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

INTRODUCTION

Pursuant to a building contract incorporating the JCT 2011 standard form, the claimant employed County Contractors (UK) Limited (“County”) to build blocks of student studios at 19-26 Claremont Place, Newcastle Upon Tyne (“the site”). County’s performance was the subject of a Performance Guarantee Bond (“the Bond”) provided by the defendant to the claimant and dated 28 January 2015. Following County’s suspension of the works and insolvency, other contractors were engaged by the claimant to complete the works. The additional costs were claimed from but not paid by County. A subsequent claim was made on the Bond which has not been satisfied.

By a claim form issued on 3 October 2017, under CPR Part 8, the claimant seeks three declarations as to the true construction of the Bond. The claims for the first two declarations are resisted by the defendant, although the third has been belatedly agreed.

I propose to deal with the issues between the parties in this way. In Section 2, I set out the relevant terms of the building contract and the Bond. In Section 3, I set out a brief chronology of the relevant events. In Section 4, I set out the declarations sought by the claimant. In Section 5,I summarise the relevant principles of interpretation and the applicable authorities relating to performance bonds of this kind. Then, in Sections 6, 7 and 8, I deal with each of the three Declarations. I am very grateful to both counsel for their thoughtful skeleton arguments and concise oral submissions.

THE BUILDING CONTRACT AND THE BOND

The Building Contract

It is only necessary to set out the relevant terms of the building contract between the claimant and County in so far as they relate to termination. The provisions were as follows:

“General

Meaning of insolvency

8·1 For the purposes of these Conditions:

·1 a Party which is a company becomes Insolvent:

·1 when it enters administration within the meaning of Schedule B1 to the Insolvency Act 1986;

·2 on the appointment of an administrative receiver or a receiver or manager of its property under Chapter I of Part III of that Act, or the appointment of a receiver under Chapter II of that Part;

·3 on the passing of a resolution for voluntary winding-up without a declaration of solvency under section 89 of that Act; or

·4 on the making of a winding-up order under Part IV or V of that Act.

·2 a Party which is a partnership becomes Insolvent:

·1 on the making of a winding-up order against it under any provision of the Insolvency Act 1986 as applied by an order under section 420 of that Act; or

·2 when sequestration is awarded on the estate of the partnership under section 12 of the Bankruptcy (Scotland) Act 1985 the partnership grants a trust deed for its creditors.

·3 a Party who is an individual becomes insolvent:

·1 on the making of a bankruptcy order against him under Part IX of the Insolvency Act 1986; or

·2 on the sequestration of his estate under the Bankruptcy (Scotland) Act 1985 or when he grants a trust deed for his creditors.

·4 a Party also becomes Insolvent if:

·1 he enters into an arrangement, compromise or composition in satisfaction of his debts (excluding a scheme of arrangement as a solvent company for the purposes of amalgamation or reconstruction); or

·2 (in the case of a Party which is a partnership) each partner is the subject of an individual arrangement or any other event or proceedings referred to in this clause 8·1.

Each of clauses 8·1·1 to 8·1·4 also includes any analogous arrangement, event or proceedings in any other jurisdiction.

…

Termination by Employer

Default by Contractor

8·4 ·1 If, before practical completion of the Works, the Contractor:

·1 without reasonable cause wholly or substantially suspends the carrying out of the Works or the design of the Contractor’s Designed Portion; or

·2 fails to proceed regularly and diligently with the Works or the design of the Contractor’s Designed Portion; or

·3 refuses or neglects to comply with a notice or instruction from the Architect/Contract Administrator requiring him to remove any work, materials or goods not in accordance with this Contract and by such refusal or neglect the Works are materially affected; or

·4 fails to comply with clause 3·7 or 7·1; or

·5 fails to comply with clause 3·23;

the Architect/Contract Administrator may give to the Contractor a notice specifying the default or defaults (the ‘specified default or defaults’).

·2 If the Contractor continues a specified default for 14 days from receipt of the notice under clause 8·4·1, the Employer may on, or within 21 days from, the expiry of that 14 day period by a further notice to the Contractor terminate the Contractor’s employment under this Contract.

·3 If the Employer does not give the further notice referred to in clause 8·4·2 (whether as a result of the ending of any specified default or otherwise) but the Contractor repeats a specified default (whether previously repeated or not), then, upon or within a reasonable time after such repetition, the Employer may by notice to the Contractor terminate that employment.

Insolvency of Contractor

8·5 ·1 If the Contractor is Insolvent, the Employer may at any time by notice to the Contractor terminate the Contractor’s employment under this Contract.

