| Date | 30 July 1997 |
|
|
| Judgment | Oval 717 Limited -v- Aegon Insurance. ORB 5/6/97 |
|
|
| The Issue | Liability under performance bonds. |
|
|
| Implication |
The courts will uphold any stipulation within a performance guarantee requiring that the Surety should be kept informed of the performance of the contractor under the principle contract as a condition precedent to the operation of the bond itself. This may apply whether or not with hindsight the non-notification can be said to be trivial. |
printThe case of Perar BV -v- General Surety and Guarantee Company Limited will be remembered as one of those cases where the result defied belief. Westleigh Ltd, a developer, had employed G P Trentham as contractor for the design and construction of a building in London under the 1981 JCT Form. They had agreed that Trentham should provide their client with a performance bond in the amount of 10% of the contract value and this was duly provided in fairly standard terms. Before the works were completed, Trentham went into administrative receivership. Clause 27.2 of the contract provided that in such an event the contractor's employment would be automatically determined, Westleigh having refused to operate the contract provisions for reinstatement or continuation of Trentham's employment. Westleigh advised General Surety and Guarantee Company of a potential claim which would be made under the bond, and in due course assigned all rights under the bond to Perar. The decision which followed these events in the Court of Appeal was, to say the least, a surprising one. It was held that once the contractor's employment had been automatically determined under the provisions of the contract, thereafter the contractor had no obligation to continue with the works and therefore were not in breach for failing to do so. Since the contractors were 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 needs the bond, that is the administrative receivership of the contractor, the bond proved to be unavailable. Central to the Court of Appeal's decision in this matter was their view that Clauses 27 (2) and 27 (4) of the JCT form provided an exclusive code governing the consequence of the contractor entering into administrative receivership. Thus entering into administrative receivership was not itself a breach. The recent case of Oval 717 Ltd -v- Aegon Insurance also showed how difficult it can be to get payment under the provisions of a relatively standard performance bond. Oval was a private company set up by the University of Bristol, who had entered into contract with a contractor for the construction of new halls of residence at the university. They had obtained a performance bond in respect of the performance of their contractor, Woodward Construction. The works were in substantial delay and eventually an administrator receiver was appointed to the contractor. As in the Perar case, the contractor's employment was automatically determined and the works completed by another contractor, at substantial additional cost. The insurer resisted payment on the basis that Oval had failed to notify them in writing of any non-performance or non-observance on the part of the contractor of any terms of the construction contract. This complaint was by reference to an express term of the bond, which required notification within one month in the event of "non-performance or non-observance on the part of the contractors of any of the stipulations or provisions contained in terms of the [construction] contract". The court was fairly ruthless in its interpertation of these provisions. They did not accept that the word "any" could fairly be read to mean "any material", such that the provision would only apply to non-performance or non-observation which directly constituted the breach of contract in relation to which the call upon the bond came to be made. Nor were they weakened by the argument of the employer that it would be absurd to suggest that any single, trivial non-oberservance which could not conceivable result in a call on the Bond, could none the less discharge the defendant from any liability under the bond. In short, two parties were entitled to agree if they wished upon an express term, as part of the guarantee contract, that one party would provide to the other information concerning the performance of the underlying contract. The assumption will be that the information to be provided has actual, or potential, commercial significance to the guarantor. Having contracted on the basis that liability was to depend on such information being supplied, the court held that the Surety was entitled to refuse payment if the requisite information was not in fact given.
CJ-9727
|
|||
|
© Brewer Consulting |
|||
 |
|||