Encashment of Performance Guarantees After Taking-Over

A contractor may obtain a Taking-Over Certificate, demobilise its principal workforce and still face encashment of a performance guarantee. The dispute often turns on whether taking-over altered the employer's contractual entitlement and whether the bank's separate undertaking remains callable on demand.

Taking-over does not necessarily mean final discharge

Under FIDIC contracts, taking-over, defects obligations and final completion may occur at different stages. Taking-over generally has consequences for completion-related obligations, risk and other contractual mechanics, but it does not automatically settle every outstanding defect or financial claim. Whether performance security must be reduced or returned depends on the signed contract, particular conditions and security provisions. The contractor should identify the exact event triggering release and the documents establishing it. An employer should similarly avoid treating all outstanding disputes as a right to retain security beyond the contractually agreed period.

The guarantee has its own legal character

A performance guarantee may be an autonomous, unconditional bank undertaking or a conditional promise requiring specified proof. Its amount, expiry, demand language and beneficiary are critical. Courts have recognised the independence of unconditional bank guarantees, subject to limited exceptional grounds for interference. A contractual claim that the employer was responsible for delay does not necessarily restrain a conforming demand against the bank. The contractor should not confuse a right to seek repayment from the employer with a right to block the issuing bank.

Examine the alleged breach and the accounting

Employers may rely on uncompleted works, defects, delay damages, missing documents or costs of substitute performance. Each allegation should be tested against certificates, instructions, notices and the mechanism for calculating recoverable sums. Taking-over may affect the period over which completion delay damages can accrue, depending on the form and contract amendments. A claim for defects rectification should identify the defects and the contractual steps taken. Withheld retention, pending invoices and guarantees should be reconciled to avoid duplicate recovery through different contractual mechanisms.

Urgent relief requires a disciplined record

Where a demand is imminent, counsel should obtain the guarantee, all extensions, formal demand, release provisions and relevant certificates. If the instrument is unconditional, the narrow grounds for injunctive interference require specific evidence and cannot be supplied by general allegations of bad faith. If the contract contains arbitration or a dispute board procedure, the route for recovering wrongful encashment should be assessed simultaneously. The contractor should preserve the evidence of performance, taking-over and the financial impact without relying on the certificate alone as proof of final entitlement.

Separate release rights from bank obligations

After taking-over, the principal questions are what obligations survive, what the security documents say and whether the call meets their legal requirements. Performance security should be examined both as a contractual protection and as an independent financial instrument. The correct remedy may lie against the employer even where the bank is obliged to pay.