Building contractor insolvency triggers liability

It is common in construction contracts to use bonds as protection against non-performance by contractors. The courts have recently given guidance around the interrelation between performance bonds and contractor insolvency.

Mark James.

In Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc, Ziggurat, the employer, contracted with County Contractors UK Ltd (‘County’) to build blocks of student accommodation. The contract was in standard JCT 2011 standard form. A performance guarantee bond was provided over County’s work on the accommodation by HCC International Insurance Company plc (‘HCC’).

County stopped work on the site, highlighting financial difficulties as the cause. The bond, in general, provided that if there was an event of breach of contract by the contractor, it would discharge losses suffered by the employer. The bond differed slightly from a usual standard form bond where, at Clause 2, an addition was agreed by the parties which was described as a ‘homemade addition’ by Coulson J. Clause 2 provided that ‘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.”

County failed to return to site and Ziggurat proceeded to serve notice of termination, stating that others would be employed to finish the job and it would seek to recover these costs. Ziggurat identified County’s failure to proceed diligently with the works and attend site as the reasons for termination. County was insolvent and duly entered into a creditors’ voluntary arrangement (CVA).  Ziggurat still proceeded with its demand under the bond.

County took issue with the validity of the termination, stating that Ziggurat had repudiated the contract by serving a notice two days early, prior to the insolvency event, which meant that the contract had come to an end. Coulson J held that this was contrary to the scheme provided for under the JCT Standard Form.

The surety, HCC, heavily resisted paying under the bond, arguing that Ziggurat had to prove that County was in breach of contract and the losses stemmed from such a breach. HCC argued that it was necessary to prove both that a breach had taken place and that losses had been incurred as a result of that breach before a claim could be made under the bond.

Coulson J looked at the meaning of Clauses 1 and 2 of the bond. Clause 2 clearly stated that damages included ‘any debt’ payable under the Contract following the insolvency. The debt was therefore ascertained even though it was demanded after the CVA. The Clause was clear that County was still liable for sums that were not paid following insolvency and County was in breach because they failed to pay the debt, and payment was due under the bond.

Clause 2 was not deemed as a subsidiary clause to Clause 1 and was not ‘stand-alone’. A breach of contract was therefore not required to trigger HCC’s obligations. The contract provided two separate termination routes, the default of the contractor, or the insolvency. The bond sought to mirror these.

Coulson J rejected HCC’s arguments on the point above, stating: “In my view, that is an erroneous reading of the provisions of the bond… That interpretation would mean that clause 2 could never operate. If an insolvency event is not a breach, which is the assumption for this purpose, and the only trigger under the bond is a breach of contract by (the contractor) then clause 2 would be rendered redundant.”

County’s insolvency was sufficient to trigger the termination provisions of the building contract. Ziggurat did not have to prove that County was in breach of contract. Coulson J pointing out that the insolvency in this case “is a complete answer to the breach point.” HCC was attempting to defend a matter which did not have much hope of being defended.

The case shows that employers can always expect a fight from sureties before receiving any money, even if the fight seems fruitless.

Even though Ziggurat won this case, the lesson learnt for employers, contractors and surety’s alike, is that parties’ must always be careful when inserting homemade amendments to ABI Model Form provisions of bonds, especially when they cover insolvency proceedings. The case illustrates the danger of amending an ABI bond.

The new Clause 2 in this case was designed to protect the employer from losses resulting in the work ceasing following insolvency. Overall, the bond did not provide a sum of money for Ziggurat to spend at the end of the matter, but a right to sue once works had been completed.

Article submitted by Mark James, Partner, Coffin Mew

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