·2 The Contractor shall immediately notify the Employer if he makes any proposal, gives notice of any meeting or becomes the subject of any proceedings or appointment relating to any of the matters referred to in clause 8·1.

·3 As from the date the Contractor becomes Insolvent, whether or not the Employer has given such notice of termination:

·1 clauses 8·7·3 to 8·7·5 and (if relevant) clause 8·8 shall apply as if such notice had been given;

·2 the Contractor’s obligations under Article 1 and these Conditions to carry out and complete the Works and the design of the Contractor’s Designed Portion shall be suspended; and

·3 the Employer may take reasonable measures to ensure that the site, the Works and Site Materials are adequately protected and that such Site Materials are retained on site; the Contractor shall allow and shall not hinder or delay the taking of those measures.

…

Consequences of termination under clauses 8·4 to 8·6

8·7 If the Contractor’s employment is terminated under clause 8·4, 8·5 or 8·6:

·1 the Employer may employ and pay other persons to carry out and complete the Works and/or (where applicable) the design for the Contractor’s Designed Portion and to make good any defects of the kind referred to in clause 2·38, and he and they may enter upon and take possession of the site and the Works and (subject to obtaining any necessary third party consents) may use all temporary buildings, plant, tools, equipment and Site Materials for those purposes;

·2 the Contractor shall:

·1 when required in writing by the Architect/Contract Administrator to do so (but not before), remove or procure the removal from the Works of any temporary buildings, plant, tools, equipment, goods and materials belonging to the Contractor or Contractor’s Persons;

·2 (where there is a Contractor’s Designed Portion) without charge provide the Employer with copies of all Contractor’s Design Documents then prepared, whether or not previously provided;

·3 if so required by the Employer (or by the Architect/Contract Administrator on his behalf) within 14 days of the date of termination, assign (so far as assignable and so far as he may lawfully be required to do so) to the Employer, without charge, the benefit of any agreement for the supply of materials or goods and/or for the execution of any work for the purposes of this Contract;

·3 no further sum shall become due to the Contractor under this Contract other than any amount that may become due to him under clause 8·7·5 or 8·8·2 and the Employer need not pay any sum that has already become due either:

·1 insofar as the Employer has given or gives a Pay Less Notice under clause 4·12·5; or

·2 if the Contractor, after the last date upon which such notice could have been given by the Employer in respect of that sum, has become insolvent within the meaning of clauses 8·1·1 to 8·1·3;

·4 following the completion of the Works and the making good of defects in them (or of instructions otherwise, as referred to in clause 2·38), an account of the following shall within 3 months thereafter be set out in a certificate issued by the Architect/Contract Administrator or a statement prepared by the Employer:

·1 the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 8·7·l and, where applicable, clause 8·5·3·3, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise;

·2 the amount of payments made to the Contractor; and

·3 the total amount which would have been payable for the Works in accordance with this Contract;

·5 if the sum of the amounts stated under clauses 8·7·4·1 and 8·7·4·2 exceeds the amount stated under clause 8·7·4·3, the difference shall be a debt payable by the Contractor to the Employer or, if that sum is less, by the Employer to the Contractor.”

The Bond

It is principally the first two clauses of the Bond which are relevant to the present dispute. They were in the following terms:

“(1)

The Guarantor [the defendant] guarantees to the Employer [the claimant] that in the event of a breach of Contract by the Contractor [County] the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the losses and damages sustained by the Employer as established and ascertained pursuant to and in accordance with the provision of or by reference to the Contract and taking into account all sums due or to become due to the Contractor.

(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 Schedule provided that the maximum value of the Bond was £382,519.08 (being 10% of the building contract sum). Insolvency was defined as “the occurrence in relation to the Contractor of any of the events set out at clause 8.1 of the Contract”, again a reference back to the building contract.

Other clauses to which reference was made during argument included:

It should be noted at the outset that the Bond was in standard ABI Model Form with one important exception: clause 2 was an entirely homemade addition, and must therefore be taken to have been added by the parties to meet their particular requirements.

