| Date | 17 March 2008 |
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| Judgment | De Vere Hotels Ltd -v- Aegon Insurance Company (UK) Ltd, ORB 5th December 1997 |
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| The Issue | Release of obligations under performance bonds. |
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| Implication |
Where a performance bond contains the stipulation that the surety will be released from its obligations upon the issue of a certificate of practical completion, that certificate will logically be interpreted to mean a certificate of practical completion under the original building contract. |
printIn recent years insurance companies have been responsible for some of the most absurd and unmeritorious arguments in litigation in their attempt to avoid liability under performance guarantees. The case of De Vere Hotels Ltd -v- Aegon Insurance Company Ltd decided on 5th December 1997 gives an example. In February 1993 De Vere entered into a contract with Pentagon for the construction of a hotel in Southampton under the JCT 1981 Design and Build Form. The contract price was £16.62m and included a requirement for Pentagon to enter into a bond in an amount equivalent to 10% of the contract sum. In fact, in anticipation of that contract being formed, and apparently in full knowledge of its terms, a bond in the sum of £1.662m had been executed by Pentagon and Aegon as the surety in October 1992. In December 1993, whilst substantial works remained to be completed, administrative receivers were appointed to Pentagon. Clause 27(2) of the building contract provided that the employment of the contractor would be forthwith automatically determined as a consequence of this event. Under the normal scheme of things for JCT contracts, clause 27(4) provided that one of De Vere's rights as employer was to employ and pay other persons to carry out and complete the design and construction of the works. In the exercise of this right in May 1994, De Vere entered into a new building contract with AMEC to finish the uncompleted works. Clause 27 further provides that the contractor shall allow or pay to the employer the amount of any direct loss and/or damage caused to the employer by the determination. The arrangement is generally that the appropriate accounts will be prepared by the employer following completion of the works by the completion contractor, and if the total account including monies paid to the original contractor exceeds the sum which would have originally been payable upon due completion, the difference becomes a debt payable to the employer by the contractor in default. In September 1994 a certificate of practical completion was issued to AMEC in respect of the completion contract. In due course, De Vere made a demand to the liquidator of Pentagon for the payment of their claimed additional costs amounting to the sum of £2.7m, and having established that the liquidator could not meet this debt, made a demand to Aegon for payment under the bond. Aegon refused payment and the present proceedings were begun against them by De Vere claiming the sum of £1.662m - the amount of the bond. In its defence Aegon quoted the wording of the bond where it was stated that "the surety shall be released and discharged from its obligation under the bond upon the issue of a statement of practical completion of the works by the employer's agent, and if any suit at law or proceedings in equity are brought against the surety to recover any claim hereunder the same must be instituted within six months after the date of practical completion named in this statement and thereafter shall be absolutely barred." Aegon's position was simple. A practical completion certificate for the works had now been issued, and it therefore must be discharged from its obligations under the bond. Not only that, it argued, but the present proceedings had been commenced outside the six month limitation period commencing from the date of practical completion. Counsel for Aegon went on to argue that there was no ambiguity in the wording of the bond, and that the phrase "upon issue of a statement of practical completion" meant any such statement and was not described in the bond as a statement issued by or on behalf of De Vere to Pentagon, as it could have been. Any other interpretation, he argued, would mean that Aegon's guarantee was unlimited in time in relation to contractual defaults by Pentagon. He submitted that the liability of Aegon was discharged by the issue of the statement of practical completion in September 1994 and the failure of De Vere to institute proceedings within six months after that date. Counsel for De Vere treated these assertions somewhat incredulously. He argued that the use of the phrase "a statement of practical completion" in the bond must relate to practical completion under the building contract only, since the bond specifically identified the contract for which it was made as the building contract between De Vere and Pentagon. There could be no ambiguity here. Furthermore De Vere was under no obligation to enter into a contract to complete the works, or indeed to do so on the same terms and with an identical practical completion mechanism to that created under the building contract. The contract with AMEC was a quite separate contract, in which some of the works covered by the original building contract had been excluded. An inclusion of the same standard conditions and the provision for the issue of a certificate of practical completion in this contract was therefore fortuitous. His Honour Judge Lewis held that this must be right. No statement of practical completion had been or could have been issued to Pentagon under its contract following the termination of its employment. The fact that a certificate of practical completion had been issued under the completion contract was irrelevant in the context of the proviso to the bond. The defendant thus could not be released from its obligations under the bond.
CJ-9810
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