FIDIC / Legal Reference: FIDIC Red Book Clause 4.2
A financial guarantee — typically a bank guarantee or surety bond — provided by the contractor to the employer as security for the contractor’s performance of its obligations. Under FIDIC, the Performance Security is typically 10% of the Accepted Contract Amount.
What it means in practice
Under Clause 4.2, the contractor must provide the Performance Security within 28 days of receiving the Letter of Acceptance. The Performance Security must be in the form annexed to the contract — either a conditional bond (payable only on proof of default) or an unconditional on-demand guarantee (payable on first written demand).
The type of Performance Security matters enormously. An unconditional on-demand guarantee can be called by the employer at any time without proving breach — giving the employer very powerful leverage in disputes. In UAE construction, unconditional on-demand guarantees are the norm.
Where disputes arise
Wrongful calls on Performance Security — where the employer calls the guarantee without a genuine basis in contractor breach — do occur. The contractor’s remedy is to apply to court for an injunction to restrain payment, arguing fraud or unconscionable conduct.
UAE Context
UAE law allows on-demand guarantees to be called without proof of default. The courts will generally not intervene to prevent a call unless there is clear fraud. Contractors must carefully monitor performance security validity dates and ensure renewals are in place before expiry.
Related terms
Performance security disputes and guarantee management are handled by e-Basel as part of our construction claims advisory services.
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