England and Wales High Court (Technology and Construction Court) Decisions

De Vere Hotels Ltd v. Aegon Insurance Company (UK) Ltd [1997] EWHC Technology 354 (5th December, 1997)

 

IN THE HIGH COURT OF JUSTICE 1996 ORB 1411 

OFFICIAL REFEREES' BUSINESS

HIS HONOUR JUDGE ESYR LEWIS Q.C.

B E T W E E N

DE VERE HOTELS LIMITED

Plaintiff

 

and

 

AEGON INSURANCE COMPANY (UK) LIMITED

 

Defendant

 

__________________________

 

 

JUDGEMENT

Delivered on 5 December, 1997

 

The Circumstances

1. In this action I am required to determine preliminary issues. They arise from the following circumstances. In a contract concluded and executed under seal on 12 February 1993 the Plaintiff ("De Vere") employed Pentagon Holdings Limited and Pentagon Design & Construction Limited to construct a hotel in Southampton. It is unnecessary for me to distinguish these two companies which I shall describe henceforth as "Pentagon". The contract was of the design and build variety with a maximum price of £16.62 million, exclusive of VAT, and incorporated the articles of agreement and conditions, as amended by the parties, in the JCT Standard Form of Building Contract With Contractor's Design 1981 Edition. The building contract incorporated a document headed "Preliminaries and Contract Requirements" (Exhibit D1) which obliged Pentagon to "enter into a bond set out below binding him and the sureties referred to jointly and severally to (De Vere) in a sum equivalent to ten per cent of the Contract Sum conditioned for the due fulfilment of the terms and conditions of the Contract".

 

2. A bond in the sum of £1.662 million was in fact executed by Pentagon and Aegon as the surety on 14 October 1992, which was before completion of the building contract. Mr. Masters, a chartered surveyor employed by De Vere, said in evidence that he was closely involved in the making of the contract with Pentagon and that all its terms were agreed by the end of September 1993, which was before the bond was executed. Obviously Aegon must have informed themselves of the nature and extent of the proposed building contract before executing the bond.

 

3. Under clause 27.2 of the building contract it was provided that: "the employment of the Contractor under this Contract shall be forthwith automatically determined... " on the occurrence of certain events, which included the appointment of an administrative receiver under the Insolvency Act 1986.

 

4. In the event and when substantial works remained to be completed, administrative receivers were appointed to Pentagon on 2 December 1993. This terminated Pentagon's employment by De Vere, but not the building contract. On 3 December 1993 De Vere gave notice in writing to Aegon "of our intent to claim under the Contract Guarantee Bond.....dated the 14th October 1992, for you to satisfy and discharge the damages sustained up to the maximum amount of your Bond".

 

5. Clause 27.4 of the building contract provides for the respective rights of the employer and contractor "in the event of the employment of the Contractor under this contract being determined", inter alia, under Clause 27.2. Following the automatic termination of De Vere's employment under the building contract, one of De Vere's rights as employer, given by Clause 27.4.2, was to "employ and pay other persons to carry out and complete the design and construction of the Works..." In the exercise of this right, on 4 May 1994 De Vere entered into a new building contract ("the completion contract") with a company, to which I shall refer as Amec, to finish the uncompleted works.

 

6. Further rights were given to De Vere under Clause 27.4.5 which states, in so far as it is necessary to quote it, that:

"the Contractor shall allow or pay to the Employer in the manner hereinafter appearing the amount of any direct loss and/or damage caused to the Employer by the determination. Until after completion of the works under clause 27.4.2 the Employer shall not be bound by any provision of this Contract to make any further payment to the Contractor, but upon such completion and the verification within a reasonable time of the accounts therefore the Employer shall state the amount of the expenses properly incurred by the Employer and the amount of any direct loss and/or damage caused to the Employer by the determination and, if any such amounts when added to the monies paid to the Contractor before the date of determination exceed the total amount which would have been payable on due completion in accordance with this Contract, the difference shall be a debt payable to the Employer by the Contractor, and if the said amounts when added to the said monies be less than the said total amount, the difference shall be a debt payable by the Employer to the Contractor".

7. On 13 September 1994, a certificate was issued to Amec under the signature of Mr.I.L.M Grove, on behalf of De Vere as the employer, stating that the date of practical completion of the works which Amec were employed to do was 9 September 1994. This certificate identified the contract under which it was issued as being dated 4 May 1994, which was the date on which the completion contract was made with Amec.

