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

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URL: http://www.bailii.org/ew/cases/EWHC/TCC/1999/246.html
Cite as: 65 Con LR 132, (1999) 65 Con LR 132, [1999] EWHC Technology 246

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Paddington Churches Housing Association v. Technical and General Guarantee Company Ltd [1999] EWHC Technology 246 (22nd March, 1999)

Technology and Construction Court

His Honour Judge Peter Bowsher QC

BETWEEN:

PADDINGTON CHURCHES HOUSING ASSOCIATION

Plaintiffs

And

TECHNICAL AND GENERAL GUARANTEE COMPANY LIMITED

Defendants

Case number: 1997 P No. 715

Dates of Trial: 12 March, 1999

Date of Judgment: 22 March, 1999

Robert Clay for the plaintiffs (Solicitors: Winckworth Sherwood)

Marcus Taverner for the defendant (Solicitors Herbert Smith)

Performance bond. Condition for payment.

Introduction

1. The plaintiffs are a Housing Association. The defendants are insurers.

2. In 1994, the plaintiffs wished to make a building development at Longford Street, London, NW1.

3. For the purpose of that building development, the plaintiffs on 2 November, 1994, entered into a building contract with Woodward & Co. (Finsbury) Limited

(Woodward).

4. The plaintiffs required Woodward to provide a performance bond. Accordingly, a bond was given by the defendants in favour of the plaintiffs.

5. In February, 1996, before Practical Completion of the building works, Woodward went into liquidation and the plaintiffs, in accordance with the terms of the

building contract, terminated Woodward’s contract and entered into a contract (the second contract) with another builder to have the works finished by that other builder for a sum of -1,492,406 or such other sum as should become payable under the JCT conditions.

6. By this action, the plaintiffs claim payment under the bond. The defendants accept that they are bound to the plaintiffs by the bond, but say that the

circumstances giving rise to liability have not yet arisen.

7. The matter comes before me on the hearing of a summons under Rules of the Supreme Court, 1965 Order 14A with an application by the plaintiffs for

determination of certain questions of construction of the terms of the bond. It is to be noted that the plaintiffs do not ask for summary judgment requiring payment of any sum of money under the bond.

The Action

8. The action began in the general Queen’s Bench list by writ dated 11 August, 1997. The writ was specially indorsed with a Statement of Claim claiming -160,000 (the full amount of the bond) plus interest. On 12 September, 1997, the defendants gave notice of intention to defend, and on 29 October, 1997 served their Defence.

9. On 5 March, 1997, the action was transferred to the Official Referees and the file was regrettably allowed to lie in the office without being assigned to a judge while the parties remained inactive for the remainder of the year.

10. On 28 January, 1999 the plaintiffs issued their summons under Order 14A and on 2 March, 1999 issued a summons for leave to amend the Statement of Claim, which is also before me today.

11. The proposed amendment to the Statement of Claim would apply for the following relief:

A. A declaration that it is entitled to be paid and/or indemnified by the defendant for damages which it sustains as a result of the determination pleaded in paragraph 6 above.

B. An indemnity in respect of damages which it sustains as a result of the determination pleaded in paragraph 6 above [a valid contractual

determination on the insolvency of Woodward].

C. The sum of -160,000 or damages in the same amount.

D. VAT as appropriate.

E. Interest pursuant to statute.

12. Whether or not that amendment to the Statement of Claim is allowed, I am concerned with the rights and liabilities of the parties at the date of the issue of the writ.

The bond

13. The bond is in the ancient form of a bond with a defeasance and is short but not simple:

" -BY THIS BOND We Woodward & Company (Finsbury) Limited whose registered office is at 250 Rosendale Road London SE24 90J (hereinafter called "the Contractor") and Technical & General Guarantee Company Limited of Salisbury House 15 Victoria Street Douglas Isle of Man IMI 2LW (hereinafter called "the Surety") are held and firmly bound unto Paddington Churches Housing Association (hereinafter called "the Employer") in the sum of One hundred and sixty thousand pounds (-160,000.0O) for the payment of which sum the Contractor and the Surety bind themselves their successors and assigns jointly and severally by these presents

SEALED with our respective seals and dated this 17th day August, 1995.

WHEREAS the Contractor by an Agreement made between the- Employer of the one part and the Contractor of the other part has entered into a contract (hereinafter called "the Contract") for the construction and completion of certain works as therein mentioned in conformity with the provisions of the said Contract (hereinafter called "the Contract Works").

