| Date | 8 March 2000 |
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| Judgment | Balfour Beatty -v- Technical and General Guarantee Company Ltd CA 14 October 1999. |
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| The Issue | Whether a Surety is entitled to resist payment under an on demand performance bond. |
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| Implication |
Where a demand is made which satisfies the requirements of an on demand bond, the Surety will be unable to resist judgement for payment of the amount of the bond unless it can show that the demand is fraudulent. |
printThe 1994 case of Perar B.V. -v- General Surety and Guarantee Company highlighted the difficulty that an employer could face in seeking to obtain payment under a performance bond following the insolvency of its contractor. It was held in this case that once the contractor's employment had been automatically determined under the provisions of a JCT contract as a consequence of the contractor entering into administrative receivership, thereafter the contractor had no obligation to continue with the works and therefore was not in breach for failing to do so. Since the contractor was not in breach, the Surety did not become liable under the bond. The practical effect of this decision was that in a circumstance in which the employer most needed the bond, that is the insolvency of the contractor, the bond proved to be unavailable. In the 1997 case of Tower Housing Association -v- Technical and General Guarantee Company similar issues were examined. In this case there had been an attempt to use plainer English in the wording of the bond, which stated that "in the event of a proven breach of the contract by the contractor and/or in the event of the determination of the contractor's employment under the contract for reasons of insolvency, whether such determination is automatic or otherwise ·(the surety shall)· satisfy and discharge the net damages sustained by the employer as established and ascertained pursuant to and in accordance with the provisions of the contract." These provisions overcame the question of whether the bond would be enforceable in the event of the contractor's insolvency. Nevertheless, the Surety was still able to resist immediate payment on the basis that the final account for the completion works would have to be concluded before the employer could make a proper demand under the terms of the bond. In March 1999 Technical and General Guarantee Company returned to the courts to clarify the effect of a similarly worded performance bond, in the case of Paddington Churches Housing Association -v- Technical and General Guarantee Company. Paddington argued that, as with the Tower Housing case, the bond had been specifically worded to cater for the insolvency of its contractor, and the purpose of the bond was therefore to assist with difficulties in financing the completion contract. Thus, as the completion contract progressed Paddington argued that the bond should provide a speedy source of funds that could be used to meet those increased costs. Once again Technical and General were successful in convincing the court that though they remained bound under the terms of the bond, payment would not be due until the employer's final statement of accounts could be ascertained in accordance with the underlying contract. Similar issues were examined by the Court of Appeal in the recent case of Balfour Beatty Civil Engineering -v- Technical and General Guarantee Company. The Balfour Beatty/Costain joint venture constructing the Cardiff Bay Barrage scheme entered into a sub-contract with Leadrail for construction of parts of the harbour break-water. Leadrail had provided the joint venture with a performance bond issued by Technical and General. Leadrail went into liquidation and under clause 17 of the FCEC sub-contract, the joint venture determined Leadrail's sub-contract and made a demand under the bond. Technical and General refused to pay, on the basis that the liquidation of the sub-contractor was not a fault under the terms of the sub-contract. The Court of Appeal noted that the bond was an "on demand" type of bond which contained language which made it absolutely clear that the bond was intended to be met without the Surety having either the right or duty to make any detailed enquiry, providing the demand letter conformed with the conditions of the bond. Counsel for Technical and General accepted that this was indeed the basis upon which the bond was given but that there must be some limitation to this general principal. He argued that if the demand was patently groundless, even if it complied with the required conditions, the Surety would be entitled to refuse to pay. The Court of Appeal held that Technical and General could not succeed on this point unless it could first show that it was unarguably right that liquidation was not a fault under the contract. Having cleared that hurdle, Technical and General would also have to demonstrate that the demand was being made fraudulently. In other words, there would be a requirement for Technical and General to show that the joint venture did not honestly believe that the breach of contract they described as a breach, was in fact a breach. The Court of Appeal concluded that an 'on demand' bond of this type is to be treated as the equivalent of a bill of exchange or a letter of credit, and thus a beneficiary will be entitled to judgement unless, at the time of the demand, the Surety has clear evidence of fraud. Where evidence of fraud does not come to light until the hearing of the matter in court, the court may give judgement in favour of the beneficiary, but may choose to stay execution until the allegation of fraud is properly heard. In the present case Technical and General had no evidence of fraud, and thus the Balfour Beatty JV was entitled to judgement in its favour.
CJ-0009
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