Property, infrastructure and development – Bank guarantees: straw poll on expiry dates
In a recent article on bank guarantees and insurance bonds which can be viewed here, we set out the criteria that bank guarantees must satisfy in order to constitute adequate security. One criterion is an appropriately lengthy or no expiry date. This is to ensure that the bank guarantee is available for the duration of the works and to the end of any defects liability period.
Open-ended bank guarantees (i.e. with no expiry date) have generally been preferred by councils. This is because timeframes for completion of works can often extend beyond initial estimates (and as documented in a bonding agreement), either with or without agreement of the council. Having an open-ended bank guarantee means that extensions can be accommodated (or tolerated) without the need for a replacement bank guarantee to be provided and without exposing the council to the risk that a bank guarantee may expire before works are completed, or before the end of any defects liability period.
However, we have been noticing a recent trend of some developers insisting they are not able to obtain open-ended bank guarantees from the bank. This may be problematic for councils if expiry dates are not sufficiently lengthy to accommodate the completion of works, or if there are delays in completion of works (either within or outside of a developer’s control) or delays in provision of replacement bank guarantees for defects liability periods before a bank guarantee expires.
Putting on our detective hats, we embarked on an informal research project to see what was behind this trend, or indeed, if there was any truth to it!
Following investigations with each of the “Big 4” banks, our general impressions are that:
- Bank A appears to have a policy of resisting undated bank guarantees. However, there is no prohibition against them as such.
- Bank B’s position is that the party requiring the guarantee will advise whether they require the bank guarantee to be open-ended or have an expiry date.
- Bank C charges a slightly higher annual percentage fee for bank guarantees with no expiry date, but will provide them.
- Bank D will provide them, depending on the nature and terms of the agreement.
Given this, our suggested approach is for councils to continue to require open-ended bank guarantees in the first instance where they are warranted. As the party accepting and relying on security in a bonding arrangement, councils are entitled to determine whether such security is adequate. As a matter of comparison, another large semi-government authority that accepts infrastructure through land divisions insists on open-ended guarantees, so councils are not acting alone in maintaining this position.
If a developer insists they cannot obtain an open-ended bank guarantee (and council is prepared to proceed on this basis), there may be ways to mitigate the risk to council of accepting a bank guarantee with an expiry date, by careful amendment to council’s bonding agreement and managing associated internal processes.
Finally, whatever the position in relation to expiry dates (or lack thereof) in bank guarantees, continue to practice good contract management of bonding agreements by:
- ensuring dates for practical completion and defects liability periods are centrally diarised;
- keeping an eye on progress and requests for extensions of time;
- maintaining regular communication with developers; and
- acting promptly to return bank guarantees when works are practically completed and/or defects liability periods expire, to remove this as a perceived justification for any ongoing resistance on the part of the banks to open-ended bank guarantees.
For more specific information on any of the material contained in this article please contact Yari McCall on +61 8 8217 1307 or ymccall@normans.com.au.