The TCC has just handed down judgment in Yuanda (UK) Company Ltd v Multiplex Construction Europe Ltd and another, which will be of interest to the construction industry as it deals with how ABI-type performance bonds operate.

Background

In July 2014, Yuanda entered into a sub-contract with Multiplex for façade works on a major project at Blackfriars Road. The sub-contract was based on a JCT Design and Build Sub-Contract, 2011 Edition. Yuanda also procured a “Guarantee Bond” in favour of Multiplex in the sum of £4,411,490.70 that had an expiry date of 4 April 2020 – referred to in the judgment as the “Guarantee”.

The main contract works were delayed, as were those under the sub-contract. Yuanda believed it was entitled to an extension of time, a view not endorsed by Multiplex. Multiplex settled certain claims under the main contract, part of which was a payment of £7.5 million of liquidated damages (LDs) to the employer. Multiplex sought to recover this sum from Yuanda. This claim was rejected by Yuanda, who in turn raised a claim of circa £7 million as part of its final account.

Multiplex commenced an adjudication against Yuanda on 2 December 2019, although the parties agreed that the adjudicator would have until 6 March 2020 to make his decision. On 17 January 2020, Multiplex made a call on the Guarantee.

Call on the Guarantee

There were two particular clauses in the Guarantee that the court found material to this case.

Clause 1 provided that: “The [bond provider] guarantees [to Multiplex] that in the event of a breach [of the sub-contract by Yuanda], the [bond provider] shall … [pay] the damages sustained by [Multiplex] as established and ascertained pursuant to and in accordance with… [the sub-contract] and taking into account all sums due or to become due to the Sub-Contractor.”

Clause 4 provided that: “….this Guarantee Bond shall be released and discharged absolutely upon Expiry … Any claim in writing containing particulars of the Sub-Contractor’s breach of his obligation(s) under the [sub-contract] must be made upon the Guarantee before Expiry, or would be deemed invalid otherwise.

One of the issues the court had to decide was whether Multiplex was entitled to make a call on the Guarantee on 17 January 2020 and if not, whether it can make a valid call on or after 6 March 2020 if it receives a favourable adjudicator’s decision.

In order to determine this, the court had to analyse what the highlighted words in clauses 1 and 4 (above) of the Guarantee meant.

Positions of the parties

Yuanda’s case was that what was required to establish and ascertain Multiplex’s “damages” was a full trial in order to determine all matters in dispute between the parties. In other words, any call on the bond provider must wait until after Yuanda’s final account had either been agreed or determined in court. Yuanda relied upon the words “and taking into account all sums due or to become due to the Sub-Contractor in clause 1 to support this contention.

Multiplex relied upon provisions in the sub-contract to the effect that if Yuanda failed to complete the sub-contract works on time (as may be extended) and that delay led to Multiplex suffering direct loss and/or expense, then an indemnity provision entitled Multiplex (in this case) to recoup from Yuanda the £7.5 million in LDs paid to the employer under the main contract.

The decision

After a useful discussion about the distinction between on-demand bonds and performance bonds, the court concluded that this “Guarantee Bond”, despite its “composite” title, was clearly a performance bond. It was a “conditional” bond, guaranteeing the liability of one party to another, rather than an on-demand bond where the bond provider is required to pay out literally on demand.

The court pointed to the fact that this Guarantee was set up as a secondary liability on the part of the bond provider for Yuanda’s liability. In other words, it was dependent on the underlying liability of Yuanda to Multiplex under the sub-contract. It was therefore the terms of the underlying sub-contract and not the Guarantee that determined this issue.

The court found that a mere statement by Multiplex that a sum was due to Multiplex by way of LDs could not equate to the “establishment and ascertainment” of damages pursuant to and in accordance with the sub-contract. This was not equivalent to a certificate being issued under the sub-contract by a “certifier” or “decision maker” that the court appeared to consider would be a sufficient basis for a call on the Guarantee. That said, it is important to note that this depends very much on the terms of the contract in question.

