Performance Guarantees: the Georgian Model
The state performance-bond schemes widespread in international construction practice do not exist in Georgian legislation. What exists here is the civil-law institution of the guarantee and its most common form — the bank guarantee — which secures the performance of the underlying obligation under the construction contract. In other words, a performance guarantee in Georgia is a contractual instrument, not a security layer established automatically by legislation.
Under a bank guarantee, a bank, other credit institution or insurance organization — the guarantor — at the principal’s request undertakes a written obligation to pay the beneficiary a monetary amount in accordance with the obligation assumed, on the basis of the beneficiary’s written demand. The convenience of the guarantee lies precisely in the fact that it redistributes the risk of the contractor’s performance onto a third, financially stable person.
The Concept and Requirements of a Guarantee
The general institution of the guarantee is defined as follows: a guarantee by the debtor exists where the debtor undertakes the performance of some unconditional act, or of an act that goes beyond the object of the contract. A guarantee is deemed valid where it does not contradict the rules contemplated by law, or excessively burden the debtor. The form is clearly established as well: a guarantee must be made in writing.
Independence from the Construction Dispute
The guarantor’s obligation contemplated by the bank guarantee, in the relationship between it and the beneficiary, does not depend on the underlying obligation for the performance of which it was issued, even where the guarantee contains a reference to that obligation. This is the central issue in performance-guarantee disputes: defects notified by the contractor on the underlying contract do not automatically suspend the enforcement of the guarantee. The practical consequence cuts both ways. For the beneficiary it is strength: the demand conforms to the conditions, and payment must follow. For the contractor it is a risk: that is why the form of the demand, the documents and the periods must be described as precisely as possible in the guarantee text.
The Framework of the Construction Contract
The guarantee rests on the contract it secures: under the contract of work, the contractor undertakes to perform the work contemplated by the contract, and the customer must pay the contractor the agreed remuneration. Where the work involves the making of some product and the contractor makes it from materials purchased by itself, it transfers to the customer ownership of the product made; where a generic item is made, the rules of sale apply. The preparation of a cost estimate is not separately compensated unless otherwise agreed.
Managing and Preventing the Dispute
Managing the dispute unfolds into two sequential circuits. The first is the guarantee circuit: the conformity of the demand with the conditions of the guarantee, the completeness of the documentation and the observance of periods — here the decision is taken quickly and its consequence is monetary. The second is the underlying-contract circuit: the quality of the work, the periods and the remuneration — this dispute is longer and built on evidence. For the beneficiary the key knowledge lies in the principle of independence: the guarantee is a separate instrument, and its enforcement does not wait for the outcome of the underlying dispute. For the contractor the key knowledge is the opposite: every stipulation of the guarantee text is a subject of negotiation.
Most performance-guarantee disputes are preventable in advance if three elements are clearly stipulated: the form of the demand and the documents — what exactly the beneficiary must present; the rule of notification of breaches in the underlying contract — how and when the contractor records defects; and the harmonization of periods — the periods of the guarantee and of the construction schedule must fit each other. The logic of the guarantee amount, too, should be defined by the content of the underlying obligation and not only by a percentage rule, since in a dispute precisely the basis of the amount becomes contested.
Frequently Asked Questions
Below are the answers to the questions most frequently asked about performance-guarantee disputes.
Is there a state performance guarantee in construction?
No — such a scheme is not in the legislation; performance is secured by the civil-law guarantee and primarily the bank guarantee.
What form does a guarantee require?
A guarantee must be made in writing; it is deemed valid where it does not contradict the law and does not excessively burden the debtor.
Can enforcement of the guarantee be suspended due to defects in the work?
No — the guarantor’s obligation toward the beneficiary is independent of the underlying obligation; the contractor’s notification of defects does not automatically stop payment.
How is the guarantee connected with the construction contract?
It secures the underlying obligation — the contractor’s duty to perform the work; but its enforcement does not depend on the content of that obligation.
How We Help on Legal.ge
The Legal.ge team will assist you both in preparing the guarantee and in conducting both circuits of the dispute: we explain the concept of the guarantee, the requirements of form and validity, assess the conformity of the demand and conduct the underlying-contract dispute. Contact us — the guarantee text must be negotiated before the contract enters into force.