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Ziggurat: the crumbling edifice of surety bonds

I read the decision in Ziggurat with some incredulity. I hadn’t intended to trespass on Karen Spencer’s territory, and overall I’d agree with her conclusion that the amendments made to the ABI form seem to have confused rather than clarified matters. I’d also agree with Roddy Cormack’s comment that more radical surgery is needed if the employer wishes to secure earlier payment following the contractor’s insolvency. But I did want to offer some thoughts on what the decision tells us about wider issues in the surety bonding market.

The Perar issue: debt and breach

Most commentaries on the case (including Karen’s) have focussed on the Perar point. As Karen notes, under the JCT forms insolvency is not in itself a breach and will not therefore trigger a call on the bond. That is why many employers (and their advisers) seek to amend the ABI form to include insolvency as a ground on which a call may be made.

All well and good. But in this case, as Coulson J makes clear, the point had become a non-issue by the time the call was made, since the contract administrator had issued a certificate under JCT clause 8.7.4 stating a balance due from the contractor to the employer. That created a debt, and the contractor’s failure to pay constituted a breach to which (as Peter Gibson LJ noted in Perar) the ABI bond would respond.

In short, an open and shut case. So why did the matter come to court at all? Even accepting (as Coulson J noted) that it was open to the surety to challenge the amount of the debt, why did it not accept liability and pursue its case on quantum only? That, to me, is the real question raised by this decision.

Sureties: teeth and nails

Try as I may, I can’t avoid the conclusion that the surety was desperate to try and avoid liability, at (almost) any cost. We have seen this many times before, the Hackney Empire saga being a recent precedent that springs to mind. But Ziggurat does seem to be a particularly egregious example.

I accept that it is entirely appropriate for sureties to resist spurious claims, and that they do not wish to set an unwelcome precedent by paying out too easily. But (I’d suggest) that is very far from the position in this case. Putting the claimant to proof is one thing; defending the indefensible is quite another. Put another way, is the surety’s premium income better spent on settling obviously meritorious claims, or in fighting a hopeless cause tooth and nail? As most readers will know, to mount a TCC action does not come cheap, especially if you lose. Is the surety industry really so stressed that it needs to conduct itself in this way?

Context: expectations and reality

It’s worth remembering the context in which bonds are typically requested on construction projects; namely, to provide security in the event of the contractor’s failure – a piquant subject this week, given Carillion’s sad demise. In almost all cases, it is the employer who pays for the bond, in the understanding that it is getting something meaningful for its money. Many employers (and, just as important, funders) mistakenly believe that a bond will provide a pot of money to fund completion of the works if the contractor becomes insolvent. Surety companies have been only too willing to acquiesce in this deception, holding out their product as offering “sleep at night” comfort and happily collecting premiums in return.

We have been advising clients for many years (since Trafalgar House v General Surety, in fact) that this is not what surety bonds actually offer. A more realistic view is that they provide a “right to sue” once the work has been completed and the final account assessed. For those clients who see that as a valuable source of protection, a bond may be worth the cost. Others take a different view, saving the premium and seeking alternative forms of security.

We have also long known that sureties do not lightly part with their cash. Clients can expect a fight before receiving a payout, even where the very event occurs that the bond is designed to cover. But, even against that backdrop, the surety’s approach in Ziggurat is eyebrow-raising.

An aberration or a trend?

Is this case a one-off, or an indication of a hardening in attitude among sureties generally? Only time will tell, but the signs are not promising. We are seeing sureties push back on terms that have become market standard in recent years; for example, refusing to accept an adjudicator’s decision as the basis for a call, even where the bond includes a reconciliation mechanism should the decision later be overturned in court or arbitration proceedings.

Of course, it is up to them. But, assuming they wish to continue providing bonds for construction projects at all, I’d suggest that sureties should think very carefully before biting the hand that feeds them. Employers are increasingly aware of the tactics that sureties commonly use to avoid payment, and many are already unwilling to incur costs on an instrument that in reality offers little value. The “Carillion effect” is only likely to focus minds, on both sides of the debate.

Final thoughts

In summary, I think Karen has answered the wrong question. The right question is not whether (and, if so, how) to amend the ABI form, but whether a surety bond is really worth having at all.

My closing advice? By all means ask for a bond at tender stage, if only as an informal credit check. But, assuming an on demand bond is not available (and, in the UK at least, it rarely will be), clients may be well advised to look elsewhere for the security they need.

Berwin Leighton Paisner LLP John Hughes-D’Aeth

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