Performance Bonds and Insolvency: Issues Clarified In TCC

25/01/2018

Ziggurat (Claremont Place) LLP v HCC International Insurance Company Plc [1]

The recent case of Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc has highlighted some clear principles relating to termination provisions in JCT contracts and performance bonds.  The Technology and Construction Court (TCC) held that the contractor’s insolvency was enough to trigger the performance bond, due to a clause added by the parties to the ABI Model Form[2].  However, The Honourable Mr Justice Coulson stated that on the facts of the case, even if the amending clause had not been present, the contractor had been in breach of the construction contract (which incorporated the JCT conditions) by failing to pay the amount due to the employer following insolvency as determined under the contract.

The facts of the case

Ziggurat entered into a construction contract (JCT 2011 standard form) with County Contractors, to build a block of student flats in Newcastle Upon Tyne.

County’s performance was subject to a Performance Guarantee Bond ("the Bond"), which was provided by HCC.  The bond was based on the ABI Model Form.  Clause 1 stated that the bond could be called in should County breach the construction contract.  This clause was a standard ABI Model Form clause.  The parties added a bespoke clause (clause 2) which stated:

“(2) The damages payable under this Guarantee Bond shall include (without limitation) any debt or other sum payable to the Employer under the Contract following the insolvency (as defined in the Schedule) of the Contractor."

The following events subsequently occurred:

Ø  February 2016 – County ceased to work on the project, citing monetary problems.

Ø  14^th March 2016 - Notice was given to County under clause 8.4.1 of the contract stating that the contract had been breached because; a) County had suspended work without due cause and b) they had failed to proceed with the work regularly and diligently.

Ø  County never responded to the notice and therefore Ziggurat fired them under clause 8.4.2 on 31^st March 2016.

Ø  8^th April 2016 – County went into insolvency.

Ø  10^th March 2017 - Ziggurat made a claim against County under clause 8.7.1 of the construction contract, which included the costs of the remainder of the work having to be completed by another contractor.

Ø  17^th March 2017 - Ziggurat called in the value of the Performance Bond to cover the amount claimed against County

Ø  125^th April 2017 - County stated the termination notice served on them was invalid and as a result, Ziggurat was in breach of the construction contract.

The issues for the court to decide regarding the Performance Bond

The court was asked to decide whether Ziggurat could call on the Performance Bond as a result of County’s insolvency and rely on the accounting exercise, carried out by the Contract Administrator under clauses 8.7.4 and 8.7.5, to establish the amount payable under the bond.

The TCC’s decisions

It was held by the TCC that the fact County fell into insolvency was enough for Ziggurat to call on the performance bond.  This was because clauses 1 and 2 of the Performance Bond were put in place to mirror the grounds of termination in clauses 8.4 (default by the contractor) and 8.5 (insolvency of the contractor) of the construction contract, and clause 2 made it clear that HCC was liable under the bond for losses caused by County’s insolvency. 

HCC tried to argue that clause 2 was merely a subsidiary to clause 1, but this was rejected by the court on the grounds of being contrary to common sense.

The court held that even if its decision was wrong and a breach of the construction contract was required to trigger the Performance Bond, County committed a breach when it failed to pay Zuggurat following the claim made on 10^th March 2017.  The Honourable Mr Justice Coulson referred to: 

Perar v General Surety and Guarantee Co[3] which stated that although insolvency did not constitute a breach of contract, failure to pay a debt due under the agreement because of insolvency did.  This is highly relevant when the triggering of a performance bond relies on the contractor to be in breach of the construction contract.

Both arguments presented by County, a) because the validity of the contract termination by Ziggurat was disputed, County was not in breach, and, b) Ziggurat’s repudiation of the contract meant that the contract had come to an end and accordingly there was no obligation to pay the clause 8.7.5 debt.

The ABI Model Form of Guarantee Bond can include the following amendment to clause 1 to ensure a contractor’s insolvency does trigger the Performance Bond:

‘For the purposes of this Guarantee Bond the expression “breach of the Contract” shall be deemed to include any failure or inability on the part of the Contractor to carry out or complete the Works in accordance with the Contract, as a result of the insolvency of the Contractor and in this case the “damages sustained by the Employer” shall include the Employer’s direct loss and expense caused by such failure or inability on the part of the Contractor’.

By inserting this, there can be no doubt that if the contractor falls into insolvency, the Performance Bond is payable, saving all parties time and money having to litigate this fact.