Most standard form performance bonds provided on construction projects contain wording stating that the guarantor shall discharge the damages that have been “established and ascertained” by the employer by reference to the provisions of the underlying contract.
We look at the recent decision of Yuanda -v- Multiplex & Ors delivered by Fraser J on 28 February 2020 which examined this wording and considered the requirements for validly calling on a performance bond having particular regard to the wording of the bond and the underlying contract provisions.
This decision, along with the recent Irish decision of Clarington Developments Limited -v- HCC International Insurance Co Plc, highlights the need for the beneficiary of a bond to carefully consider by reference to the underlying contract the steps it should take to establish and ascertain a claim under a performance bond. A mere statement that money is due will not be adequate.
Multiplex Construction Europe Limited (“Multiplex”) were employed by St George PLC as main-contractor under an amended JCT Design and Build (2011) contract in relation to the construction of a tower, a hotel and a retail/leisure facility known as “One Blackfriars” adjacent to Blackfriars Bridge in London. Yuanda (UK) Company Limited (“Yuanda”) were engaged by Multiplex to carry out façade sub-contractor works for the project. In guaranteeing its performance obligations under the sub-contract, Yuanda provided security to Multiplex by way of guarantee bond whereby Australia and New Zealand Banking Group Limited (the “Bank”) acted as guarantor up to a maximum sum of £4,411,490.70.
Delays arose on the project and a dispute arose as to whether Multiplex or Yuanda’s actions were the cause of such delays. St George PLC, the employer pursued Multiplex for liquidated and ascertained damages (“LADs”) which were capped at £7.5 million under the terms of the main contract. Multiplex susbequenly demanded this sum from Yuanda. Yuanda denied it was liable to pay any LADs and proceeded to submit its final account to Multiplex claiming the sum of £48.9 million which included costs for loss and expense suffered as a result of the delays which Multiplex pleaded in the court proceedings was not an accurate final valuation. Adjudication was contractually provided for in Clause 8.2 of the sub-contract and Multiplex commenced an adjudication on 2 December 2019 in relation to the dispute with Yuanda on the LADs. On 17 January 2020 Multiplex made a call on the guarantee bond for the full amount on the basis that Yuanda had breached the terms of the sub-contract by refusing to pay the LADs claimed.
Key Aspects of the Case
There were three core issues determined by the court.
Firstly, Fraser J examined the wording of the guarantee in determining the type of instrument provided by the Bank. He held it was a performance bond as opposed to an on-demand bond based on the construction of the wording of the instrument. He honed in on the wording of Clause 1 of the guarantee bond which stated that the guarantor “guarantees to the Contractor that in the event of a breach of the Contract by the Sub-Contractor…the Guarantor shall satisfy and discharge the damages sustained by the Contractor as established and ascertained in accordance with the provisions of the…Contract and taking into account all sums due to or to become due to the sub-contractor”. This wording established that the Bank’s liability was secondary in nature to the primary liability of Yuanda. He also pointed to the fact that the bond itself did not contain the word “demand” and therefore did not use the language typically seen in an on-demand bond.
The main aspect of the case was determining whether a valid demand on the bond had been made by Multiplex. The court examined whether the demand was made within the timeframe specified in the bond which outlined that any claim must be made before “Expiry”. In the bond, “Expiry” was defined as the earlier of a) 28 days following the date of the issue of the Notice of Completion of Making Good under the Main Contract or b) 4 April 2020. The latter was deemed to be the expiry date as the Notice of Completion of Making Good was not due to be issued until a future date. Multiplex argued that even if the demand on 17 January was not considered valid it would be entitled to make another call on the bond between 6 March 2020, when the adjudicator’s decision was due, and the expiry date on 4 April provided the adjudicator’s decision was in its favour. This hypothetical subsequent demand was referred by Fraser J in his judgment as the “Adjudication Decision Demand”. Fraser J stated that a court will rarely answer hypothetical questions but, based on the facts of this case, the court held that it would proceed to determine the validity of the demand on 17 January 2020 and consider whether an adjudicator’s decision in favour of Multiplex would or would not qualify as a sum that was “established and ascertained” in accordance with the provisons of the underlying contract. Such a determination would essentially answer the hypothetical question as to whether Multiplex could validly make an Adjudication Decision Demand should it obtain a favourable adjudicator’s decision before the expiry date.
Lastly, the key concern which Fraser J raised was whether the sums claimed had been correctly “established and ascertained” by reference to the provisions of the sub-contract. Yuanda’s counsel on the one hand argued that in order to establish and ascertain all sums due or becoming due to Yaunda, any demand must not be made until such a time as the final account had been agreed by means of final judgment in the High Court. This stance was rejected by the court. Multiplex argued that they had correctly called on the bond having regard to the indemnity in respect of damages for loss suffered as a result of the failure to progress the sub-contract works in time. The court determined that Multiplex could not simply assert that LADs were due to it and doing so was not sufficient to “establish and acertain” the damages it claimed. Based on the facts of the case and the sub-contract provisions Fraser J held that Multiplex must receive a favourable decision from the adjudicator to ascertain and establish the LADs due.
The pivotal take away from this decision is that extreme care should be taken by a beneficiary in ensuring that the contractual mechanisms within the underlying contract are followed in ascertaining and establishing that sums are due prior to making any call on a bond. In this case, a mere statement that money was due was not enough to establish the requirement for damages to be established and ascertained but equally Multiplex was not required to go as far as obtaining a final judgment from the High Court.
It is also evident from this case that a court will analyse a bond by reference to the instrument as a whole rather than isolated parts of the instrument. For example, the parties simply referring to a bond as an “on-demand bond” does not mean that it will be regarded as such by the courts.
Prior to calling in a performance bond, we urge a beneficiary to consider (i) the contractual provisions in the underlying contract by reference to the specific event of default; and (ii) what, if any, further action is required under that contract in order for it to establish and ascertain the damages claimed.