 

8. By September 1996, Pentagon had gone into liquidation. In a letter dated 11 September 1966 signed by Mr. Grove, who was a surveyor employed by De Vere, a demand was made on their behalf to the liquidator for payment of the sum of £2,738,869.05. This was said to be the amount of the expenses properly incurred by De Vere and the amount of direct loss and/damage incurred by them caused by the determination of "the contract" as set out in a document described as "Statement of Accounts" prepared by De Vere after the final account for the completion contract had been agreed with Amec. In fact it was of course Pentagon's employment under building contract and not the contract itself which had been determined as a result of the appointment of administrative receivers. Pentagon were not able to make any payment due to their insolvency and on 4 October 1996 De Vere made a demand to Aegon for payment under the bond. Aegon refused payment and the present proceedings were begun against Aegon claiming the sum of £1,622,000, which is the amount of the bond.

9. Under Clause 16.1 of the standard conditions it is provided that "When the works have reached Practical Completion the Employer shall give the contractor a written statement to that effect".... This clause contemplates the issue of one such statement when all the works required to be done under the contract are completed. However, in the building contract, amendments were made which provided for completion of the whole works to be achieved by Pentagon in stages by their sequential completion of identified sections of those works. I need not set out all the amendments necessary to achieve this purpose and its consequential effects. Clause 16.1 was amended to read:

"When any section of the Works has reached Practical Completion the Employer shall give the Contractor a written statement to that effect, which statement shall not be unreasonably delayed or withheld, and Practical Completion of that Section shall be deemed for all purposes to have taken place on the day named in such statement". I have underlined the words inserted by amendment.

 

10. A new clause 16.5 was also added in these words, so far as I need quote it:

"When, in the opinion of the Contractor, the Works have reached Practical Completion, the Contractor shall give notice to that effect to the Employer accompanied by a written undertaking to complete with due expedition any outstanding work within the first three months of the Employer taking possession of the Works. The Employer shall thereafter:

.1 when the works have reached Practical Completion, give the Contractor a written statement to that effect, which statement shall not be unreasonably delayed or withheld, and Practical Completion of the Works shall be deemed for all purposes of this Contract to have taken place on the day named in such statement....."

 

11. This last amendment provided for the issue of a written statement of practical completion for all the works to be completed under the building contract in addition to the statements to be issued upon practical completion of sections of those works. This is made plain by an amendment to Clause 30.3.1.2, which deals with interim payments "up to and including the end of the Period during which the day named in the Statement of Practical Completion of the whole of the works under clause 16.5 occurs". Again, I have underlined the words added to the standard clause by amendment. The issue of the statement of practical completion by the employer was the starting point of a three months' period during which the contractor was obliged under Clause 30.5.1 to submit his final account to the employer.

 

12. In Clause 1.3. of the building contract "Works" are defined as "the works briefly described in the First recital and referred to in the Employer's Requirements and the Contractor's Proposals and including any changes made in those works in accordance with this contract".

The First recital reads:

"the employer is desirous of obtaining the construction of the following works (a) A five star Hotel including the incorporation of fixtures, fittings and equipment installed under a separate contract but within the contract period of this Contract". Clause 2.1 of the Conditions states, inter alia, that "The Contractor shall upon and subject to the Conditions carry out and complete the Works referred to in the Employer's requirements....." The building contract plainly, in my view, required Pentagon to construct to completion the hotel described in the contract documents. Secondly, by Article 3 of the building contract Mr. I.L.M. Grove was named as "the Employer's Agent" for the purpose, inter alia, of issuing "statements otherwise acting for the Employer under any other of the Conditions".

The Bond

13. It is common ground that the bond is a guarantee by Aegon as surety. The premium paid for the bond by De Vere was £49,860. According to Mr. Masters, and I accept, its wording was devised by De Vere and was in a standard form commonly used by them. After Pentagon and Aegon bound themselves in the sum of £1,662,000, the bond reads:

"WHEREAS

The Contractor by an agreement made between the employer of the one part and the Contractor of the other part dated (the date was not inserted) (hereinafter called 'the said Contract') for the design construction and completion mentioned in conformity with the provisions of the said Contract.

