This case serves as a reminder to all parties to a contract as to the nature of guarantee bonds and the importance of understanding the rationale for making amendments to standard forms.

Background

In 2011, Ziggurat (Claremont Place) LLP (the “Employer”) employed County Contractors (UK) Ltd (the “Contractor”) to build a block of student studios in Newcastle under the JCT 2011 standard form building contract. HCC International Insurance Company Plc (the “Guarantor”) agreed to issue an ABI Bond (the “Bond”) to the Employer guaranteeing the Contractor’s obligations under the contract.

Following the Contractor’s suspension of the works in February 2016 due to financial difficulties, the Employer terminated the contract and engaged other contractors to complete the works in March 2016. The Contractor became insolvent following a Company Voluntary Agreement in April 2016.

In March 2017, the contract administrator prepared an account following completion and the making good of any defects, which included the costs involved in procuring other contractors to carry out and complete the works. The contract administrator issued a notice under clause 8.7.4 of the contract, claiming a balance due of £621,798.38 from the Contractor as a debt. This sum was never paid. Subsequently, the Employer made a demand under the Bond, referring to the debt due from the Contractor. The demand under the Bond was limited to a maximum amount of £382,519.06, but the Guarantor never satisfied this demand.

It is the first two clauses of the Bond which are relevant to this case:

  1. The Guarantor [the defendant] guarantees to the Employer [the claimant] that in the event of a breach of Contract by the Contractor [County] the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the losses and damages sustained by the Employer as established and ascertained pursuant to and in accordance with the provision of or by reference to the Contract and taking into account all sums due or to become due to the Contractor.
  1. 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 Guarantor submitted that the Employer had to prove that a breach of contract pursuant to clause 1 of the bond had occurred and losses were incurred as a result of that breach before a claim could be made.

Decision

The court rejected the Guarantor’s submission and found in favour of the Employer. In arriving at its decision, the court focused on what was necessary to bring a claim against the Contractor under the first two clauses of the Bond.

The wording under clause 2 of the Bond stated that “any debt or sum payable to the Employer” would be payable “following the insolvency (as defined in the Schedule) of the Contractor “. As the contract administrator’s certificate for the debt due (March 2017) followed the insolvency of the Contractor (April 2016), the debt due became payable to the Employer under clause 2 of the Bond. Clause 2 was triggered purely by reason of insolvency and therefore the amount was payable without the need to prove breach. Lord Justice Coulson concluded in his judgment that “clause 2 of the Bond can have had no purpose whatsoever other than to make it clear that the Bond was to protect the claimant [Employer] from the non-payment by County [Contractor] of the debt following the insolvency”.

Lord Justice Coulson noted that “it would be contrary to common sense” to construe clause 2 as being less important than clause 1, as to do so would mean that the only trigger for the Guarantor to fulfil its obligation to make payment under the Bond, would be a breach of contract under clause 1. The court considered this rationale to have missed the purpose of clause 2 and in effect, almost relegate the clause to being made redundant, reiterating that the Employer was not required to prove breach in order to have the Bond payment triggered, stating that the insolvency of the Contractor was enough to trigger payment under clause 2.

The Court were prepared to go further in the event that their interpretation of clause 2 was wrong and decided that the facts of the case would have satisfied the requirement for breach of contract under clause 1. Citing the case of Perar BV v General Surety & Guarantee Co Ltd 1994, Lord Justice Coulson concluded that “if a breach by County [Contractor] is required to trigger the Bond, then such a breach…occurred in this case” when the Contractor failed to pay the debt due to the Employer, “this is how the bond was intended to work”. From a drafting perspective, clause 1 makes it as clear as possible that a breach of contract will result in the Guarantor paying the claimed amount up to the permitted limit under the Bond. Little wonder Lord Justice Coulson considered clause 2, which is not in the standard ABI form and was added by the parties, to be superfluous, recognising that payment under the Bond would have been triggered under clause 1 as soon as the Contractor failed to pay the debt due to the Employer.

Lord Justice Coulson, commented on whether the additional wording in clause 2 served any real purpose, given that by his understanding, the definition of damages in clause 1 was already wide enough to include debt within its meaning. This suggests that the additional wording in clause 2, whilst aiming to help clarify the Employer’s intentions, nonetheless resulted in these proceedings.

Implications

Whilst modified clauses can allow for flexibility to standard form documents, care has to be taken when drafting these as there are often complex interactions with other clauses and even other contract documents.

The ABI bond operates as a guarantee of payment on contractor default (not on demand), providing the employer with an entitlement to damages immediately at the point where the contractor becomes liable under the contract. The ABI bond is industry standard and the ABI believes that it can be used without amendment.

The clause 2 amendment discussed above, whilst not uncommon but according to ABI, unnecessary, aims to assist the Employer in light of clause 8.7.4 of the JCT Standard Building Contract 2011, which prevents the Employer from claiming for losses due to Contractor insolvency until after completion.

In addition to understanding what an amendment to a standard clause does and means, it is important to remember that ancillary documents (e.g. bonds) must be read in the context of the main contract, and any amendments to either the main standard form contract or the ancillary documents must be consistent with each other. This involves taking a holistic and common sense approach to drafting so that all parties understand how risk is spread.

Our firm has a breadth of expertise on advising on standard form contracts, including industry standard construction contracts, and is readily available to assist clients wishing to use these. Feel free to contact any member of the construction team to make an enquiry.