Views in the last 30 days: 46
Estimated read time: 20 minute(s)
1️⃣ What’s the Real Purpose of Clause 4.2?
Let’s start with the big picture.
At its core, Clause 4.2 is like a contractual safety net for the Employer. Imagine you hire a contractor to build a processing plant. You’re investing a lot of money — maybe even tens of millions. How do you protect yourself in case the contractor:
- Vanishes mid-project?
- Delivers poor-quality work?
- Fails to mobilize or gets stuck due to internal issues?
That’s where the Performance Security steps in. It’s a financial guarantee — often in the form of a bank guarantee or bond — issued by a reputable financial institution. If the contractor breaches the contract, the Employer can “call” the bond and use those funds to recover losses or complete the work.
📌 So the key goals are:
- ✅ Assure the Employer that the Contractor is serious.
- ✅ Cover potential losses in case of default.
- ✅ Encourage performance through financial risk.
🕰️ Timing is Key:
Both editions give the Contractor 28 days from receiving the Letter of Acceptance to submit the bond. This keeps the pressure on right from the start — no performance security, no project start.
⚖️ Power Balance:
The 1999 edition gives more unilateral power to the Employer, whereas the 2017 edition starts to balance the scales, adding protections for the Contractor (like requiring written notification before the bond can be called).
2️⃣ Clause Dissected: Let’s Break Down the Wording
📘 FIDIC 1999 – Clause 4.2
Here’s how the 1999 edition plays out:
- 🔹 The Contractor must obtain a Performance Security within 28 days after getting the Letter of Acceptance.
- 🔹 The amount and currency must match what’s in the Contract Data.
- 🔹 The Employer must approve the form and the issuing institution (usually a bank).
- 🔹 The bond must stay valid until the Performance Certificate is issued — that’s after defects are fixed.
- 🔹 If the Contractor doesn’t submit it on time? The Employer can terminate immediately under Clause 15.2 — no grace period.
No flexibility. No compromise. The Employer holds the reins tightly here.
📘 FIDIC 2017 – Sub-Clause 4.2
Now let’s see how FIDIC matured in 2017:
- 🔹 Same deadline: 28 days after the Letter of Acceptance.
- 🔹 Still from a reputable financial institution, still in an Employer-approved form.
- 🔹 The big difference? 🎯 It adds due process:
- Before calling the Performance Security, the Employer must notify the Contractor in writing and cite the clause that’s been breached.
- That’s a huge improvement — it prevents “trigger-happy” bond calls and protects the Contractor from surprise actions.
- 🔹 Another win: once the Performance Certificate is issued, the Employer is obligated to return the original bond within 21 days.
- 🔹 Plus, if the Contractor doesn’t provide the bond in time, the Employer must now give 14 days’ notice before terminating.
👉 This shift reflects a growing trend in contracts toward procedural fairness and balance between the parties.
3️⃣ Key Interpretations and Practical Implications
Below are crucial interpretations that apply under both editions (with some 2017 refinements):
- Obligation to Provide Security
- The Contractor must procure and maintain the Performance Security from a reputable issuer approved by the Employer.
- If the Contractor fails to provide it in time, the Employer can treat it as a contractual breach—potentially even leading to termination.
- Limited Grounds to Call Upon Security
- 🚨 Critical Point: The Employer can only draw on the Performance Security for the reasons enumerated in Sub-Clause 4.2, such as the Contractor’s failure to remedy a default within a stated period (e.g., 42 days).
- Expiry and Extension
- Both editions require the Contractor to ensure that the Performance Security never expires prematurely. If the expiry date is approaching and the Contractor has not yet earned the Performance Certificate, the Contractor must extend validity.
- Obligation to Return
- ✅ Once the Works are complete, all defects are remedied, and a Performance Certificate is issued, the Employer must return the original security, typically within 21 days.
- Changes in the Contract Price (2017 Edition)
- 📌 New in 2017: If the Contract Price changes by more than 20%, the Performance Security can be increased or decreased proportionately.
