Parent Company Guarantee: Everything You Need to Know
A parent company guarantee is a set of expectations that must be adhered to when a contractor or subsidiary company enter into contracts with a client.3 min read
A parent company guarantee is a set of expectations that must be adhered to when a contractor or subsidiary company enter into contracts with a client.
Parent Company Guarantee
A parent company guarantee is a promise that a company will meet the performance requirement that their clients expect. These come into play when a contractor or subsidiary enter into a contract with clients. The expectations outlined in this guarantee are detailed by the parent company. The document that outlines a parent company guarantee should clearly state that the parent company is only held liable if the contractor or subsidiary company is in breach of the contract and fails to correct the breach in question.
Should this occur, the parent company's liability to the client will not be greater than that of the contractor or subsidiary company. A parent company guarantee, or PCG, is a promise given by a contracting party's holding company. This is done in favor of the other party involved in the contract as a measure to guarantee the expected performance of contractual obligations.
The terms of an agreement might have limited value associated with them if the party you are entering into a contract with does not have the necessary resources or assets to back up the commitments they have made. Sales subsidiaries of suppliers might be potentially risky in terms of contracts and purchases if they don't possess the necessary resources or assets on their own. A parent company is generally not held liable for the sales of their contractors or subsidiary companies unless they specifically agree to take on the liability. The exception to this is in tort liability scenarios.
Even if both the subsidiary and the supplier sign your contract, the supplier is not normally held liable for the subsidiaries actions or purchases made through them unless the contract specifically states that there is a joint liability. In cases such as this, both parties are generally held liable.
There are multiple reasons that a parent company might choose to incorporate what is known as a "Buyer's Purchase" from a subsidiary company. Some of these reasons are:
- Avoiding liability on sales
- Conducting business directly in certain areas
- Avoiding the need to be registered in those areas
- Protecting prices and profits as a form of purchase through subsidiaries
A parent company might also want to avoid being held liable for their subsidiary companies because not every subsidiary is completely owned by the parent company. They also may wish to be held responsible for any promises that a subsidiary company makes in their contractual agreements.
When Would a Parent Company Guarantee Be Used?
In a construction setting, a parent company will normally offer a guarantee as a measure to bolster their subsidiary companies' financial credibility. In the event that one of the parent company's subsidiaries enters into a contract with a third party, the other entity involved may have an interest in ensuring that the contract is properly carried out. In cases such as this, they will look to other companies in the group to offer performance and financial guarantees to support these expectations.
A parent company guarantee offers a measure of comfort regarding the obligations that the subsidiary company in question is expected to meet. Parent company guarantees are common among employers because they provide a level of protection if the contractor should default on their contractual obligations. Protection of this nature can cover the employer in the event that the contractor in question is in breach of their contract. In many cases, this takes place on the contractor's insolvency.
Parent company guarantees in a construction setting are commonly offered by the holding company of the contractor. They will normally favor the employer as a means of guaranteeing certain performance obligations of the contract. Parent company guarantees are also commonly used by contractors as a means of protection should a subcontractor default on their obligations. Contractors may also ask for a parent company guarantee from employers when they are concerned about their employer's ability to pay wages. This might be a case in which the employer is an SPV that was set up by a larger holding company for a specific project.
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