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 intent and meaning thereof or if on default by the Contractor or for the avoidance of doubt a valid determination of the Contractor's employment under clause 27 of the said Contract the Surety shall satisfy and discharge the net established and ascertained 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 up to the date of issue of the Statement of Practical Completion 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 designed (as applicable) executed constructed completed and maintained [hereunder and no allowance of time by the Employer or the Employer's Agent under the said Contract nor any forbearance or forgiveness in or in respect of any matter of. thing concerning the said Contract on the part of the Employer or the said Employer's Agent shall in any way release the Surety from any liability under the above-written Bond- "

14. By the bond, the defendants undertook to pay to the plaintiffs -160,000 and that undertaking was to remain in full force and effect up to the date of the issue of the Statement of Practical Completion unless one of three events occurred:

A. The contractor fully performed the contract; or

B. There was default by the contractor and the defendant satisfied and discharged the net established and ascertained damages sustained by the plaintiff up to -160,000; or

C. There was a valid determination of the building contract under clause 27 and the defendant satisfied and discharged the net established and ascertained damages sustained by the plaintiff up to -160,000.

15. Event A did not occur. Event B did not occur because determination of the contract pursuant to the terms of the contract on an insolvency did not involve a default by the contractor: Perar BV v. General Surety and Guarantee Co Limited (1994) 66 BLR 72. Event C has occurred in part in that there has been a valid determination of the contractor’s employment under clause 27: the defendants remain bound until they "satisfy and discharge the net established and ascertained damages sustained by the employer thereby" up to the amount of the bond.

16. The question then arises, What do the defendants have to do to discharge the net established and ascertained damages? Mr. Robert Clay (who was instructed shortly before the hearing) argued the plaintiff’s case with great skill, but that case has about it an air of unreality.

17. The original Statement of Claim was verified for the purpose of this application by an affidavit of Mr.Antony Hall, the plaintiffs’ Deputy Director of Development. By that affidavit, Mr. Hall testified that:

"It was foreseeable that the need to employ an alternative contractor would cause the Plaintiff to incur increased costs, including increased building costs and financing costs. The provision of a bond was required to provide the Plaintiff with a speedy and secure source of funds that could be used to meet. those increased costs."

18. The plaintiffs seem to have considered that the purpose of the bond was to help them with difficulties in financing the second contract as it progressed. The defendants say that if that was what they wanted, they should have required a specific insolvency bond or an on demand bond. The writ was issued on the plaintiffs' original understanding of the bond, but on that understanding, one would expect them to have proceeded with the action and applied for summary relief without delay. When I asked what was the explanation for the delay, I was told that the plaintiffs had been taking the advice of a consultant to ascertain the amount of their loss. Presumably the plaintiffs took that course as a result of reading the Defence served in this action. As I understand it, the plaintiffs have still not presented the defendants with any statement of their net and ascertained damages. The defendants contend that those net and ascertained damages must be calculated and assessed by Woodward’s liability under clause 27.6.7 of the building contract and that the defendants have no liability until the procedure in clause 27.6.7 of the building contract has been complied with. But whatever the method of calculation, it is clear from the terms of the bond that the liability of the defendants is to pay a net figure ascertained by some means. The use of the words "net" and "ascertained" make it quite clear that what is to be paid is what is due after an account has been taken: there is no liability to make a payment on account to help the plaintiffs with funding difficulties pending the taking of the account. That net figure would include (a) the giving of credit for any sums owed to Woodwards for any balance of work not paid for at the time of the determination of their contract and certain other credits which might be due to them and (b) a calculation of the difference in the cost of completing the work between what would have been paid to Woodwards and what was paid under the second contract.

19. I was told, in response to my enquiry, that Practical Completion of the second contract took place in January, 1998 and that the Defects Liability period under that contract ended in January, 1999. There should have been no further liability upon the defendants for expenditure during that Defects Liability Period. No reason is given for the net loss not having been ascertained by now, and there is no reason to believe that the net sum due will not be paid when a statement is presented to the defendants. The applications before me seem to be concerned with the costs of the action.

The ascertainment of the net damages

20. The defendants' contention that the net established and ascertained damages are to be calculated and assessed by reference to Woodward’s liability under clause 27.6.7 of the building contract makes it necessary to look at that contract.

