3PB s Construction Law Seminar

1 3PB s Construction Law Seminar Paul Newman 3PB Barristers Radisson Blu Hotel, Bristol 30 June 2015 London 3 Paper Buildings Temple London EC4Y 7EU Bournemouth 30 Christchurch Rd Bournemouth BH1 3PD Bristol Royal Talbot House 2 Victoria Street Bristol, BS1 6BN Oxford 23 Beaumont Street, Oxford OX1 2NP Winchester 4 St Peter Street Winchester SO23 8BW T: 020 7583 8055 F: 020 7353 6271 Steve Evers Practice Director T: 01202 292102 F:01202 298498 Robert Leonard Practice Director T: 0117 928 1520 T: 01865 793736 F: 0117 928 1525 F: 01865 790760 Mark Heath Russell Porter Chambers Director Chambers Director Email: clerks.all@3pb.co.uk T: 01962 868884 F: 01962 868644 Stuart Pringle Chambers Director

2 PROFILE Paul Newman Call: 1982 Paul Newman is recommended by the Legal 500 UK Directory 2014 for his expertise in the Western Circuit in Construction. 3PB s Paul Newman - He is very personable and always understands what is required from him. Paul Newman is recommended by the Legal 500 UK Directory 2013 for his expertise in the Western Circuit in Construction. At 3PB, construction industry specialist Paul Newman is highlighted for his excellent advocacy skills." Paul Newman is recommended by Chambers & Partners 500 UK Directory 2014 for his expertise in Construction Law. Paul Newman of 3PB Barristers offers contentious and non-contentious services in the construction sphere. He is noted for his litigation work, and is increasingly acting as a mediator in construction matters. Very impressive advocacy skills. Mr Newman dealt with an application to enforce an adjudicators decision for us. His advocacy skills were most impressive, and we were granted the enforcement. Technology & Construction Before returning to private practice at the Bar, for a number of years Paul was an employed barrister in solicitors practice. He worked for two major regional firms, where he was featured in both Legal 500 and Chambers & Partners as a leading construction lawyer. Paul advises across a broad range of construction disputes, including ones under standard form and under less formal contract arrangements. His workload includes

3 delay and disruption claims, building defect claims (including ones under The Defective Premises Act 1972 and the Building Regulations), party wall disputes, claims against construction professionals and property misrepresentation claims. He appears regularly in Court and arbitration hearings, represents clients in adjudication and mediation and has acted as an adjudicator, arbitrator and more particularly a mediator. He is an ADR Group accredited mediator (2001), a Fellow of the Chartered Institute of Arbitrators (1999) and an RIBA accredited adjudicator (1998). Paul s former employment in solicitors practice has given him in addition to the traditional barrister skills wide experience in the preparation of project documentation and knowledge of the cross-over between construction and property law. He has been involved in a number of substantial projects, including the Cardiff Bay Barrage, the National Botanic Garden of Wales and the Millennium Stadium, Cardiff. He continues to accept instructions to prepare professional appointments, terms and conditions, contract amendments, collateral warranties and bonds and guarantees. Recent experience Advising and representing a government agency in an adjudication Successfully representing the Claimants in a property misrepresentation claim Advising a major tenant of a short-let apartment block of potential claims for defective works under collateral warranties Acting for an assignee of the benefit of an adjudicator s decision seeking enforcement Acting for a defendant in a dispute relating to the conversion of existing buildings / construction of luxury holiday accommodation in the South-west Notable Cases Boardwell v K3D Partnership Property (2006) ADJ CS 04/21 Lovell Projects Ltd v Legg & Carver (2003) BLR 452 Rankilor (1) / Perco Civil Engineering Ltd v M Igoe Ltd (2006) ADJ LR 01/27 David & Teresa Bothma (T/A DAB Builders) v Mayhaven Healthcare Ltd [2007] EWCA Civ. 527 Melhuish & Saunders Ltd v Hurden & Hurden [2012] EWHC 3119 (TCC) Contact details: Paul Newman Tel: 0117 928 1520 Email: paul.newman@3pb.co.uk Practice Director: Stephen Evers Tel: 020 7583 8055 Email: stephen.evers@3pb.co.uk

