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.


Author: Tola Odedoyin and Justin Mendelle

We continue our look back at some of the more interesting or lesser reported cases from last year – in the spotlight this week, GB Building Solutions Limited (GB) v SFS Fire Services Limited (SFS).

Background

In 2009, GB Building Solutions Ltd (the main contractor) was engaged as a design and build contractor for an office development in Manchester. It engaged SFS Fire Services Ltd (the sub-contractor) to design and install the development’s fire prevention sprinkler system.  Both parties entered into an amended JCT 2005 design and build sub-contract.  Due to an apparent fault with the water sprinkler system, flooding at the site caused damage, with GB claiming in excess of £600,000 for losses incurred as a result of the flood.

Clause 6.6.1 of the sub-contract conditions contained within it, a provision which stated that the joint names insurance policy that applied to GB would also name SFS as an insured.  The joint names insurance policy would cover SFS up until the Terminal Date.  In bringing its claim, GB claimed that the flooding occurred after the Terminal Date and therefore SFS was liable for the losses suffered.  In contrast, SFS raised a defence stating that because the meaning of practical completion under the sub-contract is to be given the meaning of practical completion as defined within the schedule of modifications, the flooding therefore occurred before the Terminal Date.  A dispute arose concerning the correct interpretation of when practical completion was considered to have occurred, for the purpose of ascertaining whether the flood occurred before or after the Terminal Date.

The key clauses from the sub-contract in relation to this dispute centred on the definition of practical completion, as this confirmed when the transfer of risk moved from the main contractor to the sub-contractor.  Within the standard sub-contract conditions, clause 6.1 defined the Terminal Date as:

the date of practical completion of the Sub-Contract Works or, in respect of a Section, of such works in the Section as determined in accordance with clause 2.20” (emphasis added).

Clause 6.1 reads as the Terminal Date being when the sub-contract works are practically complete in accordance with clause 2.20 that the main contractor and sub-contractor have to go through in order to confirm practical completion of the sub-contract works has been achieved.  However, the design and build sub-contract conditions as modified by the schedule of modifications defines “Practical Completion” as:

the issue of the Certificate of Practical Completion pursuant to the Main Contract.” (emphasis added)

The issue for the court, was whether the undefined definition of practical completion in clause 6.1 could be interpreted to mean the same as the defined term in the schedule of modifications and what effect that would have.

Decision

The court agreed with the arguments raised by GB, pointing out that the uncapitalised definition of practical completion in clause 6.1 could not be taken to mean the same as the capitalised definition of “Practical Completion” under the schedule of modifications.  Despite SFS raising the argument that the schedule of modifications takes precedence over the sub-contract conditions and therefore the definition of practical completion in clause 6.1 should be given the same meaning as in the schedule of modifications, the court opposed this interpretation of the clause and concluded that practical completion was achieved when the sub-contract works were practically complete under clause 6.1.

HHJ Davies acknowledged that whilst there was some ambiguity presented by the bespoke amendments to the JCT standard form document in providing two contrasting definitions of practical completion, the usual tools of contract interpretation apply.  Specifically, relying on the recent case of Wood v Capita Insurance Services Limited, he stated that “the court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement.”  In saying this, HHJ Davies considers interpreting “such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type” and the “iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.”

In reaching his judgment, HHJ Davies was content that there was no ambiguity between the two phrases as “they are not the same”, accepting the claimant’s submission that “it would have been perfectly easy to have amended clause 6.1 so that it defined the Terminal Date as “the date of Practical Completion”, if that had been intended,” but because that was not what had been intended, it was understood that each clause “simply applies in different circumstances.”  As such, he concluded that the flooding occurred after the Terminal Date and therefore the risk transferred to SFS.

Implications

It’s easy to say but difficult to achieve – say what you mean! Far too often, both clients and lawyers are guilty of over-complicating matters, drafting convoluted clauses or provisions which are inconsistent with each other. The advice is straightforward – aim for simplicity and always seek to phrase things in the most clear and logical way possible.


As 2018 kicks off, we thought we’d take a look back over a few of the key decisions from last year – this is the first in our series. In MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59, the Supreme Court, in a significant judgment for the construction industry, allowed E.ON’s appeal and restored the first instance decision of Edwards-Stuart J in the Technology and Construction Court.

Background

E.ON appointed MT Højgaard A/S (“MTH”) under a contract dated 20 December 2006 to design, build and install two offshore wind farms. Unfortunately, some of the turbines developed significant faults shortly after construction was completed and costly repairs were necessary.

