Bank guarantees and expiry dates: Where does the risk lie?

Providing security under a construction contract is an important risk allocation mechanism that can give rise to disputes between parties. Although bank guarantees are a popular way of providing security, when misused under a contract, they can have large implications for a party's reputation and future borrowing ability. This often gives rise to parties disputing how and when bank guarantees should be released or retained in accordance with the contract.

Most construction contracts require the contractor to provide some form of security to the principal, with the usual position requiring 50 per cent of the held security to be released upon practical completion, with the remainder to be released upon the expiry of the defects liability period or soon after.