Construction alert: performance bonds in the spotlight

Facts

Ziggurat (Claremont Place) LLP (Ziggurat) employed County Contractors (UK) Limited (County) to build blocks of student studios in Newcastle. County was employed on the terms of a JCT 2011 contract (the Contract). HCC International Insurance Company Plc (the Guarantor) had provided a performance bond in respect of County's performance to Ziggurat (the Bond). The Bond was based on the ABI model form of bond, as varied by the parties.

Ziggurat had served various notices on County in respect of outstanding defects to be remedied. In February 2016, County stopped work owing to financial difficulties, before rectifying the defects. In March 2016, Ziggurat served notice of termination under the Contract making clear that it would engage other contractors to complete the works. In April 2016, County became subject to a compulsory voluntary arrangement, thus triggering the insolvency provisions under the Contract.

In March 2017, Ziggurat claimed under the Bond for the cost of engaging other contractors, up to the maximum limit under the Bond.

The Guarantor contested the meaning of the first two clauses of the Bond, which were as follows:

(1) The Guarantor guarantees to [Ziggurat] that in the event of a breach of Contract by [County] the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the losses and damages sustained by [Ziggurat] 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 [County].

(2) The damages payable under this Guarantee Bond shall include (without limitation) any debt or other sum payable to [Ziggurat] under the Contract following the insolvency (as defined in the Schedule) of [County]."

It is worth noting that the Bond adopted the standard form ABI provisions in their entirety, the only modification being the insertion of clause (2).

The Guarantor argued that:

• the Bond was a default bond and not a demand instrument, pointing to the reference to 'damages' in Clause (2) which implied that the Bond was not a performance bond
• accordingly, Ziggurat needed to prove that a breach of the Contract had taken place, and that losses had been incurred as result of that breach
• it was necessary for Ziggurat to obtain judgment against County as a prerequisite to claiming under the Bond.

Judgment

The Judge pointed out that the Contract could be terminated in two circumstances – on the insolvency of County; or on County's breach of contract. The Bond was intended to mirror the Contract.

In the Judge's view, clause (2) of the Bond was intended to make it clear that the Bond would protect Ziggurat from County's non-payment following its insolvency.

Even if the Judge's primary view was wrong, and a breach was required to trigger the Guarantor's obligation to pay, there clearly had been breaches of contract on County's part (e.g. its failure to complete the works or to pay debts due to third party contractors) satisfying this requirement.

Coulson J affirmed that the Bond was a demand instrument. The Guarantor's argument that judgment needed to be obtained against the contractor before payment could be made under the Bond was "wholly incorrect".

Comment

The uncertainty in this case seems to stem from the particluar amendments made to the standard ABI form of performance bond. The court has made clear that a performance bond will still respond and be applicable in an insolvency situation. Indeed, Coulson J pointed out that the ABI guidance itself "suggests that there is no need to amend the model form of the Bond to stipulate that insolvency or automatic determination will be treated as a breach of contract". Notwithstanding this and the fact that there is now a well-trodden path in terms of enforcing performance bonds, the view is still often taken that it is preferable to amend the standard ABI form of performance bond to expressly include insolvency. The key will be to ensure that the drafting is sufficiently clear so as not to cause ambiguity.

Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc [2017] EWHC 3286 (TCC)