Reduction clause in an advance payment guarantee (AP-bond) under an overseas construction contract

Purpose: The purpose of this paper is to review characteristics and functions of an advance payment guarantee (AP-Bond), and to analyse some legal and practical issues concerning a “reduction clause” in an AP-Bond under an overseas construction contract. Design/methodology/approach: This paper compares relevant provisions of the URDG 758, the UN Convention, the ISP 98, and the FIDIC Silver Book, and also cites relevant case laws of the USA, UK and Korea. This paper also refers many Korean scholars’ views on characteristics of an independent guarantee including an AP-Bond. Findings: A demand for payment under an AP-Bond shall not be honoured in the event that an employer wrongfully refuses to issue documents required for reduction of an AP-Bond. A beneficiary shall not be favoured by independence nature of an AP-Bond in case of fraud or abuse of right. Originality/value: This paper originally analyzes a “reduction clause” in an AP-Bond. This paper provides logics that a demand for payment shall not be honoured in the event that a beneficiary wrongfully refuses to issue documents required for reduction of an AP-Bond.