implications for both the contractor and the parent company
Take into account the financial and operational impact of any potential risk
Evaluate the potential impact of the guarantee on the contractor’s ability to complete the project
Analyze the potential impact of the guarantee on the parent company’s financial position
When you are satisfied that the potential legal risks have been assessed and addressed to an acceptable level, you can move on to the next step.

Contractual Rights and Obligations

Review and assess the contractual rights and obligations of the parent company and the contractor, in the context of the construction project and the parent company guarantee
Ensure the parent company guarantee is compliant with the terms of the contract
Understand the terms of the parent company guarantee and ensure that all the necessary steps have been taken to ensure the guarantee is valid
Check that the parent company guarantee does not conflict with any other contractual obligations
Confirm that the parent company guarantee has been properly executed and is valid

Once you have completed this step, you will be able to move on to the next step: ## Enforcement of the Parent Company Guarantee.

Enforcement of the Parent Company Guarantee

Make sure that you understand the terms of the Parent Company Guarantee and ensure that they are enforceable in the relevant jurisdiction.
Consider whether any breach of the Parent Company Guarantee has occurred and whether you are able to take the necessary action to enforce it.
Research the legal remedies available to you if a breach of the Parent Company Guarantee has occurred.
Take advice from your legal team on the most appropriate action to take in order to enforce the Parent Company Guarantee.
Once you have identified the breach and taken the necessary steps to enforce the Parent Company Guarantee, you will be able to move on to the next step of identifying any potential breaches.

Identification of Potential Breaches

Review the construction contract and relevant documentation to identify any potential breaches
Identify any possible legal or contractual rights that are available to you should the parent company guarantee be invoked
Assess the risk of any potential breaches or rights being invoked
Determine whether any potential breaches or rights are sufficient to be taken up through the parent company guarantee
Make a note of any potential breaches and rights that may be invoked in the event of the parent company guarantee being invoked
Check off this step when you have completed the review and identified any potential breaches or rights that may be invoked in the event of the parent company guarantee being invoked.

Rights to Terminate the Guarantee

Check the parent company guarantee to determine if there are any conditions for termination
Consider the circumstances and reason for the potential breach to determine if any rights to terminate are triggered
Analyse if any of the conditions for termination have been met or if any other rights to terminate exist
Review any applicable legislation in the jurisdiction governing the parent company guarantee to determine if any rights to terminate exist
When satisfied that the rights to terminate are valid, notify the contractor in writing of the termination of the parent company guarantee

Once the rights to terminate the guarantee have been identified and any necessary actions taken, you can check this step off your list and move on to the next step.