NOW THE CONDITION of the above written Bond is such that if the Contractor shall duly perform and observe all the terms provisions conditions and stipulations of the said Contract on the Contractor's part to be performed and observed according to the true purport and meaning thereof or if on default by the Contractor the Surety shall satisfy and discharge the damages sustained by the Employer thereby up to the amount of the above written Bond then this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration in the terms of the said Contract made by agreement between the Employer and the Contractor or in the extent or nature of the works to be constructed and completed and maintained thereunder and no allowance of time by the Employer and the Contractor under the said Contract for any forbearance or forgiveness in or in respect of any matter or thing shall in any way release the Surety from any liability under the above written Bond.

AND PROVIDED ALSO that the Surety shall be released and

discharged from its obligation under the above written Bond upon the issue of a Statement of Practical Completion of the works by the Employer's agent and if any suit at law or proceedings in equity are brought against the Surety to recover any claim hereunder the same must be instituted within six months after the date of Practical Completion named in the Statement and thereafter shall be absolutely barred".

 

14. By paragraph 8 of their Defence Aegon admitted that the Plaintiff "purported to make a demand under the Bond by a letter dated 4th October 1996 but "denied that the said demand was a valid and effective demand as the Bond provided for the Surety to be released and discharged from its obligations upon the issue of a Statement of Practical completion of the works by the Employer's Agent. The said Statement of Practical Completion was issued on the 13th September 1994".

 

15. By paragraph 9 it is pleaded "further or in the alternative" that "the Bond provided that any proceedings to enforce the Surety's obligations under the Bond should be instituted within six months after the date of Practical Completion named in the Statement and thereafter should be absolutely barred. The proceedings herein were commenced on the 24th October outside the relevant period and in breach of the aforementioned condition of the Bond". This paragraph of course refers to the certificate of practical completion issued to Amec under the provisions of the completion contract. It is obviously admitted by De Vere that the action was started more than six months after the issue of that certificate.

 

16. A further ground of defence to the claim for payment on the Bond was made in paragraph 10 of Aegon's Defence but I need not describe it since this ground was expressly abandoned at the hearing before me.

 

17. In paragraph 2 of their Defence it is asserted that Aegon "has no knowledge of the contract between the Plaintiff and Pentagon pending production thereof by the Plaintiff" and the allegations in paragraph 2 of the Statement of Claim that "The Bond was given in contemplation" of a contract between De Vere and Pentagon and in paragraph 4 relating to the provisions of clauses 27.2 and 27.4.5 of the building contract were not admitted. Discovery of documents relevant to the preliminary issues was, I was told, given some time ago and there is no suggestion that Aegon have not seen the completed building contract which they must have done well before the matter came before me.

 

The Preliminary Issues

18. It was initially ordered by His Honour Judge LLoyd Q.C. that the issues raised by paragraphs 8,9 and 10 of Aegon's Defence be tried as preliminary issues. Subsequently, he ordered that the preliminary issues raised by those paragraphs should be expressed in nine questions which were drafted by counsel on each side "On the assumption that the contract referred to in paragraphs 3 and 4 of the Statement of Claim is that referred to in the bond". Although, as has been seen, it is not admitted in the Defence that the bond was made in contemplation of the building contract as completed, Mr. Akenhead for Aegon accepts that the issues before me are to be decided on this basis. I should say that, if any material difference has been discovered between the contract contemplated by Aegon when the bond was executed and the completed contract, I have not been informed of it. Having heard the evidence of Mr. Masters, any such difference appears to me to be unlikely.

19. It is common ground that, as a result of the abandonment of the defence pleaded by Aegon in paragraph 10 of their Defence, three questions remain to be answered. They are as follows:

1. Is a document dated 13 September 1994 a certificate or

statement of practical completion for the purposes of the proviso to the bond sued on in the action?

2. If so, is the date appearing in that document the date of practical completion for the purposes of the proviso?

3. Was the defendant released from its obligations under the bond on the date named in the certificate under the Amec contract?