THE RELEVANT EVENTS

At some time in February 2016, County stopped work at the site. They did not suggest that this was anything to do with the claimant; the evidence suggests that it was because of their financial difficulties. On 14 March 2016, CAG Architects Limited, the contract administrator (“CAG”) served a notice on County pursuant to clause 8.4.1 of the contract identifying two specified defaults. These were:

The notice gave County 14 days to remedy the specified defaults and warned that, if they failed to do so, their employment under the building contract would be terminated. County failed to respond to the notice or return to site. So, on 31 March 2016, the claimant served notice of termination under clause 8.4.2. The notice made plain that, pursuant to clause 8.7.1, the claimant would employ and pay others to carry out and complete the works and would seek to recover from County the costs which were thereby incurred. County again failed to respond to the notice.

On 8 April 2016, County became subject to a Company Voluntary Arrangement (“CVA”). County were therefore insolvent as defined in clause 8.1.1 of the building contract. Administrators were appointed on 19 May 2016. County remains in administration, and there has been a recent application to extend the administration until 1 November 2018.

The claimant then engaged others to complete County’s works. Following completion and the making good of defects, an account was prepared by CAG in accordance with clauses 8.7.4-8.7.5 of the building contract, which indicated a balance due to the claimant of £621,798.38. On 10 March 2017, a notice pursuant to clause 8.7 was served on County, demanding the payment of this sum as a debt in accordance with clause 8.7.5.

On 17 March 2017, the claimant made a demand under the Bond against the defendant. This referred to the debt due from County of £621,798.38. The claim on the Bond was limited to the maximum permitted, namely £382,519.06.

Under the terms of the building contract, the debt was due and payable by County on 31 March 2017, 21 days after the notice. It was not paid by County and neither was the claim on the Bond accepted.

On 12 April 2017, County’s solicitors wrote, more than a year after the relevant events, to complain about the claimant’s termination of County’s employment. It was said that the purported termination was invalid due to a miscalculation of the length of the relevant notice period. This, it was said, meant that the termination notice was invalid and that, in consequence, the claimant had repudiated the building contract. As to the quantum of the claimant’s claim, County’s solicitors simply said that “in any event the sums claimed by Ziggurat are disputed”. Further particulars of this dispute were promised, but have never been provided, either by County or by the defendant.

As for the claim on the Bond, in a letter from the defendant dated 12 July 2017, the defendant’s position was summarised as follows:

“As the bond is a default bond and not a demand instrument, it must be proven that a breach of contract has taken place and that losses have been incurred as a result of that breach before a claim can be made upon it.

We are aware that County Contractors (UK) Limited and Ziggurat (Claremont Place) LLP are in dispute regarding the purported breaches of contract, the resolution of which needs to be established via the terms and conditions of the underlying construction contract.

Until a formal decision as to whether County Contractors (UK) Limited has breached the underlying construction contract and a formal ruling upon the extent of the losses therefore arising have been established, HCC deny that any payment is due.”

THE DECLARATIONS SOUGHT

Declaration 1 is in the following terms:

“(a)

That an insolvency event has occurred within the meaning the paragraph 2 of the bond and [the claimant] is entitled as a matter of principle to claim under paragraph 2 of the bond as a result of that insolvency event.

(b)

In respect of a claim under paragraph 2 of the bond, there is no requirement for [the claimant] to prove a breach by [County] of the construction contract and/or valid termination of the construction contract, which are irrelevant to a claim under paragraph 2 of the bond.”

Declaration 2 is in the following terms:

“For the purpose of a claim under paragraph 1 and/or paragraph 2 of the bond, as a matter of principle, [the claimant] would be entitled to rely on the result of an accounting exercise properly carried out in accordance with clauses 8.7.4-8.7.5 of the construction contract, in order to establish:

(a)

The losses and damages sustained by [the claimant] for the purpose of a claim under paragraph 1 of the bond; and/or

(b)

Damages, including any debt or other sum payable (for the purpose of a claim under paragraph 2 of the bond).

There would be no requirement to also or instead obtain a court judgment or reach an agreement with [County] in order to establish these matters.”

Declaration 3 is in the following terms:

“For the purpose of a claim under paragraph 1 and/or paragraph 2 of the Bond, to the extent necessary, [the claimant] would be entitled as a matter of principle to seek to establish (a) breach by [County] and valid determination of [County]’s employment under the construction contract and/or (b) losses and damages sustained (for the purpose of a claim under paragraph 1 of the bond) and/or damages, including any debt or other sums payable (for the purpose of a claim under paragraph 2 of the bond), in Court proceedings against [the defendant]. There would be no requirement for [the claimant] to issue proceedings against [County] first or at all in order to establish these matters.”

