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TCC judgment illustrates danger of amending ABI bond

In my previous blog post, (Mis)Understanding Perar, I referred to the practice of employers of amending the standard ABI bond wording to cater for misconceived difficulties in claiming under a performance bond following the insolvency of the contractor. At the time, there was no reported decision on a bond wording that contained such amendments, but we now have one. 

Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc

In the case of Ziggurat (Claremont Place) LLP -v- HCC International Insurance Company plc the court was faced with standard ABI bond wording, which had been amended by including a new clause 2:

“The damages payable under this Guarantee Bond shall include (without limitation) any debt or other sum payable to the Employer under the Contract following the insolvency (as defined in the Schedule) of the Contractor.”

The facts of the case were that the employer (claimant) engaged a contractor (County Contractors (UK) Ltd) on the JCT 2011 form of contract to build blocks of student studios in Newcastle Upon Tyne. The guarantor (defendant) issued a performance bond to guarantee the contractor’s obligations.

In February 2016 the contractor stopped work. The contract administrator served a notice of default citing the contractor’s suspension of works and failure to proceed regularly and diligently. This was followed by a notice of termination on 31 March 2016. On 8 April 2016 the contractor went into a CVA.

The employer engaged others to complete the student accommodation, following which the contract administrator drew up an account of the balance due between the parties in accordance with the contractual provisions. The employer demanded payment of the debt due of £621,798.38 from the contractor and made a demand under the bond for the maximum bond amount of £382,519.06. One year later, the contractor’s solicitors wrote complaining about the nature of the termination of the contractor’s employment and disputing the quantum of the employer’s claim, however, without giving particulars.

There were two essential issues before the court:

  • What the employer needed to establish to bring a claim under the bond and, in particular, whether clause 2 was a stand-alone clause or accessory to clause 1.
  • Whether the amount of the debt demanded by the employer could be challenged.

What did the employer need to establish before making a claim?

In relation to the first issue, the employer argued that clause 2 was a stand-alone clause, which was not linked to or in any way accessory to clause 1 (which was in the form of the standard ABI bond wording stating that the guarantor guaranteed that in the event of a breach of contract by the contractor then the guarantor would satisfy and discharge the losses and damages sustained by the employer as established under the contract).

The guarantor submitted that the bond was a default bond and, as such, it was necessary to prove both that a breach had taken place and that losses had been incurred as a result of that breach before a claim could be made under the bond. The guarantor said that clause 2 was definitional only and did not set out a stand-alone obligation; that the trigger for the guarantor to pay was a breach under clause 1, not an insolvency event under clause 2.

The judge did not accept the guarantor’s submissions and stated:

“In my view, that is an erroneous reading of the provisions of the bond… That interpretation would mean that clause 2 could never operate. If an insolvency event is not a breach, which is the assumption for this purpose, and the only trigger under the bond is a breach of contract by (the contractor) then clause 2 would be rendered redundant.”

The judge’s conclusion in this respect is different to that in the leading case on conditional bonds (Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co Ltd), in which it was made clear that proof of breach of contract and proof of loss were required to found a claim under a guarantee bond. Of course, the House of Lords was not faced with the amended ABI bond wording and specifically the new clause 2.

It is clause 1 of the ABI bond wording that contains the actual obligation of the guarantor to make payment. So it seems unclear how clause 2 can operate to obligate the guarantor to make payment without it being read in conjunction with clause 1. In practice, the reason employers give for adding the reference to “debt” (or insolvency) into bond wordings is to more precisely mirror the wording of the contract because the account to be taken following the insolvency of the employer is described as a debt in the contract and there is concern (albeit unjustified) that this may not fit within the bond wording description of “damages”. I agree with the judge’s conclusion in this case that “if clause 2 was somehow assisting in the definition of the quantification process only, it would be adding nothing”. Damages is wide enough to include “debt”, so it is not necessary to include “debt”, however, not for the first time, the court is faced with the tension between giving effect to the meaning of the actual words used and parties using wording that is duplicative or unnecessary. Adding unnecessary wording to the standard ABI bond wording in this case has resulted in contested proceedings with competing arguments about what was the intention of the parties when it may simply have been the employer’s intention to clarify that damages would include the debt payable following insolvency.