- Employer’s Indemnity (1999 and 2017)
- The Employer must indemnify the Contractor if the Performance Security is called in circumstances where the Employer was not entitled to make the claim.
4️⃣ Cross-Referencing with Other Clauses
4.1 Sub-Clause 2.5 (Employer’s Claims) and Clause 20/Clause 21 (Claims and Disputes)
- Why it matters: Before the Employer calls on the Performance Security, any claim for payment that the Employer believes it’s owed generally needs to go through the standard claims procedure. This ensures the Employer isn’t making a hasty call on the security without proper cause or documentation.
- Picture this: Suppose the Employer thinks the Contractor owes them for extra costs due to defective work. Under Sub-Clause 2.5 (Employer’s Claims) or the broader Claims, Disputes, and Arbitration clauses (which are Clause 20 in 1999 and Clause 20/21 in 2017), the Employer will first have to establish an entitlement—often by notice, negotiation, or adjudication. Only if that process confirms the Contractor truly owes money (and hasn’t paid within a stated period) will the Employer have grounds to call the Performance Security.
- Engagement tip: It’s almost like a safety check or “due process” rule. It keeps the Employer from arbitrarily dipping into the security and also gives the Contractor a chance to present their side.
4.2 Sub-Clause 15.2 (Termination by Employer)
- Why it matters: This clause describes how and when the Employer can terminate the Contract because of the Contractor’s default. Once termination grounds are validly established, Sub-Clause 4.2 (Performance Security) becomes a lifeline for the Employer to recover costs.
- Picture this: Maybe the Contractor completely stops work halfway through the project, ignoring repeated notices to correct the situation. If the Employer proceeds with termination, they can legitimately call on the Performance Security to mitigate losses like hiring a replacement contractor or handling any additional expenses caused by the default.
- Engagement tip: Think of Sub-Clause 15.2 as the big hammer, with the Performance Security acting as the financial fallback once that hammer has been (legitimately) swung.
4.3 Sub-Clause 14 (Contract Price and Payment)
- Why it matters: Your Contract Price can go up or down significantly—especially in the 2017 Edition, where there’s a clear rule about increasing or decreasing the Performance Security if the total Contract Price changes by more than 20%.
- Picture this: Let’s say the Employer instructs a big Variation worth 25% of the original contract sum. Under the 2017 rules, the Employer has the right to request an increase in the Performance Security to match this larger contract value. Similarly, if the Contract Price drops drastically, the Contractor can request the security be reduced.
- Engagement tip: Keep an eye on the Variation totals! If you’re the Contractor, you don’t want to provide more security than necessary. If you’re the Employer, you want to ensure your security still covers that bigger risk if the scope (and price) balloon.
4.4 Clause 11 (Defects After Taking Over) – and the Performance Certificate
- Why it matters: Clause 11 deals with the Defects Notification Period (DNP) and outlines your obligations to fix issues that appear after the project is substantially complete. Sub-Clause 4.2 specifically notes that the Performance Security must remain valid until you’ve tackled all those defects and earned your Performance Certificate.
- Picture this: You’ve completed the project and the Employer issues a Taking-Over Certificate, but some minor defects pop up. You fix them promptly, pass the final checks, and then—once your Performance Certificate arrives—the Employer is obliged to release that security (usually within 21 days).
- Engagement tip: Don’t forget to diarize the timeline for the Defects Notification Period. Even if your main works are done, the Performance Security is still locked in place until the official green light (Performance Certificate) signals you’ve met the last of your obligations.
Bringing It All Together
- Sub-Clause 4.2 isn’t an island. It directly interacts with the Claims/Disputes process (so the Employer doesn’t wrongfully call the security), the Termination clause (setting out final recourse in a default scenario), the Payment/Variations clause (adjusting the security amount if the contract sum goes up or down significantly), and the Defects Liability framework (ensuring the security remains valid until final obligations are cleared).
