We come across situations sometimes where contractors agree to
enter into contract with clients, with a form of bond or collateral
warranty attached to the contract. The contract is signed and works
commence on site. Both the contractor and the client are well into
the project. The contractor then fails to procure a bond and fails
to procure collateral warranties from its sub-consultants (which
were in fact under the contract). The client requests the
performance bond from the contractor. The contractor procrastinates
and starts negotiating with the client on the form of bond to be
used. By this point this has become a commercial issue for the
client. The client is now also concerned that the contractor has
not procured the collateral warranties from its key designers. The
contract is terminated for other reasons.
The Liberty Mercian Limited v Cuddy Civil Engineering Limited,
Cuddy Demolition and Dismantling Limited cases seek to protect
a client in a similar position. There have so far been three cases
in total in front of Mr Justice Ramsey between these two parties.
In the first two cases, the court found that a contract existed
between Cuddy Civil Engineering Limited ('Cuddy') and
Liberty Mercian Limited ('Liberty Mercian'). The first case
also highlighted the importance of knowing who the contractor is
– is it really the contractor undertaking the works or some
other entity/group company? In the second case, the court found
that Cuddy was in breach of contract for not providing a
performance bond and two collateral warranties, and it required
Cuddy to use 'best endeavours' to obtain these documents,
even though the contract between Cuddy and Liberty Mercian had
terminated. The approach taken by Mr Justice Ramsey was not to
ratchet up and force Cuddy to provide these documents, but instead
he approached the matter in stages, which provided Cuddy an
opportunity to take action and remedy the situation.
In the third case, Cuddy and Liberty Mercian provided evidence in
relation to Cuddy's efforts to procure a performance bond. The
obligation on Cuddy to procure the bond was one of 'best
endeavours'. How did Cuddy discharge this? Cuddy consulted
underwriters and banks who suggested that a performance bond could
not be secured as the works were now nearing practical completion,
the NEC3 form of contract would need to be amended to make it
acceptable to the underwriters, and that the contentious
relationship between Liberty Mercian and Cuddy made these
underwriters and banks uneasy. As far as the banks were concerned,
each required 100% cash payments or declined to provide a bond
outright. There was also the general view that it would not be
possible to issue a performance bond guaranteeing performance of a
contract which no longer existed and therefore was not capable of
being performed. The court considered that Cuddy had complied with
its obligation to use best endeavours to secure a performance bond,
but sadly it could not, so it would be impossible for the court to
order specific performance requiring Cuddy to procure a bond in the
terms attached to the contract.
The financial information available on the surety is likely to be
quite important - Liberty Mercian explored the possibility of
'Evolution' (a surety) underwriting Cuddy's bond. Cuddy
took the view that Evolution, an insurance company based in
Gibraltar, was unrated. It requested the court not to require Cuddy
to enter into arrangements with such a company especially where a
substantial cash deposit was also required to be made. Although the
court examined the form of bond proposed by Evolution and
considered that if the court wished it could grant specific
performance of a bond on revised terms, the much stronger argument
related to the financial information available on Evolution, and
the contractual provision between Liberty Mercian and Cuddy which
required the bond to be placed with a bank or insurer in a strong
financial position. The court considered that there was limited
financial information on Evolution and a large amount of money
£420,000 to which Evolution would have free access. As the
company was registered in Gibraltar, the sum could well be placed
somewhere outside the UK. If a financially prudent party would not
place a bond in such a circumstance, neither was the court going to
allow this.
The court therefore considered that substituted performance was the
best solution - the sum of £420,000 should be paid into court
to stand as equivalent to the performance bond. Liberty Mercian
would need to apply to Cuddy to obtain payment. The court further
considered that the sum should be paid out to Cuddy if proceedings
were not commenced within six months, subject to Liberty Mercian
applying for an extension. Therefore whilst Cuddy could not obtain
a performance bond in the form attached to the contract, the court
took the view that there should be substituted performance in this
case by way of a payment into court as an equivalent to the
provision of the bond.
The court also dealt with the two collateral warranties that needed
to be procured by Cuddy from Quantum (GB) Limited
('Quantum', an insolvent company) – one in favour of
Liberty Mercian and the other to Waterman, another entity. Cuddy
was required to use 'best endeavours' to procure these
warranties. The court considered that there was evidence before the
court that up until 21 January 2012 Quantum had professional
indemnity insurance organised through a Lloyd's broker with a
limit of indemnity of £5,000,000. However, it was unclear
whether or not Quantum had current valid insurance cover. The court
took the view that if there was no insurance cover then Liberty
Mercian and Waterman would not derive any benefit from having a
warranty or want to seek to enforce an order for specific
performance.
The court considered that, if proceedings were commenced in court
against Quantum, the proceedings very likely might not be defended
by Quantum but 'points may be taken up by its insurers'. As
there was some evidence that the warranty would be backed by
insurance, the court considered that specific performance against
Cuddy could be granted for its obligation to procure warranties
from Quantum.
This case illustrates how the court can step-in to safeguard a
client's interest where a contractor has failed to procure and
provide documents, which the contractor agreed to provide to the
client in the first place, but failed to do so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.