However, the court did find that if the adjudicator awarded Multiplex any sum for delay (which appears from the judgment to be part of the adjudicator’s scope) then this would be something that would fall into the category of an “established and ascertained amount.

The court was dismissive of the argument that the requirement in the Guarantee to take “into account all sums due or to become due to the Sub-Contractor” meant that no valid call could be made until Yuanda’s final account had been agreed or resolved. The sub-contract provided that Yuanda had to “pay or allow” to Multiplex any loss Yuanda caused to Multiplex. If the adjudicator finds in Multiplex’s favour and awards it monies, this would be payable and would not amount to some notional credit under the sub-contract.

The expiry of the Guarantee

The argument that a valid demand could only be made at the very end of the final account process ran contrary to the fact that the Guarantee expires on 4 April 2020. If Yuanda’s argument in this regard was correct, this would wholly defeat the commercial purpose of the Guarantee, which was to provide security during the project. To counter this, Yuanda argued that the last sentence of clause 4 (“[a]ny claim in writing containing particulars of the Sub-Contractor’s breach of his obligation(s) under the [sub-contract] must be made upon the [bond provider] before Expiry“) meant that as long as a valid demand had been made prior to 4 April 2020, such a demand stopped the clock.

The court rejected this interpretation. First, the words in clause 4, “released and discharged absolutely upon Expiry“, were very clear and meant what they said. To adopt Yuanda’s interpretation would leave the bond provider in limbo and amount to an open ended payment obligation.

So what to make of the words: “[a]ny claim in writing… must be made upon the [bond provider] before Expiry? The court’s answer was that this was to deal with, perhaps the rare cases, where a valid claim has been made yet there was insufficient time for the bond provider to make payment. In other words, if the damages have not, by the expiry date of the Guarantee, been established and ascertained in accordance with the sub-contract, the fact that the bond provider has been notified of a claim will not be sufficient to keep the Guarantee alive.

“Ascertaining” damages pre-adjudication

One interesting point arising out of this case is that the court seemed to accept that a contract could be drafted in such a way that damages could be established and ascertained pursuant to the contract without, for example, the intervention of an adjudicator’s decision. The court seemed to consider that if there was a certification procedure by a “decision-maker” such as an architect or contract administrator who was under a legal duty to balance the competing interests between the two contracting parties and act fairly, this could form the basis for a call under such a performance bond.

This proposition is derived from the court’s analysis of the earlier decision in Ziggurat LLP v CC International Insurance Company plc, which concerned an amended form of ABI bond. That case concerned a claim after an insolvency, and termination upon that insolvency, and the court found that in accordance with that contract (a JCT Standard Building Contract, 2011 Edition) once the financial ascertainment exercise had been undertaken by the contract administrator following completion of the works and the insolvent contractor failed to pay the “ascertained” amount (as a debt), a call on the bond could be made.

A more interesting question would arise where a contractor employed under a JCT Design and Build Contract became insolvent. In the JCT’s design and build form, the equivalent financial ascertainment mechanism that applies after a contractor’s insolvency is carried out by the employer, not a “decision-maker” such as an architect or contract administrator. In these circumstances, would the employer’s statement be sufficient or would an adjudicator’s decision be required before a call on the bond could be made?

If an adjudicator’s decision was required, would there be sufficient time for this to be obtained before the expiry date of the relevant bond? It is clear from the court’s decision in this case that (depending on the precise terms of the expiry provision in the bond) simply notifying the bond provider of a potential claim may not be sufficient to stop the bond expiring if the relevant sum claimed has not been “established and ascertained” at that time pursuant to the underlying contract.

Therefore, parties should carefully consider the terms of their performance bonds (and underlying contracts) to establish when an entitlement to call on the bond may crystallise and how this corresponds to any express expiry date in the bond.