It is right to note at the outset that, in my view, these declarations are unnecessarily prolix. More significantly, they do not always reflect the arguments that were so skilfully advanced by both counsel. Up to a point, this reflects the uncertain and fluid nature of civil litigation, and no substantive criticism is intended of either side. But I cannot help feeling that these Part 8 proceedings were not perhaps the best vehicle for resolving the underlying issues, and that it would have been much better if the arguments had arisen on an application for summary judgment under Part 24. Then at least the tramlines introduced by the draft declarations would have been unneccessary.

Following the production of Mr Oram’s skeleton argument, as I have indicated, Declaration 3 is no longer in issue.

THE RELEVANT PRINCIPLES OF LAW

The Principles of Interpretation

As to the general principles of contract construction, I follow the well-known guidance set out most recently by the Supreme Court in Arnold v Britton [2015] AC 1619 and Wood v Capita Insurance Co [2017] UKSC 24. What matters is what a reasonable person, having all the background knowledge available to the parties, would have understood the words of the contract to mean, using the language in its commercial and factual context. Where there are rival interpretations, concepts of business common sense can be relevant as an aid to construction.

The Relevant Principles Relating to Performance Bonds

A bond of this sort is an instrument of secondary liability. The surety cannot be in a worse position, as against the employer, than the contractor. In Tower Housing Association Limited v Technical and General Guarantee Co Limited (1998) 87 BLR 74, Judge Humphrey Lloyd QC said:

“As the claim is made on the bond, certain basic principles have to be borne in mind in approaching a bond of this kind. First of all, it is well established and it must, I assume, be taken to be common ground that a bondsman in the position of the defendant is entitled to avail itself of all the defences that might have been available to the contractor had the contractor either not been insolvent and obviously, where it is in either insolvent or in financial difficulties, the defences available to the administrative receivers. Secondly - and this was prayed in aid by Mr Darling in the course of his submissions - that, in general terms, one would approach the terms of the bond on the basis that they are to be ‘strictly construed and no liability is imposed which is not clearly and distinctly covered by the terms of the agreement’…”

In that case, Tower were arguing that, as against the surety, their hands were not tied by some of the detailed provisions of the contract, as they might have been if they were pursuing the contractor. Judge Lloyd rejected that submission. He said that “the obligation of the surety is relative to the obligation of the contractor under the terms of the contract; as one might expect in approaching any bond, the obligation of a surety is simply to stand behind that of the debtor (the contractor) and not to be under any greater liability than the contractor would have had.”

Thirty years ago, there were regular arguments about performance bonds of this kind provided in support of building contractors. Many of those arguments arose because the performance bond was only triggered if the contractor was in breach of contract and so, if the contractor became insolvent, and the contract was terminated, it was argued that that was not a breach, and that there was therefore no liability under the bond. In this way, given the unhappy habit of building contractors becoming insolvent, both then and now, the secondary liability market was not reflecting the reality of the construction industry.

However, those issues were largely resolved by the Court of Appeal in Perar BV v General Surety and Guarantee Co Limited (1994) 66 BLR 72. In that case the Court of Appeal held that the automatic termination of the contract following the insolvency of the contractor did not amount to a breach of contract, with the result that there was no right to immediate payment under the bond merely because the contractor did not continue to execute the works. Insolvency alone did not therefore give rise to any payment entitlement.

However, Peter Gibson LJ noted that clause 27.4.5 of the contract under consideration contained a provision which allowed the calculation of a sum due under the contract following determination. This provision culminated in a debt payable by one side to the other. It was a forerunner of the provisions of clause 8.7 in the building contract between County and the claimant. Peter Gibson LJ went on to say that, in Perar, there had never been a claim under clause 27.4.5, and that:

“Had a claim been made, as the contract envisaged, it may well be that these proceedings would have been avoided, as plainly any consequent failure by the contractor to pay any such demand, if properly made, would have enabled a claim to be made under the bond…”

In other words, insolvency would lead to a breach (and thus a claim under the bond) if the employer had followed the provisions of the contract and established a debt due, and the debt remained unpaid by the contractor.