 

The Submissions

20. Mr. Akenhead's submissions in substance were as follows. His primary submission is that there is no ambiguity in the wording of the proviso to the bond and that the phrase "upon issue of a statement of practical completion" means on its face "any such statement". The statement of practical completion is not described in the bond as a statement issued by or on behalf of De Vere to Pentagon, as it could have been, and the bond must be strictly construed. Any other construction would mean that Aegon's guarantee was unlimited in time in relation to contractual defaults by Pentagon. Accordingly, the liability of Aegon was discharged by the issue of the statement of practical completion on 13 September 1994 and the failure of De Vere to institute proceedings "within six months after the date of practical completion named in the statement". This is so however the provision that "the Surety shall be released and discharged from their obligations under the above written Bond upon issue of a Statement of Practical Completion..." is to be reconciled with the requirement that proceedings must be instituted "within six months after the date of Practical Completion named in the Statement and thereafter shall be absolutely barred". Clause 27.2 of the building contract provided for the automatic termination of Pentagon's employment and Clause 27.4.2 gave De Vere the right to employ other persons "to carry out and complete the design and construction of the works". The statement issued to Amec relates to the works which Pentagon were required to do under the building contract. The presence of these provisions in the building contract means that the parties to the bond must have foreseen that "the works" which Pentagon were to do might be completed by another contractor, that no statement of practical completion could then be issued to Pentagon and that, as I understand the submission, a statement of practical completion might be issued to another contractor. Mr. Akenhead relies on Millett J.'s statement of the principle to be followed in the construction of a contract of guarantee in Johnsey Estates Ltd. v Webb and Others (1990) EGLR 80 where he said at 82C:

"Certainly it is true that neither equity nor law will put a construction on a contract of guarantee which results in imposing on the surety any greater obligation than that which on the strictest construction of the instrument he must be said expressly to have undertaken:see Eastern Counties Building Society v Russell (1947)1 All ER 500)".

 

21. Mr. Akenhead's secondary and alternative submission is that, if the phrase "a Statement of Practical Completion" is or might be ambiguous in not making it clear that it was intended to refer only to a statement issued to Pentagon, it should be construed in the sense contrary to the construction which De Vere seek to place on it, i.e. contra proferentem. In this context he referred me to the judgement of Lloyd L.J. in The Pera (1985) 2 Lloyds Rep. 105 where he said at 106:

"At the very least the use of the word in the present context is ambiguous, in the sense that it is fairly capable of more than one meaning. In those circumstances it ought to be construed against the charterers for two quite separate but interrelated reasons: First, this is not the case of a standard form of clause, like the Centron arbitration clause which is found in numerous different charter parties; it is what one might call a "Do it yourself" clause which has been prepared by the charterers themselves, for use in connection with their business. If it is ambiguous, it ought to be construed contra proferentem.

 

22. It is not often that that particular maxim is of great help in construing commercial documents. But the present case is an exception. It is of considerable assistance here".

 

23. I summarise Mr. Mann's submissions as follows. There is no

ambiguity in the use of the phrase "a Statement of Practical Completion" since it must relate in the context of the band and the building contract to a statement of practical completion issued under the building contract and to practical completion under that contract only. The bond specifically identifies the contract in which the provision for the issue of a statement of practical completion is made as the building contract in which De Vere and Pentagon were the parties. The link between the bond and the building contract is emphasised by the fact that the proviso to the bond describes the "issue of a statement of practical completion of the works by the "Employer's Agent". In Article 3 of the building contract it is provided that "I.L.M. Grove F.R.I.C.S or such other person as the Employer shall nominate in his place for the purpose shall be the Employer's agent referred to in clauses 5.4 and 11 and, save to the extent which the Employer may otherwise specify by written notice to

the contractor, for the receiving or issuing such applications, consents, instructions, notices requests or statements or for otherwise acting for the Employer under any other of the Conditions". It could not sensibly have been the intention of the parties to the bond that the termination of Aegon's liability under it should depend on whether or not De Vere chose to nominate an "Employer's Agent" to issue statements under a fresh contract with a new contractor if Pentagon's employment under the building contract was terminated under the provisions of Clause 27.4.2. De Vere were under no obligation to enter into a contract to complete the works or to do so on the same terms and with an identical practical completion mechanism to that created under the building contract and reflected in the language of the proviso. Furthermore, any new contract might not cover the same works as those which were to be completed by Pentagon. In fact some of the works covered by the building contract were excluded from the completion contract with Amec as appears from the AMEC Proposals which formed part of the completion contract. The inclusion of the same standard conditions and a provision for the issue of a certificate or statement of practical completion in the contract with Amec is therefore fortuitous.