- Insight: Whenever you see a major event—like a claim for payment, a big Variation, or potential termination—be sure to double-check Sub-Clause 4.2. Ask yourself: “Does this trigger a need to adjust the security amount or allow an immediate call on it? Has the Contractor’s default or non-payment situation been confirmed?” It’s about aligning those puzzle pieces so that the performance security does exactly what it’s meant to do: offer a fair, well-structured safety net for the Employer, without unnecessarily tying up the Contractor’s funds or placing them at risk of an unjustified call.
5️⃣ Realistic “What If” Scenarios
💡 What if the Contractor gives a bond that the Employer deems “unacceptable”?
- The clause requires Employer approval of both the form and issuer.
- If rejected, the 28-day clock keeps ticking — the Contractor might still face termination.
💡 What if the Employer wants to call the bond without warning?
- ✅ 1999? Allowed — nothing stops them.
- 🚫 2017? Not allowed. They must notify in writing, with clause references.
💡 What if the Employer forgets to return the bond after project completion?
- In 2017, the Employer is clearly obligated to return it within 21 days of the Performance Certificate.
- If they don’t, the Contractor can file a claim under Sub-Clause 20.2 for non-compliance.
6️⃣ Suggestions for Clarity & Contractual Improvement
The Performance Security is crucial to ensure the Contractor maintains diligent performance and gives the Employer some financial protection if the Contractor fails to meet key obligations. However, due to its importance and potential for dispute, clarity in drafting can prevent misunderstandings, excessive claims, or unfair calls on the Security.
6.1 Clarify Notice Requirements for Calling the Security
Suggestion
Insert language in Sub-Clause 4.2 stating that, except in emergencies or where immediate recourse is contractually justified (e.g., the Security is about to expire), the Employer should provide written notice to the Contractor before drawing on the Performance Security.
Example Wording
“Before making a claim under the Performance Security, the Employer shall give the Contractor at least 7 days’ notice in writing of the Employer’s intent to do so, specifying the reason for the claim and the amount intended to be claimed. If the Contractor remedies or disputes the alleged default within this notice period, the Employer shall not proceed with the claim unless justified by the Contract or by law.”
Why it helps
This ensures the Contractor has a final opportunity to cure any defect or clarify misunderstandings, reducing the likelihood of a premature or unjust call on the Security.
6.2 Define “Reputable” or “Recognized” Bank
Suggestion
Often, Sub-Clause 4.2 states that the Performance Security must be issued by a “reputable bank or entity” approved by the Employer. Given the variety of financial institutions, this term can be ambiguous. You could include specific guidelines or rating requirements (e.g., RBI-approved banks in India, or a minimum credit rating by recognized rating agencies).
Example Wording
“The Performance Security shall be issued by a bank that is licensed in India and listed in the Reserve Bank of India’s Schedule of Commercial Banks, or by a foreign bank with an equivalent minimum ‘A’ credit rating from an approved international rating agency, and in a form acceptable to the Employer.”
Why it helps
Reduces disputes over “acceptable” issuers and ensures the Security is backed by a solid financial institution.
6.3 Address Partial or Incremental Calls
Suggestion
In some scenarios, the Employer might need to call only part of the Security to cover smaller breaches or specific unremedied defaults. Explicitly allowing partial calls (rather than the entire sum) can be beneficial.
Example Wording
“Should the Employer be entitled to draw upon the Performance Security, the Employer may, at its discretion, call either the full amount or any lesser amount required to compensate for the Contractor’s default. The remaining balance of the Security shall continue to be valid for the unexpired term, unless otherwise stated.”
Why it helps
A partial-draw procedure prevents the Employer from having to call the entire Security for a relatively minor default, providing a more proportionate remedy and reducing potential financial strain on the Contractor.
6.4 Automatic Adjustments in the Security Amount
Suggestion
Sub-Clause 4.2 in the 2017 Edition references a threshold of ±20% change in the Contract Price for adjusting the Security amount. Some Employers or local regulations in India might require a different threshold or a more flexible mechanism.