The importance of the contractual ascertainment exercise was restated in Paddington Churches Housing Association v Technical and General Guarantee Co Limited [1999] BLR 244. Again, that was a claim on a bond in the absence of any ascertainment of the debt due under clause 27. Judge Bowsher QC reiterated both the secondary liability that arose under the bond and the importance of the contractual mechanism. At paragraph 24 he said:

“The defendants are liable as surety only, and it seems to me to be plain on the face of the bond that the defendants are liable to pay the amount (if any) shown to be due to the plaintiffs on a statement made by the employer in accordance with the terms of the contract. That contract was imported into the bond by the recitals. Clause 27 of that contract is referred to specifically in the conditions. Both in case of default and in case of determination on insolvency (or indeed in any case where it were relevant, for corruption) the damages are calculated by reference to the code of the contract, which are in any event unlikely to be different from the damages at general common law. The accuracy of the employer’s statement might be challenged in the courts, but the employer’s statement is required before the damages can be said to be ascertained and there is no liability on the defendants until those damages are ascertained. The plaintiffs submit that the employer’s statement is only a mechanism and not a condition precedent to payment, but no other mechanism for ascertaining the net damages is put forward or relied on by the plaintiffs.”

The judge said that the absence of the statement was fatal to the employer’s claim. At paragraph 30 he said that, “When such a statement is provided, if it shows a net sum due to the plaintiffs, the defendants will become liable up to the amount of the bond.”

In the present case, the relevant provisions at clauses 8.5 and 8.7 of the 2011 standard form have been the subject of recent consideration by the Court of Appeal in Wilson and Sharp Investments Limited v Harbour View Developments Limited [2015] EWCA Civ. 1030. That case was concerned with an appeal against a refusal by the first instance judge to allow the appellant an injunction to restrain the defendant from presenting a winding up petition. The issue was whether an accrued debt could be payable after termination. The judge concluded that clauses 8.5.3 and 8.7.3 could have no application if the contract had already been terminated prior to the insolvency.

The Court of Appeal rejected that conclusion. The critical paragraphs for present purposes are paragraph 49 and 50 of the judgment of Gloster LJ which were in the following terms:

“49.

First, it is clear that the provisions of clause 8.7.3 are intended to operate after termination of the contract. Indeed the entire scheme of clauses 8.7 and 8.8 are directed at setting out the respective rights and obligations of both parties after the contractor's employment under the contract has been terminated by the employer and necessarily the contract has come to an end: see the opening words of clause 8.7 – "if the Contractor's employment is terminated under clause 8.4, 8.5 or 8.6". To similar effect is clause 8.12 which addresses the consequences of termination by the contractor under clause 8.9 or by either party under clause 8.11 upon the happening of certain specified events. There is no wording in clause 8 which in any way suggests that the consequential provisions are not to apply after termination, or are not to apply after a termination by the contractor (pursuant to the saving provisions of clause 8.3.1) on the grounds of repudiatory breach (as opposed to pursuant to the express termination provisions contained in 8.4, 8.5 or 8.6).

50.

Second, clause 8.5 ("Insolvency of Contractor") has a wider ambit than simply conferring a right of termination on the employer in the event of the contractor's insolvency. Thus clause 8.5.2 imposes an obligation on the contractor immediately to notify the employer if the contractor makes any proposal, gives notice of any meeting, or becomes the subject of any proceedings or appointment relating to insolvency, to enable the employer to decide on its options. And, most importantly, clause 8.5.3 expressly states that clause 8.7.3 applies as from the date when the contractor becomes insolvent "whether or not the Employer has given such notice of termination" – i.e. a termination notice under clause 8.5 based on the contractor's insolvency. Contrary to the judge's view, therefore, I see no necessity, or basis, for the implication of what would have to be an implied term that clauses 8.5.3 and 8.7.3 have no operation in circumstances where the employer has already terminated the contractor's employment, as it is entitled to do (pursuant to the saving provisions of clause 8.3.1), on the grounds of repudiatory breach (as opposed to pursuant to the express termination provisions contained in 8.4, 8.5 or 8.6), but do apply in circumstances where either:

i)

the employer has not served any notice of termination; or

ii)

the employer has already served a notice of termination under clauses 8.4, 8.5 or 8.6.”

DECLARATION 1: THE EFFECT OF CLAUSE 2

The Real Issue

Declaration 1 is set up on the basis that the only issue between the parties is whether a breach of contract on the part of County is always required under clauses 1 and 2, or whether an insolvency event (which the parties have assumed not to be itself a breach of contract) is enough to trigger liability on the part of the defendant under clause 2.

In my view, for the reasons set out below, that is not necessarily the right question. The right approach is to identify what is necessary for a successful claim against the defendant under clauses 1 and 2 of the Bond, in circumstances where County are insolvent and have not paid the debt which has been ascertained in accordance with the building contract and is therefore due pursuant to clause 8.7.5.