4 Taking a Peak at Construction Bonds Paul Newman, FCIArb, Barrister, Mediator, Adjudicator & Arbitrator 30 June 2015 Introduction 1. Bonds in the construction industry come in various forms. They include advance payment, performance, on demand and retention bonds. Given time constraints this paper will concentrate on performance and on demand bonds. It will identify the differences between the two and focus on some cases in which the Courts have grappled with the difficulties, which bonds sometimes pose. 2. First let s have a look at the underlying purpose of a bond. Its aim is to provide the employer with security in the event that the contractor defaults. The bond sits alongside the principal construction contract to safeguard the employer if the contractor fails to perform under the construction contract. In the employer's mind the most obvious circumstance where protection is needed is against the contractor's insolvency or the contractor's failure to rectify a defect. As we will see, over the years many bonds have been construed as not automatically being triggered on a contractor's insolvency but only on the occurrence of a subsequent default, which may flow from the contractor's initial insolvency. 3. The on demand bond is popular in many jurisdictions, e.g. the Middle East as wells as under process plant contracts more generally. The employer is not required to provide the grantor (usually a bank) with any proof of default. The employer simply issues a demand, the form of which is detailed in the bond's 'small print', and then if the demand is properly served, the bank must pay the sum demanded. The employer is in funds without having to prove the contractor's default. The bank may retaliate, usually by seeking to show that

5 the call under the bond was invalid, not having been made in the prescribed way or there was underlying fraud. 4. So-called conditional bonds or guarantees as in the case of the ABI bond), often limited to 10% of the contract sum, make the liability of the guarantor dependent on the underlying liability of the contractor. In other words, if a call is made under the bond, it is the employer must prove the contractor's default, as well as demonstrating that there has been compliance with the terms of the bond. What is it? 5. On occasions, the Courts are asked to decide if a bond is a conditional bond or an on demand one. Unfortunately it is not always a case of the description on the tin being correct or to be taken at face value. 6. There is a rebuttable presumption that a bond or guarantee is not on demand unless a bank has issued it and it takes the form of a banking instrument. 7. In Esal (Commodities) Ltd and Another v Oriental Credit Limited and Another [1985] 2 Lloyd s LR 546 the bond stated - We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance Though it may have looked like a conditional bond, according to the Court of Appeal it was in fact an unconditional on demand bond. The trigger event under the bond, which a bank had issued, was the demand. Commercially it could not have been intended that the bank should be concerned with establishing whether or not there had been perfect performance of the contract. 8. In Marubeni Hong Kong and South China Ltd v Government of Mongolia [2005] EWCA Civ. 395 the Mongolian Ministry of Finance guaranteed the

6 obligations of a Mongolian company. It issued a guarantee letter which stated that it unconditionally pledges to pay you upon demand all amounts payable under the agreement if not paid when the same becomes due and further pledges the full and timely performance by the buyer of all the terms and conditions of the agreement.' Despite the language in the bond the Court of Appeal decided it was a conditional guarantee, as a bank had not issued it. The fact that the guarantee referred to amounts 'due' under the agreement required proof that sums were due under the agreement. 9. In Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch) Vossloh Aktiengesellschaft ( VAG ) was the parent company to a number of subsidiaries. One of the subsidiaries, Vossloh Locomotives ( VL ) supplied trains to Alpha Trains ( AL ). In 2009 VAG agreed to provide a parent company guarantee / bond to AL for the performance of VL s obligations and to indemnify AL from any losses caused by VL s default. 63 of the trains VL provided were defective and AL sought 17 million Euros under the guarantee. In particular, the Court looked at clauses 2.1, 3.1 and 6.4 of the guarantee. Clause 2.1 referred to the guarantor's obligation as taking effect unconditionally and irrevocably. The guarantor would forthwith on demand pay. Under clause 3.1 sums were payable on demand and without any deduction or withholding. Under clause 6.4 the Guarantor shall be entitled to raise such defences which are available to the Guaranteed Party. However, when the guarantee was read as a whole and having not been issued by a bank it was a conditional guarantee. 10. In Wuhan Guoyu Logistics v Emporiki Bank [2012] EWCA Civ 1629 the High Court (Clarke J) and the Court of Appeal differed in their interpretations of a payment guarantee arising out of a shipbuilding contract. The contract required an 'irrevocable guarantee' to be issued for the buyer's payment of the second instalment. The defendant bank provided the guarantee, which included the terms IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY, upon receipt by us of your first written demand we shall immediately pay to you and Our obligations under this Guarantee shall not be affected or prejudiced by any disputes between you

