The JBCC guarantee – testing the limits of "on-demand"

It is an on-demand guarantee, meaning that it is a guarantee that serves as a form of security against failure by a contractor to carry out works under the contract and obliges the guarantor to make the payment under the guarantee when no more than a compliant demand is submitted to it by the employer. 

The JBCC form, however, differs from most other on-demand guarantees commonly found in construction contracts – in particular those issued under the FIDIC or NEC standard contracts. The main differences are:

• Most demand guarantees are for a fixed guaranteed sum for the duration of their validity or only allow for a reduction to be effected only on presentation of specified documents. The JBCC form on the other hand can take one of two guises. it either provides a guarantee with a fixed value of 5% of the contract sum – the accepted tender price – or for a guarantee with an initial value of 10% of the contract sum which automatically reduces over the contract period, as defined milestones in the contract are met.
• Most on-demand guarantees simply specify a date of expiry to provide a definitive period of validity. By contrast, the JBCC form provides for the expiry of the guarantee only to occur, firstly, in the case of a fixed guarantee, when practical completion is achieved, or, secondly, in the case of a variable guarantee, where the final payment certificate has been issued (or if reflecting an amount due to the employer, upon the payment of that amount by the contractor). The timing for when these events occur is indefinite; and
• In a typical on-demand guarantee the grounds for which a demand can be made and the timing requirements to do so are usually kept as simple and as short as possible – usually requiring no more than a specific statement to the effect that the demanded amount is due under the underlying contract. In the JBCC form the grounds for making a demand are limited to three defined instances, in each case requiring accompanying documentation which indirectly but unavoidably affects the substance and timing of the demand.

These features of the JBCC form mean that it maintains a much closer connection to the underlying construction contract than most other on-demand guarantees, pushing the very concept of "on-demand" to its limits. Failing to take those aspects into account can have major implications for those seeking to make an associated demand.

When it comes to penalties for the failure to achieve the date for practical completion and for other amounts that may be due to the employer but which are not recovered prior to practical completion, the reduction in the value of a variable guarantee when practical completion does occur, or is deemed to occur, can instantly prejudice the employer's security for recovery of these amounts. The reduction can happen without the employer even being aware of this since the reduction is automatic and the terms of the JBCC form are often not taken into account in the events leading up to the issuing of the practical completion certificate. For this reason, great care in managing these debts is needed.

In this instance, employers should either ensure that recovery occurs – and if necessary recourse to the guarantee be had – prior to practical completion being achieved. Alternatively the contract could be amended to prevent practical completion being achieved until accrued debts to the employer have been satisfied or until a replacement or additional guarantee of a sufficient value has been provided.

When it comes to the validity of the guarantee, guarantors will usually seek to amend the standard terms of the JBCC to provide for a specified date as the date of expiry rather than a trigger event. While the latest terms of the JBCC contract make clear the contractor's obligation to maintain the validity of the guarantee until its related obligations have been fulfilled, neither the contract terms nor the guarantee terms allow for a right of the employer to make a demand on the guarantee if validity is not extended within a minimum period prior to the guarantees expiry. This can be contrasted with the FIDIC forms which clearly provide for this mechanism.

The absence of this mechanism means there is little that can be done to enforce the contractor's compliance with its obligation to renew the construction guarantee when the existing one is about to expire. While the JBCC affords the employer an option for retention money to be withheld in lieu of the guarantee or for termination, each of these only apply in a scenario where guarantee has not been provided in the first place as opposed to a scenario where a provided guarantee has expired. This can also be addressed through appropriate amendments to the contract and/or the terms of the JBCC form.

When it comes to making a demand on the guarantee, the JBCC form allows for a demand on the guarantee to be made where:

• An amount certified as due to the employer in a payment certificate has not been paid by the contractor in the period required for payment and remains unpaid despite a letter of demand being issued to the contractor affording it a further period to make payment. Both the payment certificate and letter must be enclosed with the demand;
• The JBCC contract is terminated for a breach by the contractor, in which case the notice of termination must be attached; or
• A provisional sequestration or liquidation order has been grated against the contractor, in which case a copy of the court order must be attached.

Where a demand on the guarantee is being made on the basis of an unpaid certified amount as above, the period for payment following the issue of a payment certificate (being 21 days), and thereafter the further period which only runs from the date of issue of the letter of demand (seven days), has to be factored in. Employers will want to avoid situations where the guarantee is about to expire and there is insufficient time to make a demand on the guarantee because the time periods for payment of the certified amount would not expire before the remaining period of validity of the guarantee.

A demand on termination can only occur when the termination becomes effective – that is, the notice period for termination has expired, since the required averment to be made is that the JBCC contract has been terminated for contractor breach. This would have to backed-up by the notice to terminate which must accompany the demand. Importantly, a 'no fault' termination or a termination for employer breach will not trigger any right to make the demand on the guarantee. In those circumstances, any outstanding payments due to the employer would have to be recovered by making a demand on the guarantee on the basis of certified amounts due to the employer as described above. 

Finally, a demand for provisional liquidation of the contractor can only occur when this court order is actually granted. Earlier signs of insolvency or other processes for financial distress – most notably business rescue proceedings – would not trigger a right to demand. This is because the relevant court order has to accompany the demand on the guarantee in this instance.

All too often the assumption is that if a guarantee is "on-demand" it can be made at any time the employer considers, in good faith, that there is an amount due to it under the contract up to the value of a known guaranteed sum. However, with the JBCC form, the documentation required to accompany the demand and automatic reductions under a variable guarantee indirectly require a more substantive and timeous approach which if not followed may prove fatal to any attempt to have recourse to the guarantee.