The True Construction and Proper Operation of these Clauses

Under clause 2 of the Bond, the damages payable by the defendant to the claimant included “any debt or other sum payable to the Employer under the Contract following the insolvency”. On the facts, there is a debt payable to the claimant by County under the building contract. That is the figure of £621,798.38 set out in detail in the letter from CAG to County on 10 March 2017. That debt “follows” the insolvency in that it was ascertained and had been demanded after the CVA of April 2016.

On the face of it, therefore, the unpaid debt is payable by the defendant (as surety) to the claimant under the terms of the Bond, albeit at the maximum sum due under the Bond of £382,519.06. In my view, that result can be arrived at in two different ways.

The first route involves a consideration of the Bond in the context of the building contract. The relevant terms of the contract, set out in Section 2.1 above, carefully differentiate between the two main ways in which termination may occur. One is on the default by the contractor (clause 8.4); the other is due to the insolvency of the contractor (clause 8.5). They both give rise to the same result: the calculation and identification of the debt under clause 8.7.

Thus, anyone reading clauses 1 and 2 of the Bond would see that the purpose and intent of those clauses was to mirror the two principal termination routes provided for in the building contract. It would be contrary to common sense to maintain that clause 2 was subsidiary to clause 1 in such a way that clause 2 did not operate on the occurrence of an insolvency event. That would mean that the employer could never recover against the defendant surety for losses due to insolvency (on the assumption that insolvency was not a breach), contrary to the clear purpose and intent of clause 2.

Paragraph 2 of the Bond refers to damages “payable under this Guarantee Bond…following the insolvency…of the contractor.” Thus, the Bond is making it as clear as possible that the defendant is liable for sums payable by County under the building contract, but which have not been paid as a result of, or following, County’s insolvency. In addition, the accounting exercise set out in clauses 8.7.4-8.7.5 of the building contract follows the insolvency, and results in a debt payable by the contractor to the employer. Thus, the wording of the building contract is echoed by clause 2 of the Bond.

Mr Oram’s response was to suggest that clause 2 was definitional only, and did not set out a stand-alone obligation. He said that the only trigger for the defendant’s obligation to pay was a breach under clause 1, not an insolvency event under clause 2. In my view, that is an erroneous reading of the provisions of the Bond.

First, as I have already indicated, that interpretation would mean that clause 2 could never operate. If an insolvency event is not a breach, which is the assumption for this purpose, and the only trigger under the Bond is a breach of contract by County, then clause 2 would be rendered redundant. Secondly, this interpretation reads much too much into the word “damages”. The suggestion is that damages can only flow from a breach, but that reading is contradicted by the further words of clause 2 which make it plain that, for the purposes of this Bond, the damages payable by the defendant can include a debt. In law, a debt can arise without breach, which strongly suggests that the word ‘damages’ was intended to have the broader meaning of ‘loss’ or ‘sums recoverable under the Bond’.

Another difficulty with Mr Oram’s interpretation is that, even if he was right and clause 2 was somehow assisting in the definition of the quantification process only, it would be adding nothing. Under the building contract, the loss and damage following termination is dealt with in clause 8.7 and there is a clear method for ascertaining the final figure. What in those circumstances is clause 2 doing, unless it is making it clear that any sum due to the claimant under clause 8.7 is recoverable under the Bond, whether or not there has been a breach?

In an attempt to answer that, Mr Oram argued that there was in law a difference between liquidation and administration, and he referred on that topic to the judgment of David Richards J (as he then was) in Re MF Global UK Limited (in Special Administration) [2013] 1 WLR 903. Mr Oram said that, depending on the precise nature of the contractor’s insolvency, the measure of damages at common law might not necessarily be that provided for in clause 8.7, and so clause 2 of the Bond was making it plain that, irrespective of any theoretical difference in the measure, the loss recoverable under the Bond would be calculated in accordance with clause 8.7.

In my view this is an unrealistic and convoluted interpretation of clause 2. Under a building contract, the employer does not care about the precise way in which the building contractor has become insolvent, or the nice distinctions between liquidation and administration. All he cares about are the consequences of the insolvency, which almost always include the abrupt halt to the carrying out of the works. The employer’s loss in these situations is always the same: the additional cost of completing the works. That is why the provisions under clause 8.7 are so clear. So, in my view, clause 2 of the Bond can have had no purpose whatsoever other than to make it clear that the Bond was to protect the claimant from the non-payment by County of the debt following the insolvency.

There were a number of other minor points as to how, if this was the correct reading of the Bond, then it would be inconsistent with other references to ‘breach’ alone, such as in clause 5. But in my view, these were simply the consequence of the parties adding the homemade amendment at clause 2 to cover insolvency, and then failing to amend the other ABI Model Form provisions at the same time. These matters cannot affect the proper interpretation of this Bond.

