First-demand guarantee: cap set at 5% of public contract

You are a craftsman in Hérouville-Saint-Clair, you have just won a public contract for the renovation of a school. The contracting authority demands a first-demand guarantee for an amount equivalent to the entire contract price, i.e. €150,000. Is this legal? This is the question every contractor faces when confronted with such a requirement. The Court of Cassation, in a judgment of 4 February 2016, answered in the negative: the amount of the first-demand guarantee, when it replaces the statutory retention of guarantee, is capped at 5% of the contract amount, and not the sums actually paid. A welcome clarification for professionals.

The facts: a story like many that happen every day

In 2010, the company Bâtiment et Travaux, based in Vire, lands a public contract for the construction of a gymnasium. The contract provides for a retention of guarantee of 5% of the contract amount, as allowed by Article 99 of the Code des marchés publics. To avoid this retention, the contractor offers a first-demand guarantee issued by the Banque du bâtiment et des travaux (BBT). The bank undertakes to pay upon simple demand of the contracting authority, without being able to raise any objection. However, the suretyship contract mentions a guarantee amount equal to the total contract amount, i.e. €200,000. When the contracting authority calls the guarantee for defects, the bank pays in full, then seeks recourse against the contractor. The latter contests: according to him, the guarantee could not exceed 5% of the contract, i.e. €10,000. The bank sues the contractor for payment. The Commercial Court of Caen rules in favour of the bank, but the Court of Appeal of Caen reverses the judgment: it limits the guarantee to 5%. The bank appeals to the Court of Cassation.

The reasoning of the court — dissected

The Court of Cassation examines Article 99 of the Code des marchés publics (now Article R. 2191-31 of the Code de la commande publique). This text provides that the contracting authority may retain 5% of the contract amount as a guarantee. The contractor may avoid this by providing a first-demand guarantee of an equivalent amount. The key word is there: equivalent. For the High Court, this term means that the 5% cap also applies to the substitute guarantee. It does not matter whether the sums actually paid to the contractor are higher or lower: the guarantee is fixed at a maximum of 5% of the initial contract amount. The bank argued that the amount of the guarantee should correspond to the sums paid (which could be higher in case of amendments). The Court rejects this argument: the cap is that of the initial contract, as defined in the contract. This is a strict interpretation, but protective for the contractor. The decision confirms consistent case law (Civ. 3e, 10 July 2013, no. 12-20.195).

What this changes for you — concretely

For the contractor: You can now be reassured. If you provide a first-demand guarantee for a public contract, its amount cannot exceed 5% of the contract price. Example: for a contract of €300,000, the guarantee will be capped at €15,000, even if you have received €250,000 in advances. Caution: this cap only applies to the guarantee substituting for the statutory retention. If the contracting authority requires an additional guarantee (e.g. for an advance), the cap does not apply.

For the contracting authority: You cannot require a first-demand guarantee for an amount exceeding 5%. If you do, the contractor may contest it and the judge will reduce the amount. In Vire, a contracting authority had to reimburse €40,000 to a contractor after such a challenge.

For the bank surety: You must check the legal cap before issuing a guarantee. If you pay beyond it, you will not be able to seek recourse against the contractor for the excess amount.

Four tips to avoid this type of dispute

• Check the cap in the contract: Before signing a first-demand guarantee, ensure that its amount does not exceed 5% of the initial contract. If it does, demand a correction.
• Specify the calculation basis: The 5% cap applies to the initial contract amount, excluding amendments. Have this stated in black and white in the suretyship contract.
• Keep evidence: Keep a copy of the contract, amendments and guarantee. In case of a dispute, you can prove the reference amount.
• Anticipate abusive calls: If the contracting authority calls the guarantee for an excessive amount, challenge it immediately in writing. Apply to the interim relief judge if necessary.

Further reading: related case law and developments

This decision is part of a consistent line of case law. The Court of Cassation had already ruled, in a judgment of 10 July 2013 (no. 12-20.195), that the first-demand guarantee cannot exceed 5% of the contract. The 2016 judgment merely confirms this rule. Moreover, the supreme administrative court, the Conseil d'État, applies the same rule for public contracts (CE, 28 July 2000, no. 202788). The trend is therefore clear: the 5% cap is untouchable. For the future, practitioners must be vigilant: some contracting authorities try to circumvent the cap by requiring a separate independent guarantee distinct from the statutory retention. But if the guarantee is presented as substituted for the retention, the cap applies.

In practice: what to do

Checklist: what to do if you are faced with an excessive guarantee

1. Check the contract: Does the amount of the guarantee exceed 5% of the initial contract? If so, it is illegal.
2. Send a formal notice: Send a registered letter to the contracting authority and the bank to contest the amount and demand a reduction to 5%.
3. Apply to the court: In case of refusal, apply for interim relief to obtain a reduction of the guarantee amount.
4. Claim damages: If you have already paid an excess, you can claim reimbursement on the ground of unjust enrichment.

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