Example Wording
“Should the Contract Price increase or decrease by more than 15% (or an alternative percentage) of the Accepted Contract Amount, the Contractor shall promptly increase or decrease the Performance Security by a corresponding proportion. This adjustment shall be effective upon the Engineer’s issuance of a Variation Order or Determination confirming such changes in the Contract Price.”
Why it helps
Specifies a clear, automatic trigger for revising the Security, avoiding confusion or delays if large Variations occur.
6.5 Explicit Return Procedure and Timing
Suggestion
The standard text typically states that the Performance Security must be returned within 21 days after the issue of the Performance Certificate. However, in practice, there can be delays or confusion.
Example Wording
“Within 21 days of receiving the Contractor’s request for the release of the Performance Security, following the issuance of the Performance Certificate, the Employer shall return the original Security document to the Contractor. If the Employer contends that any valid claim under this Security remains outstanding, the Employer shall, within the same 21-day period, provide the Contractor with written details of such claim.”
Why it helps
Ensures a predictable timeline for release and forces the Employer to formally clarify any outstanding issues to justify withholding the Security.
6.6 Managing Security for Multiple Entities or Joint Ventures
Suggestion
If the Contractor is a Joint Venture or consortium, specify whether each partner provides an individual Security or a combined Security naming all JV members.
Example Wording
“In the case of a Joint Venture, the Performance Security shall be in the name of all JV members, and shall reflect the joint and several liability of each member. Alternatively, each member may provide separate Securities proportionate to its share and scope of the Works, subject to the Employer’s prior written approval.”
Why it helps
Clarifies how the Security operates in multi-entity scenarios, avoiding confusion about which member’s obligations are covered.
6.7 Specific Technical Standards or Indian Code References
Suggestion
In India, local banks are governed by the Reserve Bank of India (RBI). Some Particular Conditions might require referencing relevant regulations or guidelines:
Example Wording
“The format and execution of the Performance Security shall comply with the Reserve Bank of India Master Circular on Guarantees and Co-acceptances (or any subsequent amendment in force at the date of issue), to ensure its enforceability under Indian law.”
Why it helps
Aligns the Security with local statutory requirements and ensures its legal enforceability in Indian courts.
6.8 Additional Definitions and Cross-References
Suggestion
Some terms or cross-references in the FIDIC Clause may be unclear. For instance, the period in which the Contractor must “extend the validity” could reference a specific date in Sub-Clause 11.9 (Performance Certificate) or to a defined timeline after Substantial Completion.
Example Wording
“For the avoidance of doubt, the Contractor shall extend the validity of the Performance Security if the Performance Certificate has not been issued 30 days prior to the Security’s expiry, or if Sub-Clause 11.9 states additional tasks or rectifications are pending.”
Why it helps
Prevents ambiguous dates and ensures alignment with the Post-Completion obligations set out in Clause 11.
6.9 Model Particular Condition for India
Suggestion
Below is a brief model “Particular Condition” you could add, combining several clarifications:
Additional Provisions for India
(a) “Reputable Bank” shall mean any Scheduled Bank in India as defined under Section 2(e) of the Reserve Bank of India Act, 1934 and included in the Second Schedule to said Act.
(b) The Performance Security shall be in the form of a Demand Guarantee enforceable in India in the format annexed to these Particular Conditions or as otherwise approved by the Employer.
(c) The Contractor shall ensure the Guarantee is stamped as per the Indian Stamp Act, 1899 or any applicable state legislation, and that all related fees and taxes are borne by the Contractor.
Why it helps
This is a practical example of how to localize the clause text by referencing recognized laws and ensuring the Security is valid under local regulations.
Final Thought
Each of these suggestions aims to enhance clarity, protect both Parties, and reduce potential disputes by setting out unambiguous processes for issuing, adjusting, and calling the Performance Security. Incorporating these refinements (plus any references to local Indian codes, timelines, or regulatory requirements) into Sub-Clause 4.2 can strengthen the contractual framework and give all parties confidence in how the Security will be handled.
