A recent TCC decision has concluded that the contractor insolvency provisions of the JCT form continue to apply after a termination by the contractor for repudiation. This conclusion may give rise to surprising results and potentially allow an employer to claim from the contractor additional amounts incurred in completing the works with a third party even after termination for the employer’s own default and/or repudiation. The decision also contains interesting commentary as to the requirements for claiming under performance bonds in the standard Association of British Insurers (ABI) form.

Ziggurat (Claremont Place) LLP v HCC International Insurance Company Plc

Ziggurat engaged a contractor to build student accommodation in Newcastle upon Tyne. The contract between the parties incorporated the terms of the JCT 2011 standard form, with the contractor providing a performance bond by HCC to secure performance.

The performance bond was in standard ABI form, save for clause 2 which stated that the “damages payable under this [bond] shall include (without limitation) any debt or other sum payable to the Employer under the Contract following the insolvency … of the Contractor”. The standard wording in clause 1 of the bond stated that in the event of a breach of the building contract by the contractor, HCC would pay the “losses and damages sustained by the Employer as established and ascertained pursuant to and in accordance with the provisions of or by reference to the Contract …”.

Part way through the project, the contractor stopped work on site. Ziggurat (through the Contract Administrator) gave the contractor 14 days notice to remedy the stoppage and, when the contractor failed to respond, served a notice of termination. Eight days later the contractor became subject to a Company Voluntary Arrangement and entered Administration shortly thereafter. After a long period of delay, the contractor alleged that Ziggurat’s termination was invalid and that Ziggurat had repudiated the contract.

Ziggurat engaged others to complete the work and, upon completion, an account was prepared in accordance with the standard JCT provisions setting out sums due from the contractor to Ziggurat with regard to the termination and Ziggurat’s additional costs of completion. These sums were demanded from the contractor. They were also claimed under the performance bond prior to the date by which the contractor was to pay. Neither the contractor nor HCC made payment.

Ziggurat referred a number of disputed issues as to the interpretation of the performance bond to the TCC for determination.

The requirements for liability under the bond

The court clarified that the “established and ascertained” wording of clause 1 did not require Ziggurat to obtain a court judgment against the contractor for the amount claimed prior to making a claim under the bond. All that was required was that the amount had been ascertained under the applicable contractual procedure. Similarly, however, HCC was not bound by this ascertainment and was entitled to challenge the quantum of the claim in the same way that the contractor was. Previously, many employers had been concerned that sureties might take the point that clause 1 in the ABI form required the employer to go as far as obtaining a judgment against the contractor before claiming against the surety under the bond and sought to make amendments to the standard ABI form to make it clear this wasn’t required. The need for such amendments now seems to have abated following that finding.

Previous case law as to the interpretation of on default bonds has established that the requirement in clause 1 for a breach of contract by the contractor means that an employer is not entitled to immediately claim under such a bond upon the contractor becoming insolvent (per the Court of Appeal’s decision in Perar). Instead, the employer must first complete the work and operate the contractual machinery for the taking of a final account. Only once the contractor has failed to pay the final account will there be a breach of contract claimable under the bond.

In the present case, the court held that the bespoke additions in clause 2 of the performance bond had successfully modified this rule – but to a very limited extent. The result of the provision was that Ziggurat could claim against the bond immediately upon the final account being presented to the contractor and did not need to wait for the contractor‘s failure to pay (which would have been the case had clause 2 not been present). Whilst the court made no finding as to whether clause 2 would have entitled the employer to present a claim under the bond at a stage earlier than the presentation of the final account under the building contract (he did not have to do so as in this case the employer had in fact presented the final account under the building contract prior to presenting its claim under the bond) the implication from the judgment is that on the wording of that particular bond that would not have been possible.

Does a disputed termination make any difference?

HCC also relied on the fact that the contractor had challenged Ziggurat’s notice of termination. It noted that, if the contractor was correct and Ziggurat had repudiated the contract, the contract would have come to an end prior to the contractor’s insolvency. The final accounting provisions relied upon by Ziggurat (which required either contractor insolvency or termination by Ziggurat), would not therefore have been applicable and the foundation for Ziggurat’s claim under the bond would disappear.

Although the court was not concerned to determine the factual dispute as to whether Ziggurat’s notice of termination had been validly given, it rejected the premise of HCC’s argument. The court held that even if the contract had been validly terminated by the contractor for Ziggurat’s repudiation, the subsequent insolvency of the contractor would still have allowed Ziggurat to claim against the contractor.

The court’s conclusion in this respect was based on the standard JCT wording in relation to contractor insolvency, which provides that once a contractor becomes insolvent, all payments to the contractor are stopped and the employer is entitled to prepare and recover from the contractor a final account including additional costs incurred by the employer in completing the works without the contractor. This process is said to apply “whether or not the Employer has given [a] notice of termination” due to the contractor’s insolvency.

The court relied on a recent Court of Appeal decision (Wilson and Sharp Investments Limited v Harbour View Developments Limited) which had held that these provisions remained applicable where a contractor had become insolvent after an employer had terminated for repudiation. The court developed the reasoning in this decision to conclude that a similar position ought to apply where a contractor had become insolvent after its own termination for an employer’s repudiation. HCC’s contention that the contractor in this case had terminated for Ziggurat’s repudiation prior to becoming insolvent therefore had no bearing on Ziggurat’s claim under the bond in reliance on the post-termination final account provisions of the JCT contract.

Conclusion and implications

The court’s conclusions as to the operation of the amended ABI bond in this case reinforce the need for employers to take special care in deciding whether standard ABI bonds will adequately protect their needs in the event of contractor insolvency. Even with the special wording included in this bond, the employer was still required to complete the works and operate the final account provisions of the contract before being able to make a claim under the bond. It now faces contested TCC proceedings on quantum against a surety who appears intent on resisting payment.

The court’s conclusion as to the JCT provisions regarding contractor insolvency are much more notable. The support gleaned from the Court of Appeal decision in Wilson and Sharpe may have been misplaced. In particular, the court relied on a passage from the Court of Appeal’s judgment where the provisions as to contractor insolvency were said to apply even “after a termination by the contractor … on the grounds of repudiatory breach”. However, it would appear from the Court of Appeal’s judgment that termination by the employer was intended as the passage continues: “as opposed to pursuant to the express termination provisions contained in 8.4, 8.5 or 8.6" - those all being employer termination provisions.

The practical implications of the contractor insolvency provisions applying after a prior termination by a contractor, as opposed to an employer, are considerable. Where an employer has already terminated, the application of the contractor insolvency provisions adds little to the remedies the employer will already have. Where a contractor has purported to terminate, as was the case here, the subsequent application of the contractor insolvency provisions could fundamentally alter the parties’ rights. For example, if a contractor had validly terminated for an employer’s repudiation and became insolvent 12 months later, the present decision would appear to suggest that the employer – despite its repudiation and the termination of the contract – could still operate the contractor insolvency provisions and claim for the additional costs of completing the work.