[2017] EWHC 3286 (TCC)

Ziggurat employed County Contractors (UK) Ltd (“County”) to build blocks of student studios in Newcastle. The contract incorporated the JCT 2011 standard form. County’s performance was the subject of a Performance Guarantee Bond. The Bond was in standard ABI Model Form with one important exception: clause 2 was, as described by Mr Justice Coulson, “an entirely homemade addition” which “must… be taken to have been added by the parties to meet their particular requirements”. The first two terms of the Bond were:

“(1) The Guarantor [the defendant] guarantees to the Employer [the claimant] that in the event of a breach of Contract by the Contractor [County] the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the losses and damages sustained by the Employer as established and ascertained pursuant to and in accordance with the provision of or by reference to the Contract and taking into account all sums due or to become due to the Contractor.

(2) 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.”

In February 2016, County stopped work apparently because of financial difficulties. The contract administrator served a notice giving 14 days to remedy the specified defaults. County failed to respond to the notice or return to site. Ziggurat duly served notice of termination making plain that Ziggurat would employ and pay others to complete the works and would seek to recover the costs which were incurred. On 8 April 2016, County became subject to a Company Voluntary Arrangement and were therefore insolvent. The cost of others completing the work amounted to £621,798.38. On 17 March 2017, Ziggurat made a demand under the Bond, limiting the claim to the maximum permitted, namely £382,519.06.

On 12 April 2017, County’s solicitors complained about the termination saying that it was invalid due to a miscalculation of the length of the relevant notice period. As to quantum, the sums claimed were “disputed”. Further particulars were promised, but not provided. As for the claim on the Bond, County said that as the Bond was a default Bond and not a demand instrument, Ziggurat had to prove that a breach of contract had taken place and that losses had been incurred as a result of that breach before a claim could be made upon it. Without a formal decision about breach and a formal ruling upon the extent of the losses arising, no payment was due.”

The Judge said that the right approach was to identify what was necessary for a successful claim against County under clauses 1 and 2 of the Bond, in circumstances where County were insolvent and had not paid the debt which had been ascertained in accordance with the building contract and was therefore due.

Mr Justice Coulson said that under clause 2 of the Bond, the damages payable by County included “any debt or other sum payable to the Employer under the Contract following the insolvency”. Here, there was a debt payable by County under the building contract, namely the £621,798.38. That debt “followed” the insolvency in that it was ascertained and had been demanded after the CVA of April 2016. The purpose and intent of clauses 1 and 2 of the Bond was to mirror the two principal termination routes provided for in the building contract. Clause 2 of the Bond made it as clear as possible that County was liable for sums payable by County under the building contract, but which had not been paid as a result of, or following, County’s insolvency. Clause 2 could have had no purpose whatsoever other than to make it clear that the Bond was to protect Ziggurat from the non-payment by County of the debt following the insolvency. Whilst there were a number of “minor points” that could be argued against this overall position:

“these were simply the consequence of the parties adding the homemade amendment at clause 2 to cover insolvency, and then failing to amend the other ABI Model Form provisions at the same time. These matters cannot affect the proper interpretation of this Bond.”

In relation to the “termination” issue, namely the assertion that Ziggurat had repudiated the contract by serving a notice two days early, before the insolvency event, all of which meant that the contract had come to an end, the Judge considered that this argument was contrary to the scheme provided for under the JCT Standard Form. This provided that no matter what could be argued about prior events, the insolvency of the contractor gave rise to a clear, certain process which culminated in the notification of a debt. This was designed to prevent a contractor in the position of County from avoiding the consequences of their insolvency by seeking to argue, long after the event, that the contract had come to an end prior to their insolvency and that, in consequence, these clauses no longer applied. As from the date that County became insolvent, whether or not Ziggurat had given notice of termination, and regardless of any belated arguments as to repudiation, County were in breach because they failed to pay the notified debt. Therefore payment was due under the Bond.

County also argued that they could challenge the quantum. Ziggurat said that all that was required was the ascertainment of the figure in accordance with the contract. County said that the surety could defend himself against the claim by advancing any of the arguments as to the quantum of the debt which would have been available to County. The Judge agreed with County. There was nothing in the contract to say that they could not challenge the figure, and there were no provisions which indicated that, as soon as the figure was asserted, it was due and payable in the amount asserted, without any ability to challenge. And if County could have made that challenge, then so too could HCC. Perhaps unsurprisingly, the Judge noted that on the facts of this case, it may be difficult to mount a challenge. County had been entirely silent on how and why the debt figure might be wrong and there was a significant margin between the asserted debt and the maximum sum due under the Bond.