7️⃣ Final Takeaways
Let’s tie it all together in a neat bundle:
| 🔍 Feature | FIDIC 1999 | FIDIC 2017 |
|---|---|---|
| Bond Deadline | 28 days after Letter of Acceptance | Same |
| Form Approval | Required by Employer | Same |
| Calling the Bond | No notice required | Written notice required, citing default |
| Termination for No Bond | Immediate | 14 days’ notice |
| Return of Bond | Not specified | Must return in 21 days post-Performance Certificate |
| Contractor Protections | Limited | Enhanced fairness & transparency |
🎯 Bottom line: Clause 4.2 has evolved from a one-sided enforcement tool in 1999 to a balanced risk management mechanism in 2017.
✅ Sub-Clause 4.2 Performance Security – Compliance Checklist
| # | Checklist Item | Reference Sub-Clause/Point | ✅ |
|---|---|---|---|
| 1 | Has the Contractor submitted the Performance Security within 28 days of Letter of Acceptance? | Sub-Clause 4.2 / 28-day timeline | ☐ |
| 2 | Is the Performance Security issued by a reputable/approved financial institution? | Sub-Clause 4.2 / Approved bank criteria | ☐ |
| 3 | Is the format of the Performance Security in accordance with the Contract or approved by the Employer? | Sub-Clause 4.2 / Format compliance | ☐ |
| 4 | Is the Performance Security valid through the Defects Notification Period and until the Performance Certificate is issued? | Sub-Clause 4.2 / Validity duration | ☐ |
| 5 | Has the Contractor extended the validity of the Security if the Performance Certificate has not yet been issued? | Sub-Clause 4.2 / Extension condition | ☐ |
| 6 | Has the Performance Security been adjusted if the Contract Price changed by more than ±20%? | Sub-Clause 4.2 (2017) / ±20% rule | ☐ |
| 7 | Has the Employer provided written notice to the Contractor before making a claim on the Security? | Suggested Improvement / Notice before call | ☐ |
| 8 | Is the claim made under the Performance Security in line with the grounds specified in Sub-Clause 4.2? | Sub-Clause 4.2 / Grounds for claim | ☐ |
| 9 | Is the Performance Security released within 21 days of issuing the Performance Certificate? | Sub-Clause 4.2 / 21-day return | ☐ |
| 10 | Have all claims, variations, or disputes been resolved before the Security is released? | Clause 20-21 / Dispute resolution | ☐ |
| 11 | For JV Contractors: Has the Security clearly stated joint and several liability or proportional responsibilities? | Suggested Improvement / JV Security | ☐ |
| 12 | Is the Performance Security compliant with Indian laws (e.g., RBI guidelines, Stamp Act)? | Suggested Improvement / India compliance | ☐ |
📩 Sample Letter
📩 Sample Letter 1: Submission of Performance Security by Contractor
Scenario: Contractor is submitting the Performance Security within the required 28-day window after the Letter of Acceptance.
To: The Engineer / Employer
Subject: Submission of Performance Security – Sub-Clause 4.2
Date: [Insert Date]
Contract: [Insert Contract Title / Reference Number]
Dear [Engineer/Employer’s Name],
Pursuant to the requirements under Sub-Clause 4.2 of the Contract, we hereby submit the original Performance Security issued by [Bank Name] in the amount of [Insert Amount], representing [Insert %] of the Accepted Contract Amount.
The security:
- Is issued by a [reputable Indian scheduled bank / international bank with required credit rating];
- Is valid until [Insert Date], covering the full duration of the Works and Defects Notification Period;
- Complies with the format stipulated in the Particular Conditions of the Contract.
We kindly request acknowledgment of receipt and confirmation of its acceptability at your earliest convenience.
