ARTICLE
4 December 2014

Liberty v Cuddy (3): Is The Court Acting As A Bondsman?

The Technology and Construction Court considered a payment of funds into court as an alternative remedy to specific performance to deliver security documentation.
UK Real Estate and Construction
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Summary and implications

In the recent decision of Liberty Mercian Limited v Cuddy Civil Engineering Limited [2014] EWHC 3854 (TCC) the Technology and Construction Court (the Court) considered a payment of funds into court as an alternative remedy to specific performance to deliver security documentation.

Liberty Mercian Limited (Liberty) entered into a contract with Cuddy Civil Engineering Limited (CCEL) for works relating to the construction of a new retail plateau which was later terminated.

In fact, CCEL is a dormant company and its group company, Cuddy Demolition and Dismantling Limited (CDDL), was the company carrying out the works. 

On termination of the contract, Liberty alleged that CDDL ought to have been the contracting party and in any event, either CDDL or CCEL were in breach of the contract by failing to provide a parent company guarantee, performance bond and collateral warranties from a consultant in its favour, as required under the contract.

Liberty sought:

  1. declaratory relief and/or rectification with regard to the correct contractor contracting party; and
  2. specific performance and/or damages with respect to the non-provision of security documents.

First decision [2013] EWHC 2688 (TCC)

The Court decided that whilst the contracting party, CCEL, was a dormant company there was no common mistake, misnomer or unilateral mistake in respect of the contracting party and, further, there was no reason why the Court should rectify the contract and make CDDL the contracting party. 

The Court further held that CCEL was in breach of contract by failing to provide the parent company guarantee, performance bond and warranties, and this obligation survived the termination of the contract.

In considering the issue of specific performance and/or damages, the Court noted that CCEL and CDDL did not have a parent-child corporate relationship and, in fact, CCEL did not have a parent company. Therefore, the Court was reluctant to order specific performance of an obligation that would prove impossible to perform. 

On that basis, the Court invited further evidence and submissions from both parties before it decided what remedies were available to Liberty.

Second decision [2013] EWHC 4110

The Court did not consider how the fact that CCEL did not have a parent company affected its obligation to provide a parent company guarantee. However, it held that damages were not an adequate remedy for the non-provision of the other security documentation.

Whilst the Court accepted that, commercially, it may be difficult for CCEL to procure a performance bond following termination of the contract, it considered that it still was minded to order specific performance. This was on the basis that the purpose of a performance bond was to protect Liberty from any sums that may have been due to it from CCEL and there was evidence that CCEL had access to funds from CDDL and therefore could not rely on its inability to fund a performance bond.

The Court provided CCEL "with a final chance to establish that the obligations to provide the performance bond and warranties are impossible" and ordered that CCEL use its "best endeavours" to procure the security documentation. The Court reserved judgement on the remedy afforded to Liberty.

Third decision [2014] EWHC 3584

The Court held that CCEL had complied with its obligation to use its best endeavours to secure a performance bond. However, CCEL had not been able to procure a bond due to the lack of market "appetite" to provide security to a company with no assets, over a project that was the subject of litigation and on the agreed terms of the bond attached to the contract.

On that basis, the Court considered CCEL's ability to procure a performance bond impossible and ordered CCEL to pay the equivalent of the bond amount into court as providing Liberty with an equivalent remedy by substituted performance.

Further, the Court ordered specific performance of the delivery of the warranties. 

Comment

There have been a number of commentaries regarding the importance of naming the right company as the contracting party to avoid similar issues as seen in this case and that point is reiterated here.

However, this latest decision is an interesting use of the Court's power to order a payment into court in lieu of a performance bond where specific performance, if ordered, would have been impossible. 

The Court acknowledged that the fund would "stand as security for any claim" by Liberty against CCEL and, in the event of no claim, the sums would be repaid to CCEL in the same way a bondsman's liability would be discharged. However, the funds would be available to Liberty in the event of a judgment in its favour and the Court "would make an order after liability had been determined dealing with the position in relation to the sums paid into court as if it were dealing with the liability of the guarantor under the bond and the same terms and conditions would apply."

This would suggest that the Court is in effect acting as a bondsman but only insofar as releasing payment from the fund as opposed to administering the bond.

Aside from the importance of naming the correct contracting entity, the decisions in Liberty v Cuddy equally demonstrate the importance of verifying that requested security can be delivered. Some building contracts provide mechanisms which, in effect, provide alternative security pending delivery of the requisite documents (for example, the right for the employer to withhold sums pending provision of bond or guarantee documents), but contractors need to be aware that arguing an inability to procure a bond or guarantee may not be the end of the matter as failure to deliver such a document could result in the court imposing, in effect, a financial solution.

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.

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