Parent company guarantees (PCGs) in construction—drafting and negotiation issues

The following Construction practice note provides comprehensive and up to date legal information covering:

  • Parent company guarantees (PCGs) in construction—drafting and negotiation issues
  • Risk to a parent company of giving a PCG
  • Parties
  • Ability of the parent company to give a PCG
  • What level of parent company should give a PCG?
  • Insurances held by the parent company
  • PCGs provided by joint ventures
  • Subject matter of the PCG
  • Operative Wording
  • Primary obligor wording
  • More...

Parent company guarantees (PCGs) in construction—drafting and negotiation issues

Risk to a parent company of giving a PCG

A parent or holding company does not normally carry out trading activities itself but owns assets, including shares in other companies and the retained profits which they earn. It also provides strategic management services to the group. Commercial organisations use this structure chiefly because it reduces risk. Corporate assets, transferred to a holding company, are insulated from risks associated with contracting activities. Trading profits can be sheltered from exposure to losses and liabilities affecting the subsidiary company. There are also tax advantages in that losses taken by one subsidiary are available to be used to be offset against profits taken elsewhere in the group.

As corporate groups grow, the structure expands with several levels of parents up to an ultimate holding company controlling all the companies beneath it. This creates a buffer between the assets held in the holding company owned, by the group’s investors, and the risk-taking subsidiary companies which generate the groups profits.

For a parent company to guarantee the liability of one of its subsidiaries would seem to run contrary to the whole purpose for which the corporate structure was set up. The parent is, in effect, taking on part of the risk that its subsidiary is in existence to assume. A guarantee will remove part of

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