Now let us assume that this interpretation is wrong and that Mr Oram was right to say that there had to be a breach under clause 1 of the Bond before clause 2 came into play. In my view, it is beyond doubt that there was such a breach. The debt under clause 8.7 was asserted by the claimant on 10 March 2017 but it has not been paid by County. County are therefore in breach of the building contract because they have not paid the debt. The amount of the damages payable by the defendant to the claimant is the amount of the debt, limited by the maximum figure stipulated in the Bond.

Thus, even if Mr Oram is right about clause 1, and a breach is required to trigger a claim under the Bond, even under clause 2, then there has been a breach. That was precisely what Peter Gibson LJ said in Perar: see paragraph 27 above. For what it is worth, the ABI guidance notes which accompanied the Model Form expressly referred to this passage in the judgment of the Court of Appeal to conclude that, as a result:

“If, by reason of the insolvency, that debt is not discharged (which is, for obvious reasons, usually the case) the Guarantor will be liable up to the Bond Amount for that debt. The failure of the Contractor, following insolvency, to pay the sum due will be a breach of Contract which will be protected by the Bond.”

Accordingly, it seems to me that Perar is a complete answer to the breach point: if (contrary to my primary view) a breach by County is required to trigger the Bond, then such a breach has occurred in this case. That is how the Bond was intended to work. Indeed, it is as a result of this that the ABI guidance suggests that there is no need to amend the model form of the Bond to stipulate that insolvency or automatic determination will be treated as a breach of contract. On this basis, the defendant’s stance might be regarded as somewhat surprising because, on the face of it, it is seeking to undermine the guidance notes of its own professional body.

Mr Oram’s response was to submit that there was arguably no breach at all, because the validity of the original termination (for slow progress and/or suspension) was disputed (albeit long after the event) by County’s solicitors in their letter of 12 April 2017. But in my view, that was not an answer. The building contract makes clear that the employer can terminate the contractor’s employment for default or for insolvency. What is more, if the contractor becomes insolvent then that automatically triggers the clause 8.7 ascertainment process, regardless of whether or not a notice of termination had been given by the employer: see clause 8.5.3 of the building contract. On that basis, the prior notice, and the arguments about it raised so much later by County’s solicitors, are immaterial.

As part of his argument, Mr Oram submitted that, although it was “evidentially awkward” that County’s solicitors had not raised the point at the time, and had instead waited for over a year, the fact that they had asserted that the claimant had repudiated the contract by serving a notice two days early, and that this had happened a few days before the insolvency event, meant that the contract had come to an end and there was no obligation on the part of County to pay the clause 8.7.5 debt. In my view, that argument fails for two reasons.

First, I consider that this argument is contrary to the scheme provided for in clauses 8.5 and 8.7 of the JCT Standard Form. Those provisions are designed – amongst other things – to ensure that, no matter what could be argued about prior events, the insolvency of the contractor gave rise to a clear and certain process which culminates in the notification of a debt pursuant to clause 8.7.5. This process was designed to prevent a contractor in the position of County from avoiding the consequences of their insolvency by seeking to argue, long after the event, that the contract had come to an end prior to their insolvency and that, in consequence, these clauses no longer applied.

Secondly, I am confirmed in that approach by the decision of the Court of Appeal (which is of course binding on me) in Wilson and Sharp Investments. In the passages identified at paragraph 31 above, Gloster LJ expressly rejected the argument that clauses 8.5.3 and 8.7.3 have no operation in circumstances where the employment had already been terminated on other grounds. Although the facts were different, the Court of Appeal made it plain that these clauses were intended to operate after the termination of the contract, without qualification. Indeed, at paragraph 49 of her judgment, Gloster LJ expressly identifies one such situation: “after a termination by the contractor…on the grounds of repudiatory breach.” I respectfully agree with those conclusions.

Thus, the arguments belatedly raised by County’s solicitors as to the validity or otherwise of the termination notice go nowhere. As from the date that County became insolvent, whether or not the employer had given notice of termination, and regardless of belated arguments as to repudiation, clauses 8.7.3-8.7.5 applied in any event. CAG certified that the debt had been calculated in accordance with those clauses, so County were in breach because they failed to pay it. Thus, subject to what I say about Declaration 2, the defendant is liable to pay the debt (subject to the cap introduced by the maximum amount recoverable) as damages under the Bond.

