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A Recap on Performance Bonds

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7th April, 2020

How do you ascertain “ascertained”  Guidance from the Technology and Construction Court on the construction of performance bonds.

On 28 February 2020, the case of Yuanda v Multiplex Construction Ltd & Australia and New Zealand Banking Group Ltd [2020] EWHC 468 came before Mr Justice Fraser in the Technology and Construction Court

The Court  considered in what circumstances a contractor’s claim for damages might be “established and ascertained” under the terms of a performance bond and the Court’s interpretation was significant because the form of bond was based on the Association of British Insurers model form of guarantee bond, a popular form of bond commonly used in the UK.

The main clause by the Court was:

  1. The Guarantor guarantees to the Contractor that in the event of a breach of the Contract by the Sub-Contractor, the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the damages sustained by the Contractor as established and ascertained pursuant to and in accordance with the provisions of or by reference to the Contract and taking into account all sums due or to become due to the Sub-Contractor.

The Court was required to consider a number of issues concerning the construction and application of the clause and in particular, it had to deal with the following issues:

  1. Could an interim certificate issued by the contractor to the sub-contractor satisfy the requirement for damages to be “established and ascertained”?
  2. Further and in the alternative, could an adjudicator’s decision satisfy the requirement for damages to be “established and ascertained?”

 

  1. Did the final line of the clause and in particular, the inclusion of “all sums due or to become due to the Sub-Contractor” mean that before any call on the bond could be made, the sub-contractor’s final account had to be decided?

In analysing the terms of the bond, the Court accepted that the form of bond was one that could be used in a variety of situations with a variety of different underlying contractual agreements and therefore, the correct starting position was to consider the terms of the underlying contract, not upon the terms of the bond.

The Court considered the underlying contract, in this case a JCT Design and Build (2011) Sub-Contract dated 14 July 2014 and concluded that:

The Contractor’s self certified “interim certificate” was not a true interim certificate as is commonly recognised within the construction industry and could not be relied upon as evidence that a claim for damages had been “established and ascertained”.  Effectively, the contractor would have to go further than merely provided self certified certificates to establish and ascertain a claim.

In reaching this conclusion, the Court held that the contractor was not a decision-maker in the sense that a Contract Administrator or Architect might perform the certification process and could not “certify” sums due to itself by way of issuing certificates.  Furthermore, the sub-contract did not have a contractual mechanism whereby certificates for liquidated damages could be issued in any event.

Interestingly, the Court appeared to be persuaded that a certificate issued by an architect or contract administrator who was under a legal duty to balance the competing interests between the two contracting parties might be evidence of a claim that was established and ascertained, however there would still need to be a contractual mechanism that allowed for the certification of liquidated damages.

In relation to the decision of an adjudicator, the Court held that a decision of an adjudicator would undoubtedly qualify as being an amount “established and ascertained” in accordance with the sub-contract machinery.

Finally, the Court was not persuaded that the contractor would be required to wait until the conclusion of the final account before making a call on the bond.  The sub-contract provided that the sub-contractor had to pay or allow to the Contractor any loss that the sub-contractor caused to the contractor and if an adjudicator found in favour of the contractor, that sum would be payable and would not be treated as some sort of notional credit, to be used at the very end of the accounting process under the sub-contract.

Whilst the form of performance bond used in Yuanda v Multiplex was based on an ABI standard form of bond that is used frequently on UK projects, the case stresses the importance for parties to carefully consider the underlying conditions required to trigger a call on a bond.

Phil Caton

Construction

Senior Associate
Email: [email protected]
Tel: 01244 405 531

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