Building Blocks: What is a parent company guarantee?

What is a parent company guarantee? If you want to know more read on.

A parent company guarantee (“PCG”) is a guarantee given by a party’s parent company to the other party to the contract. It is a form of undertaking by the parent company to answer for one of the group company’s liabilities under the main contract.

In this blog post, we take a look at PCGs in a construction context.

PCGs are a type of performance security, they are used by parties to a contract as a means of protection against non-performance by the other.

In a construction context, where the main contract is an agreement between an Employer and a Contractor, there are two types of PCGs:

  1. PCG from the Contractor's parent company

A PCG from the Contractor’s parent (or ultimate holding company) protecting the Employer against any default by the Contractor.

If the Contractor defaults (usually because of failure to complete the works due to insolvency), the Employer is able to call upon the Contractor’s parent to remedy the breach so that the Contractor’s obligations under the contract are met. Typically, this is either arranging for the works to be completed, or the payment of monies to enable the Employer to appoint another contractor to complete the works.

PCGs are often required by Employers where there is doubt about the Contractor’s solvency, and where the contractor is part of a financially stable group.

Finally, it is worth noting that there is no industry standard form PCG. It is for the parties to appropriately record when a PCG may be relied on, and what the parent company may be required to do.

2. PCG from Employer's parent company

These are known as “payment guarantees” – the Employer’s parent will only be guaranteeing the employer’s payment obligations under the main contract.

In practice, payment guarantees are rare on UK projects.

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