| Date | 21 April 1999 |
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| Judgment | Paddington Churches Housing Association -v- Technical and General Guarantee Company Ltd, TCC 22 March 1999 |
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| The Issue | Conditions for payment under performance bonds following main contractor insolvency. |
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| Implication |
The employer will normally be obliged to prepare a full statement of accounts following the completion of a contract prior to making a demand for payment under a performance bond. The primary purpose of the bond is to remedy loss and not to aid cashflow. |
printThe use of performance bonds in the construction industry continues to cause difficulty. One problem concerns the employer's recourse under the bond following a main contractor's insolvency. Under the normal scheme of things for JCT contracts, the employment of the main contractor will be automatically determined as a consequence of an insolvency event. Clause 27 of the main contract then provides that the employer may employ and pay other persons to carry out and complete the works, and that the original 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 1994 case of Perar BV-v-General Surety and Guarantee Co caused some rethinking. It was held in this case that the determination of the contractor pursuant to the terms of the contract due to an insolvency event did not involve a default by the contractor according to the terms of the bond. Therefore, 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 circumstances in which the employer most needed the bond, that is the insolvency or receivership of the contractor, the bond proved to be unavailable. As a consequence many such bonds now have added text such that the bond will have full effect in circumstances where a valid determination of the contractor's employment has taken place as a consequence of an insolvency event. The case of Paddington Churches Housing Association-v-Technical and General Guarantee Company decided in the Technology and Construction Court on 22 March 1999 examined these issues. Paddington entered into a building contract with Woodward & Company Ltd for building works at Longford Street in London. Technical & General issued a bond in respect of the contractor's performance in generally standard terms in accordance with the requirements of the main contract. Before practical completion of the works Woodward went into liquidation. In accordance with the terms of the contract Paddington terminated the contract and entered into a contract with another builder to have the works finished. Paddington then made a claim under the bond. Unable to secure payment of the amount of the bond, after some time Paddington served a writ claiming the full amount of the bond plus interest. Technical and Guarantee accepted that it was bound under the terms of the bond but argued that the circumstances giving rise to liability had not yet arisen and therefore the action was premature. The text of the bond was short but not simple. In essence the surety undertook to pay the employer up to the value of the bond (£160,000), and that undertaking was to remain in full force and effect up to the date of issue of the certificate of practical completion unless one of three events occurred. These were either (a) the contractor had fully performed the contract, or, the surety had satisfied and discharged the nett established and ascertained damages sustained by the employer up to the value of the bond in circumstances where, (b) there was a default by the contractor or (c) there was a valid determination of the building contract under clause 27. Event (a) had not occurred. Neither had event (b) occurred, because following the Perar case, a determination of the contractor pursuant to the terms of the contract on an insolvency did not involve a default by the contractor. Event (c) had occurred in part in that there had been a valid determination of the contractor's employment under clause 27. Accordingly, Technical and General remained bound under the terms of the bond until it "satisfied and discharged the nett established and ascertained damages sustained by the employer thereby up to the amount of the bond". Paddington argued that the bond had been specifically worded to cater for the insolvency event. The purpose of the bond was therefore to assist with difficulties in financing the second contract as it progressed such that the bond would provide a speedy source of funds that could be used to meet those increased costs. The court held that the bond could not be interpreted in this way. The liability of the surety was to pay a nett figure ascertained by some means. Clause 27 of the contract confirmed a requirement for the employer to prepare a statement of accounts within a reasonable time after completion of the works. The accuracy of an employer's statement might be challenged in the courts but the employer's statement would be required before the damages could be said to be ascertained. Accordingly there would be no liability on the surety until those damages were ascertained by this means. In conclusion Technical and General had not been provided with a statement setting out the nett established and ascertained damages sustained by the Employer, Paddington. Technical and General was therefore not as yet under any liability to make payment under the bond. Accordingly the action was premature and required to be dismissed.
CJ-9916
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