Conclusions

24. It is a long established principle that contracts of guarantee must be strictly construed to ensure that no liability is imposed on the guarantor which is not clearly covered in the contract. This of course is the principle stated in the passage from Millett J's judgement in Johnsey Estates Ltd. v. Webb which I have quoted above. It is also well established that the general principles for the construction of contracts apply to contracts of guarantee. It follows that in this case the terms of the bond as a whole and the contract which was contemplated at the time of its execution may be looked at in order to determine the extent of the obligations undertaken by Aegon and thus the meaning to be given to the relevant words of the proviso.

25. Under the condition of the bond it is provided: (i) if (Pentagon)"shall duly perform and observe all the terms, provisions, conditions and stipulations of the said contract"; or (ii) "if on default by (Pentagon), Aegon were to "satisfy and discharge the damages sustained by (De Vere) thereby up to the amount of the above written bond then this obligation shall be null and void but otherwise shall be and remain in full force and effect....."

The recital identifies the contract as "a contract.....for the design construction completion and maintenance of certain works as therein mentioned". Although the recital states wrongly that the contract had been entered into, I do not consider that this affects the construction of the bond. The description does in my view plainly identify in general terms the contract eventually completed by De Vere and Aegon and contemplates that Pentagon will complete the works for which the building contract made provision.

26. The provision in the condition that "no alteration in the terms of the said contract" (i.e. the contract contemplated by the recital) "or in the extent or nature of the works to be constructed and completed and maintained thereunder........shall in any way release the Surety from any liability under the above written Bond" in my judgement plainly identifies "the works" as those to be performed by Pentagon.

Had they completed the works, it was De Vere's obligation under the building contract to issue a statement of practical completion as provided by Clause 16.5 of the contract conditions. I find it difficult to see how, in those circumstances, "a Statement of Practical Completion of the works" can be read as referring to any such statement other than that which was to be issued to Pentagon when the works were completed.

 

 

27. Clause 27.2 of the building contract conditions of course

provided for circumstances in which the employment of Pentagon under the contract would automatically be determined and Clause 27.4.2 allowed De Vere to employ Amec "to carry out and complete the design and construction of the Works". Any contract entered into with a new contractor under the provisions of the this clause would necessarily be distinct from the contract which underlay the obligation assumed by Aegon under the bond. It would not cover, and the contract with Amec did not cover, the works to be constructed by Pentagon under the building contract, but only part of them. Moreover some of the works included in the building contract were, I accept, excluded from the certificate or statement of practical completion issued to Amec on 13 September 1994, as appears from Amec's proposals which formed part of the building contract. That certificate was issued under the contract between De Vere stated in the certificate to have been made on 4 May 1994.

 

28. I accept Mr. Mann's submission that there was nothing in the building contract or the bond which required De Vere to issue a document under the completion contract in the style of that provided for in Clause 16.5 of the building contract conditions or indeed to issue any kind of practical completion certificate or statement. I agree with his submission that it was thus purely fortuitous that De Vere chose to make the completion contract with Amec which contained the same provision for the issue to Amec of a statement of practical completion as in the building contract. In my view, it does not make good sense that Aegon's prima facie obligation under the bond, "on default" by Pentagon, to "satisfy and discharge the damages sustained by the Employer" was to be discharged, irrespective of the time limitation for taking proceedings contained in the bond proviso, on the pure chance that a completion contract would contain a similar provision for the issuing of a statement of practical completion as in the building contract and when no such statement had to be issued to Pentagon under that contract following the determination of their employment. I do not consider that this is what was envisaged or intended by the provisions in the bond which, in my judgement, relate entirely to the building contract contemplated when the bond was executed.

 

29. For these reasons I do not consider that there is any ambiguity in the words "a Statement of Practical Completion of the works". In my view they can only reasonably be read as referring to the statement of practical to which Pentagon would have been entitled had they completed the works which they undertook to do and reject the submission that they should be read as referring to "any" certificate of practical completion

 

 

 

30. It follows that I answer each of the three preliminary questions in the negative.

HIS HONOUR JUDGE ESYR LEWIS Q.C.

5 December, 1997

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