Catherine Gritt

Associate

Construction Law


A lot of unnecessary prolix: Why you should avoid amending performance bond wording

Catherine Gritt

The recent decision in Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc in relation to amendments to the standard form of conditional guarantee bonds could be summarised in seven words: if it ain’t broke, don’t fix it. 


As long ago as 1994 the Court went through the process of how an employer claims against a standard bond on the when their contractor becomes insolvent.

In essence, the employer has to show that:


1. the contractor has breached the contract; and


2. the employer can show that it has sustained loss and damage as a result of the breach.

Contractor insolvency on its own is not generally a breach of the contract, but it almost always allows the employer to terminate performance, engage a third party to finish the work and claim any loss from the contractor.

If the contractor is insolvent, then it won’t pay the sums due. This is a breach of the contract, which triggers the guarantor’s obligations under the bond. The loss and damage is the quantified loss being claimed from the insolvent contractor, and can be claimed from the guarantor up to the limit of the bond.

Despite this very clear step-by-step guidance, it has been common practice for parties to agree amendments to the standard form bonds to try to make it even more clear that the employer is covered upon contractor insolvency. Ziggurat is a prime example of why this isn’t generally a good idea.

 

The facts

Ziggurat as employer engaged a contractor (County Contractors (UK) Ltd) to build blocks of student accommodation. HCC, the guarantor, issued a performance bond. The bond was amended to include a provision that “damages payable shall include any debt or sum payable to the Employer under the Contract following the insolvency of the Contractor”.


Issues arose which led to Ziggurat terminating the contract, engaging a third party to finish construction and, following final accounts, claiming its loss from the contractor. Between termination and the contract administrator drawing up final accounts, the contractor went into a CVA. Ziggurat claimed the maximum bond amount from HCC.

HCC raised a number of arguments, most of which centred around the effect of the amendment on the operation of the clause. The parties were forced to take the matter to Court.

 

The decision

The judge, Mr Justice Coulson, gave the guarantor’s arguments short shrift and found for Ziggurat. However he made it clear that he was deeply unimpressed with the amendments to the standard wording that had been agreed between the parties. His view was that the position would have been exactly the same whether the amendment was made or not; in fact the amendment was described as serving “no purpose” and being “unnecessary prolix”.

 

The effect

This ruling highlights the dangers of tinkering with industry standard wording. The normal position is that employers are covered against losses sustained on the Contractor’s insolvency under the standard ABI bond wording. The amendment in Ziggurat had absolutely no effect, apart from to embroil both parties in a lengthy, costly and ultimately pointless dispute.

There are of course circumstances in which amendments to the ABI standard form will be appropriate – for example, where the nature of the contract means that the employer won’t be able to trigger the obligations under the bond for a lengthy period following the contractor’s insolvency. However, such amendments must be drafted with extreme care. If they are not comprehensive enough, they will be of no practical value; if they are too extensive, it’s unlikely that they will be accepted by the guarantor. Unless absolutely necessary it is probably best to leave the standard bond wording alone.

If you are interested in any of the topics raised in this article, or for further information, please contact Catherine Gritt. Alternatively, you can call 0115 9888 777 to speak to a member of our team. 

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