21. The contract was on the terms of the form known as JCT With Contractors Design 1981 edition incorporating amendments 1 to 6. Clause 27, referred to in the bond, provides for determination of the contract by the employer in the event of the contractor's default (27.2), insolvency (27.3), or corruption (27.4). Clauses 27.5.1 to 27.5.4 give to the employer certain options after giving notice to determine the contract on the insolvency of the contractor, including rights and duties in relation to site materials. Clause 27.6 provides for the consequences of determination under clauses 27.2 to 27.4, that is, it provides for the consequences of determination for both breach and insolvency, the two contingencies provided for in the bond. Clause 27.6.5.2 provides that:

"Upon the completion of the design and construction of the Works and the making good of defects as referred to in clause 27.6.2 (but subject where relevant, to the exercise of the right under clause 16.2 and/or clause 16.3 of the Employer not to require defects of the kind referred to in clause 16 to be made good) then within a reasonable time thereafter an account in respect of the matters referred to in clause 27-6.6 shall be set out in a statement prepared by the Employer."

The reference to the making good of defects under clause 27.6.2 is a reference to the making good of defects in Woodward's work, not to any defects liability period in the second contract.

22. Clause 27.6.6 setting out the matters to be referred to in the employer’s statement is as follows:

"6 .1 the amount of expenses properly incurred by the Employer including those incurred pursuant to clause 27.6.2 and of any direct loss and/or damage caused to the Employer as a result of the determination;

.2 the amount of any payment made to the Contractor;

.3 the total amount which would have been payable for the Works on due completion in accordance with this Contract."

23. Clause 27.7.1. provides:

"If the sum of the amounts stated under clauses 27.6.6.1 and 27.6.6.2 exceeds or is less than the amount stated under clause 27.6.6.3 the difference shall be a debt payable by the Contractor to the Employer or by the Employer to the Contractor as the case may be."

That clause quite properly recognises that the sum ascertained to be due may go either way: it may be due either to the employer or to the contractor. Having the work completed by someone other than the original contractor will not always be more expensive, though that is usually the case.

24. 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.

25. For the plaintiffs it was argued that the terms of this form of bond have been altered since the decision of the Court of Appeal in Perar BV v. General Surety and Guarantee Co Limited and that the change must indicate an intention to benefit the plaintiffs.

26. The bond under consideration in Perar contained a condition which, with one exception, was very similar to the condition of the bond in the present case. That condition was as follows:

"NOW THEREFORE the condition of the foregoing obligation is such that if the Contractors shall well truly and faithfully comply with all the terms and conditions of the said Contract on their part to be kept and performed so far as the same are legally enforceable against them or if on default by the Contractors the Surety shall satisfy and discharge the damages sustained by the employer thereby up to the sum of -1,370,000.00 (One million three hundred and seventy thousand pounds) then this obligation shall be null and void otherwise it shall remain in full force and virtue."

One can readily infer that it was because the Court of Appeal in Perar held that insolvency was not a default that there were added to the condition in the bond under consideration the words, "or for the avoidance of doubt a valid determination of the Contractor's employment under clause 27 of the said Contract". However, I cannot see that one should infer from those additional words an intention to change the whole nature of the liability of the bondsman to make payment. The additional words make plain that the liability to pay will arise in circumstances additional to the circumstances where there has been a default under the building contract: they do not change the nature of the liability to pay, which remains a liability to "satisfy and discharge the net established and ascertained damages sustained by the Employer thereby up to the amount of the above written Bond".

27. The original Statement of Claim in this action did not make it clear that the plaintiffs were relying on the words, "a valid determination of the Contractor's employment under clause 27 of the said Contract". The proposed amendment to the Statement of Claim would make that clear, but that does not assist the plaintiffs.

Conclusion

28. This case provides yet another example of the failure of a person or body for whose protection a bond was given to understand the nature of the protection provided. One can readily sympathise with that failure of understanding. While one can understand the reluctance of insurance companies to abandon forms construed in a substantial body of case law, a complete revision of the form of these bonds is long overdue. More readily comprehensible documents would help the relationships between insurance companies and their customers run more smoothly. It should not be difficult to draft a form of bond setting out the bondsman’s undertakings in simple positive terms capable of being understood by a building contractor or employer who does not have the benefit of a legal education embracing a form which has its roots in ancient legal history.

29. I find that because the defendants have not been provided with a statement setting out the net established and ascertained damages sustained by the employer calculated by reference to clause 27 of the building contract, the defendants are not yet, and were not at the date of the issue of the writ, under any liability to make any payment to the plaintiffs.

30. 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. This action is, however, premature, and it would not be improved by the proposed amendment to the Statement of Claim.

31. I therefore refuse the application for leave to amend the Statement of Claim, and exercising my power under Rules of the Supreme Court Order14A rule 1(2) I dismiss the action.