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Harbour View, contractor insolvency and the importance of a guarantee expiry date

One of the interesting features of the recent decision of Coulson J in Ziggurat (Claremont Place) LLP v HCC International Insurance Company Plc is the effect on a guarantee of a contractor becoming insolvent many years after a construction project has been completed. In Ziggurat, the amended ABI model form of guarantee bond had not yet expired. This allowed the employer to make a claim under the guarantee arising out of the contractor’s insolvency, notwithstanding the fact that the contractor’s employment had already been terminated and the project had achieved practical completion.

The employer’s argument in Ziggurat was based on the Court of Appeal decision in Wilson and Sharp Investments Ltd v Harbour View Developments Ltd. The effect of the decision in Harbour View is that the employer’s rights under clauses 8.7 and 8.8 of the JCT contract, which arise upon the contractor’s insolvency, survive notwithstanding the fact the contractor’s employment has already been terminated. In other words, an insolvency event which occurs after termination of the contractor’s employment can be relied on to relieve the employer of payment obligations and to trigger the clause 8.7.4 accounting exercise. This has important implications for a bondsman providing a guarantee in respect of the contractor’s performance on a construction project, where the guarantee responds on an insolvency. 

Surprising consequences?

Taken to its logical conclusion, if a contractor becomes insolvent many years after a project has been completed (even if the contractor’s employment on that project had been terminated), in theory the employer can make a claim under the guarantee as a result of the insolvency (provided that such guarantee has not expired). This might be thought by some to be a surprising result. Should a bondsman really be liable to pay out under the guarantee, even though the contractor is no longer employed, the project has long since been completed and accounts have long since been settled?

The commercial purpose of a guarantee is to give the employer a right to claim reimbursement for expenses incurred in completing a project as a result of a specified event. In practice this specified event will often be the contractor becoming insolvent. As such, it is logical that the guarantee should respond on insolvency whenever such insolvency occurs.

So far, so good. But by the time a project has been finished for a number of years, the employer will have moved on and got on with its business and may well have forgotten all about the project. Often, the employer will have recouped any losses suffered because of the project, during the ordinary course of business. If, a number of years after a project has completed, the employer hears that the contractor has become insolvent, should the employer really be entitled to call upon the bondsman to pay out at that point? Can that really be the purpose of a guarantee?

The answer, it is now clear, may be yes, if the guarantee has not yet expired.

What is expiry?

The fact that the guarantee had not yet expired was the key to the employer’s argument in Ziggurat. It is what allowed the employer to succeed in its argument that the contractor’s insolvency (which occurred when the bond was still alive, notwithstanding the earlier termination of the contractor’s employment) triggered a claim under the guarantee. The ABI model form of bond Guidance Notes state the following about Expiry:

“The actual date of ‘Expiry’ which is to be inserted in the Schedule will be a matter for negotiation and discussion between Employer and Contractor in each instance”.

It will be a matter for the parties to decide when any guarantee expires. Often, expiry will be tied to practical completion or final completion of the works, no matter whether it is the original or a replacement contractor which completes. In that situation, no real issue arises because the guarantee will have expired at the time of completion of the project. But, either by error or by design, expiry under a particular guarantee may be stated as being tied to completion of the original contractor’s works or to some other event or there may be no expiry date. In such a situation, the guarantee may remain alive for many, many years.

Most bondsmen will want to avoid the uncertainty of possible exposure to a claim that arises years after completion of the project that was the subject matter of the guarantee. Against that, well-advised employers will now be fully aware of the benefit to them of “long life” guarantees. It remains to be seen how premiums will be affected. We may see parties trying to amend clause 8.5.3 of the JCT standard form (which was the spring-board for the arguments in Harbour View and in Ziggurat) to circumvent the result in these cases. What is clear is that specifying a suitable expiry date in the guarantee is the key to avoiding a possible uncommercial result of a guarantee responding many years after completion of a project.

Jules Harbage and Carly Thorpe of Walker Morris LLP, instructing Alexandra Bodnar of 39 Essex Chambers, acted for the successful employer in Ziggurat v HCC.

39 Essex Chambers Walker Morris LLP Alexandra Bodnar Carly Thorpe

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