In summary, the judge stated that in his view “clause 2 of the Bond can have had no purpose whatsoever other than to make it clear that the bond was to protect (the employer) from the non-payment by (the contractor) of the debt following insolvency”.

The judge cut through the lengthy declarations sought by the employer, which he described as “unnecessary prolix”, and honed it down to the key issues. Looking at the factual scenario of this case, the legal arguments seem to have overcomplicated a fairly straightforward claim under a bond in precisely those circumstances for which a bond is obtained in the first place.

The judge was asked whether a breach of contract on the part of the contractor was always required under clauses 1 and 2 or whether an insolvency event (which the parties assumed not to be itself a breach of contract) was enough to trigger liability on the part of the guarantor under clause 2. The judge, while apparently deciding that clause 2 was stand-alone and enough to found a claim under the bond, also said that was the wrong approach and that the right approach was to identify what was necessary for a successful claim to be made against the guarantor under the bond in circumstances where the contractor was insolvent and had not paid the debt that had been ascertained by the employer in accordance with the building contract. He said even assuming that his stand-alone interpretation of clause 2 was wrong, and the guarantor was right in saying that there had to be a breach under clause 1 before clause 2 came into play, in his view, it was beyond doubt that there was such a breach. The debt due was claimed from the contractor but had not been paid; that was a breach of the contract. This secondary reasoning is clearly correct.

The judge referred to the Court of Appeal decision in Perar and stated that “Perar was a complete answer to the breach point: if (contrary to my primary view) a breach by (the contractor) is required to trigger the bond, then such a breach has occurred in this case” referring to the contractor’s failure to pay the debt due.

Could quantification of the debt be challenged?

The second main issue to be decided was whether the debt, once demanded, was due or whether the quantification of it could be challenged. There was reference to the Tower Housing and Paddington Churches cases in which it was made plain that what was required to trigger a claim under the bond was the completion of the ascertainment and accounting exercise under clause 8.7. Once that contractual process had been followed, there was no need for the employer to pursue the insolvent contractor, a claim could be made under the bond.

The judge stated that the point before him in respect of the second declaration would be narrowed down to a short, albeit important, point – namely whether all that was required was the ascertainment of the figure in accordance with the contract or whether, as the guarantor contended, the guarantor could defend himself against the claim by advancing any of the arguments as to quantum of the debt. The judge found in favour of the guarantor that there was nothing in the contract to say that the contractor, and by extension, the guarantor, could not challenge the figure asserted by the employer without any ability to challenge it. If the contractor could have made that challenge, then so could the guarantor. So to the extent that the employer was seeking to suggest that the debt was conclusive and could not be challenged by the guarantor as a matter of principle, then he rejected that argument.

Amending the ABI model wording remains unnecessary

So we now have a first instance decision on one particular aspect of the amendments that are advanced in relation to ABI bond wordings in an unnecessary attempt to cater for the insolvency of the contractor. The judge in this case was not faced with the other, albeit also unnecessary, amendment to state that insolvency of the contractor is a breach. Including such clauses runs the risk of having further litigation to clarify what the meaning and effect of such an amendment is.

This case also confirms that the response to the question: “Will the performance bond respond if the principal contractor becomes insolvent?” is and remains yes, with or without the (in my view unnecessary) amendments to refer specifically to insolvency and debt.

Gateley Plc Karen Spencer

One thought on “TCC judgment illustrates danger of amending ABI bond

  1. In defence of the red pen, however, there is still an argument in favour of amendment of the ABI form of bond.

    I would agree with Karen that if the Employer’s sole objective is to get paid under the bond at some future date then amendment of the bond would not be necessary.

    Such a position could possibly be reasonably adopted when working under an NEC 3/4 contract where the Final Account process occurs within weeks of termination due to insolvency.

    But what if you are dealing with a JCT / SBCC form where the equivalent of a Final Account process may well not occur for a year or two after termination (by the time alternative contractors are procured, the works are complete and all defects are remedied)? An Employer may simply not have the cash flow to complete a project without the extra-over costs being fed into their cash reserves in advance of the works being completed.

    What the line of cases do demonstrate, however, is that if you are going to amend the ABI bond to ensure an earlier release under the Bond then you can’t just look to the existing termination valuation / payment regime as a short hand mechanism. Much more bespoke drafting would be necessary.

    As a consequence, I don’t think it’s necessarily time to put away the red pen just yet.

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