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Why is the difference between an advance payment guarantee and a performance bond important?

In construction contracts, both an advance payment guarantee and a performance bond in the form of a bank guarantee are often agreed, which the contractor must provide. This distinction is particularly important if the employer makes unlawful use of the bank guarantee.

A performance bond ensures that the work is carried out without defects and is intended to put the employer in the same position as if the contract had been fulfilled in full. In particular, it also covers damage caused by delays and additional costs incurred by replacement companies and is also available in the event of (justified) early termination of the contract by the employer (Austrian Supreme Court, OGH 1 Ob 8/19m). In contrast, an advance payment guarantee is characterised by the fact that it secures only the return of the advance payment made if the (work) service paid for is not delivered (Austrian Supreme Court, 1 Ob 44/07p). In the case of an advance payment guarantee, it is usually agreed that the amount of the guarantee is continuously reduced to the extent that the contractor has fulfilled its contractual obligation towards the employer, because no further security is required to the extent that the advance payment has been used for the intended purpose and the works or services have been performed (Austrian Supreme Court, 8 Ob 96/11t; see also Clause 14.2.3 FIDIC Yellow Book).

The question of whether a guarantee has been called abusively therefore often depends in particular on whether it was a performance guarantee or a mere advance payment guarantee.

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