For construction of process plants (“Project”), preferred mode of execution by the project developer (“Purchaser”) is EPC contract (“Contract”). This type of Contract is a long-term contract which requires the Contractor to take responsibility for completion schedule, provide guarantees for production capacity and consumption, and guarantee the design, material, and workmanship. To support the performance guarantees from the Contractor, the Purchaser can seek to protect its interest by stipulating delay and performance liquidated damages supported by a performance bond from an insurance company or a bank. When the Contractor and the Purchaser are in different countries, the Purchaser can further seek protection by asking the Contractor to confirm the bank guarantee through a bank located in the country of the Purchaser.

The primary aim of the Purchaser of awarding the Contract is to complete the Project expeditiously at an agreed price. The guarantees incorporated in the Contract provide limited protection from slow progress or complete stoppage of work. To protect against such eventuality, the Purchaser can seek a parent company guarantee (“PCG”) from the parent (“Parent”) of the Contractor, when such guarantee is possible. The PCG is provided by the Parent of the Contractor who owns controlling interest in the Contractor, as defined by the applicable law.

The PCG is a contract between the Purchaser and the Parent which provide assurance that the Contractor will deliver the performance as per the Contract. In case the Contractor fails in delivering performance, the Parent will procure the performance of the Contract and protect the interest of the Purchaser. A typical PCG may include following conditions:

1. Parent will deliver PCG as per approved format before the effectiveness of the Contract.
2. The PCG will come into force on the effective date of the Contract and shall remain in force until the Contractor has discharged all its obligation.
3. The Parent will guarantee that the Contractor shall deliver performance in accordance with the Contract. In case of any breach or default on Contract by the Contractor, the Parent shall procure performance as if the Parent was a party to the Contract.
4. The PCG should provide for joint and several responsibilities of the Parent and the Contractor for performance demanded by the Purchaser under the PCG.
5. On receipt of information from the Purchaser of any breach of the obligation under the Contract, the Parent shall take immediate steps to ensure performance under the Contract in a timely manner.
6. The Parent will be liable to procure performance if the Contractor is in breach or default of Contract. The breach may be due to stoppage of work by the Contractor, unavailability of the Contractor to complete the Project, inability to demonstrate the performance as per Contract, unavailability to manage defect liability, and any other non-performance under the Contract.
7. PCG should provide for more than one demand for performance from the Purchaser for delivering performance by the Contractor.
8. The PCG must specify that (i) waiver of any of the terms, conditions, and obligations under Contract, (ii) any modifications or changes to Contract and (iii) grant of extensions of time to Contractor without any notice to the Parent, shall not in any way affect, change or release the Parent from its obligations under the PCG.
9. If the Contractor defaults on any payment to the Purchaser, for example payment of delay liquidated damages, the Parent shall perform such obligation on behalf of the Contractor.
10. The governing law and language for the PCG should be the same as applicable to the Contract, unless required differently.
11. The dispute resolution provision for the PCG should be the same as applicable to the Contract.
12. The liability of the Parent under the PCG shall not exceed the liability that the Contractor has under the Contract.

While preparing PCG following important aspects must be considered:

• The name of the Contractor must be correctly mentioned. This is important as some of large contractors have multiple offices with slight variation in name.
• In case there is any doubt about the controlling interest of the Parent in the Contractor management, the matter may be further checked.
• The governing law, language of PCG and dispute resolution process must be same as for the Contract.
• It will be beneficial to check that the assets of parent are in the country from where the PCG is being issued. This may facilitate any recovery process.