This litigation concerned who should be liable for the costs of those repairs and involved a detailed examination of the documents and obligations that formed the contract between E.ON and MTH. The basis of the dispute was whether or not MTH was under a fitness of purpose type obligation which was contained in a technical schedule in the contract. This had the effect of a warranty that the turbine component would not fail within a certain timeframe (20 years). This was despite obligations on MTH elsewhere in the contract to exercise reasonable skill and care and to comply with an international standard (J101) – which as it turned out, was erroneous and even if met, was insufficient to ensure the standard in the technical document was achieved.

E.ON’s tender documents included a set of Employer’s Requirements, which in turn had a set of Technical Requirements within them. It was clear from the Technical Requirements that E.ON wanted a design which would ensure the wind turbines would last for 20 years without the need for repair or refurbishment. The Technical Requirements also stated that the successful contractor would have responsibility for identifying any changes which needed to be made to the designs to ensure that they met a higher fitness for purpose threshold. These references indicated that these requirements were a minimum for the contractor to comply with. J101 was also a required standard to be met in the design and build project.

MTH submitted a tender based on these requirements, which E.ON accepted. The parties subsequently entered into a binding contract for MTH to ‘design, fabricate and install the foundations for the proposed turbines’. The Employer’s Requirements (including the Technical Requirements) and J101 formed part of the contract.

Once MTH had completed the works, it was discovered that there was an inaccuracy in J101, which meant that significant remedial works were required to MTH’s works. MTH did not consider that they should be liable for the cost of these works, as they had complied with the international standards and did not accept that the Technical Requirements placed them under a fitness for purpose obligation.

Decision

The Supreme Court concluded that MTH was liable for breaching the fitness for purpose obligations, which obliged them to deliver foundations that would have a minimum life of 20 years. This was in spite of the fact that (i) the mistaken variable (J101) was an industry standard that E.ON themselves had requested (ii) E.ON accepted the tender on the basis of the design that MTH had submitted and (iii) the design obligation on MTH was stated to be one of reasonable skill and care.

Implications

This is potentially an enormously significant decision for the construction industry. From an employer’s perspective, the case gives clear support for the position that if the technical requirements (properly incorporated into the contract) contain fitness for purpose obligations, then notwithstanding reasonable skill and care obligations elsewhere in the contract, the contractor will be required to meet the higher standard.


Authors: Justin Mendelle and Tola Odedoyin

Update

After the 2016 judgment in Lulu Construction Ltd (“Lulu”) v Mulalley & Co Ltd, the door on recovering costs in adjudication was ajar. The recent unreported case of Enviroflow Management Limited v Redhill Works (Nottingham) Limited may have closed it.

The issue is how the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) and the Late Payment of Commercial Debts (Interest) Act 1998 (as amended by the 2013 Regulations) (together the “Late Payment Act”) interact in the context of parties trying to recover costs in an adjudication.

The Lulu case concerned enforcement proceedings of an adjudicator’s decision. Before this case, it had generally been accepted that adjudication costs could not be recovered under the Construction Act. However, Lulu sought recovery under the Late Payment Act.

Issue

The issue the court was concerned with was whether the adjudicator had jurisdiction to make such an award for costs under the Late Payment Act.  The court found in favour of Lulu and stated that the adjudicator did have jurisdiction. The question however remained: are adjudication costs recoverable under the Late Payment Act? Section 108A of the Construction Act makes it clear that an adjudicator cannot determine that one party is responsible for the other party’s costs, unless both parties have agreed to this in writing. Conversely, Section 5A of the Late Payment Act implies a term into contracts that states that where the contract does not provided an adequate remedy for late payment of a debt, a party recovering a debt under the Act can recover any sums reasonably incurred in recovering the debt. The phrase ‘any sums reasonably incurred’ has been argued as being applicable to the costs of adjudication.

In Enviroflow Management Limited v Redhill Works (Nottingham) Limited, the claimant sought to recover adjudication costs under the Late Payment Act.  Mrs Justice O’Farrell concluded that the adjudicator did not have jurisdiction to make an award for such costs. The reason this case brought about a different result to Lulu was because the building contract in question was an oral contract.  She held that whilst the Late Payment Act implied certain terms into the contract, “such an implied term was caught by s.108A of the 1996 Act and was ineffective unless an agreement had been made in writing” (emphasis added).

The key point here is that it looks as if the implied terms of the Late Payment Act cannot be relied upon without more i.e. without expressly incorporating them into the relevant construction contract. To date, this is not a practice that we have seen.

Implications

Whether the costs of an adjudication can be recovered are potentially unclear.  Nevertheless, we appear to be going back to what has long been understood to be the standard position – both sides bear their own costs.

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