7 as the SELLER and the BUYER under the Shipbuilding Contract There was a dispute between the shipbuilder and the buyer as to whether or not the second instalment was due, but the shipyard made a demand under the guarantee. The continuous use of the word guarantee, the fact that clause 1 of the guarantee used the classic wording of a guarantee, the reference to a certificate issued by the buyer, the reference to the payment of interest from the date of default and the inclusion in clause 7 of words relating to variation of the principal contract were all insufficient to categorise the bond as a performance one, rather than a conditional bond. Rather, the Court of Appeal chose to adopt an observation in Paget s Law of Banking (11 th edition), whilst confirming everything must in the end depend on the words actually used by the parties.' Respecting the Bond s Wording & Resisting 11. Non-compliance with the precise wording of a bond may give the bondsman an excuse not to pay. In Attock Cement Co. Limited v Romanian Bank for Foreign Trade [1989] 1 All ER 1189, where the principal contract was for the construction of a cement works in Pakistan, the Court stuck to the precise wording of the bond. The contractor was Romanian and the claimant a Cayman Islands registered company. The contractor provided a performance bond for $6.6 million, which was called in following the determination of the contractor s employment in February 1987. The bond included conditions. There was a requirement on the employer to accompany its demand with a declaration that Uzin Export Import [the Contractor] has failed to fulfil any of its obligations under Articles 3; 15; 16 and 17 of the above contract. The employer s demand dated 24 or 25 July 1987 referred to the specific Articles. It was therefore valid. 12. By contrast, in I. E. Contractors Limited v Lloyds Bank Plc and Another (1990) 2 Lloyds LR 496, bonds relating to the construction of slaughterhouses in Iraq were, prolix and vague. However, the demand had to be in substance in accordance with the bond - I cannot attribute to the parties an intention that there had to be a strict degree of compliance.

8 13. In AES 3C Maritza East 1 Eood v Credit Agricole Corporate and Investment Bank [2011] EWHC 123 (TCC) the bank had provided an on demand bond. The bond stated that it was payable against an appropriately worded demand accompanied by any notice of a claim against the contractor for breaches of his obligations to which the demand referred. The claimant had made two demands under the Bond; one for approximately 97 million Euros and a second for 96.6 million Euros. Documentation for the first claim only accounted for 27 million Euros. The claimant sought summary judgment and whilst the Court awarded payment of the second amount the first demand was rejected. Rejection was not because the claim had to be proved but merely because the claim required to be documented, which it was not. 14. There may be limited circumstances in which the Court will grant an injunction against the beneficiary of a bond, where to allow the beneficiary to make a call under the bond would be a breach of the principal contract. Akenhead J considered this in Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC). Simon Carves ( SCL ) were employed to design and construct a bioethanol plant on Teeside. Under the contract SCL were to provide an on demand bond, which they did. The bond was to expire on 31 August 2010. The contract contained a provision that on the issue of the acceptance certificate the bond would be null and void save in respect of any pending or previously notified claims.' Following take-over, but prior to the issue of the acceptance certificate, a dispute arose between SCL and the employer. However, the acceptance certificate was issued on 17 August 2010, albeit with the odour emissions noted as a defect on the certificate. SCL's position was that no claim had been made against it as at the date of the acceptance certificate. SCL sought an injunction to prevent the bond being called. The employer argued that the defect notices and the qualification to the acceptance certificate were sufficient to constitute a 'claim' and reliance on the bond was possible. On the evidence before it the Court decided that a 'claim' had arguably not been made.

9 15. A similar approach was taken in Doosan Babcock v Mabe [2013] EWHC 3201 (TCC). An injunction was granted because the contractor argued that the employer was in breach of the underlying contract. The employer had refused to issue taking-over certificates. The effect of this breach was that the employer was able to call in a bond, which would otherwise have expired on the issue of the certificates. 16. However, the approach taken in MW High Tech Projects Ltd v Biffa Waste Services Ltd [2015] EWHC 949 (TCC) did not follow the same path. Biffa had engaged the contractor for the design, construction, installation, commissioning and testing of a waste treatment plant. The contract contained a longstop date after the completion date, whereupon the contract would automatically terminate in the event of the contractor's default. The contractor was required to provide a parent company guarantee, performance bond and retention bond. It was a condition precedent to a call under either of the two bonds that a claim was made first under the parent company guarantee. The contractor failed to complete by the longstop date. The contract terminated, with the parties in disagreement as to who was in default. In due course and after a year s delay, Biffa sought to make a claim under the retention bond. 17. The contractor sought to restrain the call on the bond by means of a without notice injunction. His case was that Biffa had failed to comply with the condition precedent to allow it to use the retention bond. Under the principal contract Biffa was not entitled to recover liquidated damages. Stuart-Smith J took an orthodox line. The Courts would not interfere with the process by which bonds are called and paid, except in exceptional circumstances. That was a long-established principle. In particular, Sirius International Insurance Co. v FAI General Insurance [2003] EWCA Civ. 470 meant that a beneficiary to a bond was not restrained from calling in the bond simply because there was a dispute as to whether or not the underlying contract had been broken. The only two exceptional circumstances of which the Court needed to take account were (1) the presence of obvious fraud, which was known to the bank / bondsman or (2) where it was clearly established that the