Yours sincerely,
[Authorized Signatory]
[Contractor’s Company Name]
📩 Sample Letter 2: Employer’s Request for Extension of Performance Security Validity
Scenario: The Contractor’s Performance Security is nearing expiry, and the Performance Certificate has not yet been issued.
To: [Contractor’s Name]
Subject: Request for Extension of Performance Security Validity – Sub-Clause 4.2
Date: [Insert Date]
Dear [Contractor’s Name],
We note that the Performance Security dated [Insert Original Issue Date] and issued by [Insert Bank Name] under the above-referenced Contract is set to expire on [Insert Expiry Date].
As the Performance Certificate has not yet been issued in accordance with Sub-Clause 11.9, and your contractual obligations under Sub-Clause 4.2 remain ongoing, we hereby request that you arrange for the extension of the validity of the Performance Security by at least [Insert Duration] and submit the extended document no later than [Insert Deadline Date].
Failure to extend the security by the specified date may result in the Employer making a claim under the existing Performance Security.
We appreciate your cooperation.
Sincerely,
[Authorized Representative of the Employer]
📩 Sample Letter 3: Employer’s Notice of Intention to Call on Performance Security
Scenario: Employer intends to draw on the Security due to Contractor’s failure to remedy a default.
To: [Contractor’s Name]
Subject: Notice of Intention to Claim under Performance Security – Sub-Clause 4.2
Date: [Insert Date]
Dear [Contractor’s Name],
We refer to your failure to [Insert Nature of Default, e.g., “remedy the identified structural defect in Section C of the Works”] within the stipulated 42-day notice period as per our letter dated [Insert Reference Date].
Pursuant to Sub-Clause 4.2, the Employer is entitled to make a claim under the Performance Security for the Contractor’s failure to fulfill contractual obligations. Unless satisfactory corrective action is taken or payment is made within [Insert Number] days, we intend to proceed with claiming an amount of [Insert Amount] from the Performance Security held with [Insert Bank Name].
Should you wish to provide any substantiated reasons or objections, you are requested to do so within the above notice period.
Sincerely,
[Authorized Representative of the Employer]
📩 Sample Letter 4: Contractor’s Objection to Employer’s Intended Call on Security
Scenario: Contractor disputes the Employer’s basis for intending to claim on the Performance Security.
To: [Employer’s Name / Engineer]
Subject: Objection to Proposed Claim on Performance Security – Sub-Clause 4.2
Date: [Insert Date]
Dear [Employer/Engineer’s Name],
We refer to your letter dated [Insert Date], in which you indicated your intention to claim under the Performance Security.
We respectfully submit that such action is unjustified and premature for the following reasons:
- [List key reasons – e.g., “The alleged defect is not attributable to the Contractor,” or “The notice period under Sub-Clause 4.2 has not yet expired.”]
- [Optional: Attach photos, reports, timelines, or Engineer’s correspondence in support.]
We therefore request that no claim be made against the Performance Security, and we reserve our rights under the Contract, including recourse to the Dispute Avoidance/Adjudication Board (DAAB) and/or arbitration, as per Clause 20/21.
Yours sincerely,
[Authorized Signatory]
[Contractor’s Company Name]
📩 Sample Letter 5: Request for Return of Performance Security (Post-Completion)
Scenario: Contractor requests return of the Performance Security after receiving the Performance Certificate.
To: [Employer / Engineer]
Subject: Request for Return of Performance Security – Sub-Clause 4.2
Date: [Insert Date]
Dear [Engineer/Employer’s Name],
We refer to the Performance Certificate issued on [Insert Date] in accordance with Sub-Clause 11.9 of the Contract.
As per the provisions of Sub-Clause 4.2, we kindly request the return of the original Performance Security issued by [Insert Bank Name], which is now due for release. All obligations under the Contract have been fulfilled to the satisfaction of the Employer and the Engineer.
We request you to confirm the release and return of the Security within the stipulated 21 days as per contract terms.
Sincerely,
[Authorized Signatory]
[Contractor’s Company Name]