Conclusions

For these reasons, I find in favour of the claimant in respect of the interpretation of the Bond. But I do not grant Declaration 1 as drafted. Declaration 1(a) omits any reference to the debt and non-payment, and Declaration 1(b) is erroneous because, even if breach is required, the relevant breach is the non-payment of the debt, and not the circumstances which led up to the termination.

I am sure that counsel can agree a Declaration which succinctly summarises my conclusions on this topic.

DECLARATION 2: IS THE DEBT DUE OR CAN IT BE CHALLENGED?

The Original Debate

The original debate under the umbrella of Declaration 2 ranged far and wide. At one point, the defendant was suggesting that the claimant needed either to get a judgment against County, or at least get County’s agreement that they were liable for the debt, before any claim could be made under the Bond. That is wholly incorrect: the decisions in Tower Housing and Paddington Churches make plain that what is required to trigger a claim under the Bond is the completion of the ascertainment exercise under clause 8.7. Once that has happened, a claim can be made under the Bond.

Once the process under clause 8.7 of the building contract is concluded, it is not only quite unnecessary for the claimant to pursue County before making a claim against the defendant, but it is also unnecessary for the claimant to have any further communication of any kind with County. The claimant can look to the defendant for payment.

Any other result would destroy the commercial value and purpose of the Bond. The Bond is required to provide the claimant with the ability to recover at least some of its losses against a solvent party. It would circumvent that commercial purpose if the claimant was then required to issue separate proceedings against that insolvent party (and get the necessary permission to do so) and/or to reach an agreement with the insolvent party, in order to establish either liability or quantum under the Bond.

Is The Notified Debt Conclusive?

In the oral submissions before me, the point in respect of Declaration 2 narrowed down to a short, albeit important, point. Ms Bodnar’s submission was that the authorities referred to above, particularly Tower Housing and Paddington Churches, made plain that what was required was the ascertainment of the figure in accordance with the contract. Once that had happened, a claim could be made on the Bond.

In response, Mr Oram said that the judgment in Paddington Churches also noted that, although a claim could be made in those circumstances, the surety could defend himself against the claim by advancing any of the arguments as to the quantum of the debt (a challenge to “the accuracy of the employer’s statement”) which would have been available to County. He points to the fact that clause 8.7 does not say that the ascertainment and assertion of the debt was in some way conclusive, and compares that with the provisions relating to, for example, the Final Certificate, which do contain various conclusivity provisions.

In my view, Mr Oram is right on this topic. It is only necessary to consider what the position would have been under the building contract to see that, as a matter of principle, the debt figure can be challenged by the defendant. Let us assume that the debt was asserted by CAG, and that County had then produced a twenty page critique of the accounting and quantity surveying methodology that had been adopted, in order to demonstrate that only 20% of the sum asserted was actually due. County could not be shut out from advancing that defence. There is nothing in the contract to say that they could not challenge the figure, and there are no provisions which indicate that, as soon as the figure was asserted, it was due and payable in the amount asserted, without any ability to challenge. And if County could have made that challenge, then so too can the defendant.

Of course, because these are Part 8 proceedings, I cannot go further than to say that, as a matter of contractual interpretation, the debt figure of £621,798.38 asserted on 10 March 2017, is not necessarily conclusive. I cannot go on to reach any other conclusions. But it is appropriate to observe that, on the facts of this case, the defendant may be in difficulties in mounting a challenge: other than the general words of challenge in the latter of 12 April 2017 (“in any event the sums claimed by Ziggurat are disputed”), County have been entirely silent on how and why the debt figure may be wrong. The defendant has not set out any case at all on that topic. In addition, in view of the margin (that is to say, the difference between the debt asserted of £621,000 odd, and the maximum amount of the Bond of £382,519.06) any arguments on quantum may not avail the defendant over-much.

It follows from all this that the words of Declaration 2 are inapt. They do not address the actual debate between the parties. It was eventually agreed that the claimant did not have to pursue County and did not have to reach an agreement with them. The claimant can rely on the debt in its claim against the defendant under the Bond but, to the extent that Declaration 2 was seeking to suggest that the debt was conclusive and could not be challenged by the defendant as a matter of principle, then I reject that argument.

As above, I am sure that counsel can agree a succinct Declaration which summarises the views expressed on this subject.

DECLARATION 3: THE NEED TO START FRESH PROCEEDINGS

As noted above, this Declaration has been agreed and it is therefore unnecessary for me to consider it further.