In a recent case that came before the High Court, the Technology and Construction Court (a specialist court within the English High Court, "TCC") has shown that it will go to great lengths to enforce obligations to deliver collateral warranties and performance bonds that are provided for in construction contracts - an outcome which will undoubtedly be welcomed by employers.
The case in question is Liberty Mercian Limited v Cuddy Civil Engineering Limited and Cuddy Demolition and Dismantling Limited.
Liberty Mercian ("Liberty") engaged Cuddy Civil Engineering ("Contractor") to construct a retail plateau for the development of a supermarket in Cardigan, Wales. The contract was an amended NEC3 form ("Contract") which required the Contractor to provide a performance bond, parent company guarantee and collateral warranties (from its sub-contractor).
Relations between the parties deteriorated. The Contract was subsequently terminated. The Contractor had, however, failed to procure a performance bond and certain collateral warranties from its sub-contractor, Quantum (GB) Limited ("Quantum") in favour of Liberty and another party.
This case marks the latest development in the protracted litigation between the parties.
In an earlier decision (in 2013), the TCC had determined that:
- an obligation to provide collateral warranties and a performance bond survived termination of the Contract; and
- an order to deliver a performance bond and collateral warranties would not be awarded if compliance with these obligations proved impossible.
Accordingly, the Court ordered the Contractor to use its best endeavours to obtain both the performance bond and the warranties in question.
The Contractor failed to procure both the bond and the warranties - following which Liberty applied to the Court for an order requiring the Contractor to obtain and deliver those documents.
Due to the Contract having been terminated and a real risk that the bond may be called upon, there was no appetite in the market to offer a bond in the form prescribed by the Contract.
The Court held that, in practical terms, it was impossible for it to order the Contractor to provide the performance bond.
However, despite this impossibility, the TCC did not stop there. It was held that the Court could seek performance of this obligation in substance - by ordering the performance in an alternative way; the Contractor was ordered to pay £420,000 (the 'Bond Amount') into Court in place of delivery of the bond and on the same terms and conditions.
The sub-contractor Quantum was in liquidation and its liquidator had refused to execute the required collateral warranties.
The liquidation was subsequently concluded and Quantum was dissolved.
Nonetheless, the Contractor was ordered to procure the collateral warranties. It was held that, although Quantum had been dissolved, there was evidence that any warranty would be backed by insurance cover (although this position, in relation to insurance, was stated to be "far from clear"). However, on this basis, the Court concluded that there would be some value in the warranties.
WHAT CAN WE LEARN FROM THIS DECISION?
This decision will be of great interest to employers, contractors and liquidators.
The TCC has shown that it will vigorously enforce obligations to provide performance bonds and collateral warranties under construction contracts - a very welcome outcome for employers.
Contractors, on the other hand, are advised to ensure that bond and warranty obligations are complied with at the outset of their projects to avoid later disputes and costs relation to those issues. Ideally, any sub-contractor warranties should be procured at the point at which subcontractors are engaged.