10 terms of the underlying contract precluded the beneficiary from making a call, rather than there was an argument about it. Conditional Bonds 18. The conditional bond, rather than the on demand bond is the preferred form of security in much of the UK construction industry, particularly for civil engineering projects. The wording of bonds has always been and still tends to remain opaque; a beneficiary must jump through the procedural hoops. It remains a commonly encountered clause - The Surety shall be notified by the Employer in writing of any nonperformance or non-observance on the part of Contractors of any of the stipulations or provisions contained in the said Contract and on their part to be performed and observed within one month after such non-performance or non-observance shall have come to the knowledge of the Employer Such clauses have enjoyed a long and inglorious history since Clydebank District Water Trustees v Fidelity Deposit of Maryland [1916] S.C. 69. In one case in the High Court of Ireland in which I was involved a public sector client had come to various ad hoc agreements with the defaulting contractor on the occurrence of the contractor s breach. With the breaches effectively waived a well-known bondsman refused to honour the employer s call under the bond. Similarly, the bond may require the employer to inform and consult the bondsman before selecting a replacement contractor. Failure to do so will tempt the bondsman to seek to avoid any call under the bond. An employer s frequent response to the adversity of his old contractor s demise through insolvency is simply to appoint a new contractor, rather than to check the bond's wording first. A refusal to contact the bondsman first can be an expensive mistake. 19. Without proof of default, the bond is null and void - Tins Industrial Co. Limited v Kono Insurance Limited (1987) 42 BLR 110. Establishing default by the contractor, particularly if the contractor has become insolvent can be difficult. Unless insolvency is expressed to be a breach of contract,

11 insolvency itself is not a circumstance of default, although the consequences of insolvency may place the contractor in breach of his obligations under the contract. 20. Northwood Development Co. Limited v Aegon Insurance Company (UK) Limited (1994) 38 Con LR 1 considered default. The contractor went into liquidation and the contractor s employment automatically determined. Five days later, Northwood itself went into administrative receivership. Aegon was surety under a conventionally worded bond. On Aegon s refusal to pay, Northwood argued it was not necessary to establish a breach of contract by the contractor. The bondsman responded that the bond required proven breaches of contract. Since insolvency brought an automatic determination of the contractor s employment under the contract the contractor had been discharged from the requirement of further performance. 21. In Perar v General Surety & Guarantee Company (1994) 66 BLR 52 the contractor, employed under a JCT 81 design and build contract, went into administrative receivership. The contractor s employment, in accordance with Clause 27.2, automatically determined. The Court of Appeal had to decide whether the surety was liable under the bond where no breach of contract was alleged. Going into receivership was not a breach of contract, although Counsel argued unsuccessfully that there was an anticipatory breach, which had caused damage. Once the contractor s employment automatically determined, he had no further obligation in regard to the works. Clause 27.2 and 27.4 of JCT 81 were intended to provide a code for what should happen on the insolvency of the contractor This code specified what were the employer s and the contractor s respective rights and duties consequent on the automatic determination. Clause 27.4 provided a framework an employer could employ others to finish the Works with a mechanism for ascertaining the account on completion. The cost of finishing the works would be calculated and an ascertainment made to show whether there was a net balance due from the employer to the contractor or vice versa. Any default would come, if at all, on that final account and the

12 contractor s failure to pay any balance due, if owed. Contracts may change but those based on these principles must be viewed in the same way. 22. The Association of British Insurers Model Form Guarantee Bond has endeavoured to simplify construction industry bonds. The ABI Bond is a guarantee although described as a guarantee bond. The differences between it and other default performance bonds are ones of form rather than substance. Like any default bond it requires the employer, when calling upon the bond, to prove his loss and to allow the surety to set off any sums due and owing from the employer to the contractor prior to payment of any residue due to the employer. The bond is generally written in clearer, more modern language and with reasonable brevity than some others. The clauses are followed by a schedule, which the parties will need to complete. Get it in Writing! 23. Contracts of guarantee have to be in writing. In Actionstrength Ltd (trading as Vital Resources) v International Glass Engineering IN.GL.EN SpA and another [2003] 2 All ER 615 (HL) the appellant sub-contractor entered into an agreement with the main contractor to supply labour. When arrears built up on the sums due to it from the contractor, the sub-contractor threatened to withdraw its labour. The sub-contractor alleged that it subsequently entered into an oral agreement with the employer. In return for the sub-contractor not withdrawing its labour from the site, the employer promised to ensure that the sub-contractor received any amount due to it from the contractor under the labour supply contract. If necessary the employer would redirect to the sub-contractor payments due from the employer to the contractor. There was no written note or memorandum of the alleged agreement. The subcontractor further alleged that, in reliance on the alleged agreement, it continued to provide labour to the contractor on credit for a further month. Later the employer successfully contended that the sub-contractor relied upon a guarantee, which was unenforceable as it was not in writing. Section 4 of the Statute of Frauds 1677 applied.