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Cite as: [2019] IEHC 630

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THE HIGH COURT

[2019] IEHC 630

2014 No. 2536 P.

BETWEEN

CLARINGTON DEVELOPMENTS LIMITED

AND

HCC INTERNATIONAL INSURANCE COMPANY PLC

Judgment of Mr Justice Garrett Simons delivered on 6 September 2019.

PLAINTIFF

DEFENDANT

Introduction

1. This matter comes before the court by way of an application to dismiss the plaintiff’s

claim on the grounds that it discloses no reasonable cause of action. An order is sought,

in the alternative, staying the proceedings pursuant to the court’s inherent jurisdiction on

the grounds that the plaintiff’s case is bound to fail.

2. The proceedings seek to enforce a bond which has been entered into between

(i) the plaintiff, (ii) the defendant and (iii) the contractor under a (separate) building

contract. The bond has been described variously as a “performance bond” or a

“contract guarantee bond”. In brief, the bond represents a form of guarantee

whereby the defendant, as surety, undertook to satisfy and discharge any damages

sustained by the plaintiff, as employer, in the event of default on the part of the

contractor in the performance of the building contract. This undertaking is subject

to a twelve-month time-limit reckonable by reference to the date of the issuing of a

certificate of practical completion.

3. The plaintiff alleges that the construction works under the building contract were carried

out defectively by the contractor, and has issued these proceedings seeking to recover

damages from the defendant as surety under the bond.

4. The plaintiff and defendant both agree that the damages must be quantified—to use a

neutral term—before liability to make payment under the bond arises. There is, however,

a fundamental disagreement between the parties as to the mechanism by which damages

are to be quantified. The plaintiff contends that damages can be assessed by the High

Court in plenary proceedings taken against the surety. Conversely, the defendant insists

that it is a condition precedent to the surety’s liability under the bond that damages must

first have been established and ascertained by way of conciliation or arbitration between

the employer and the contractor pursuant to the building contract. No such arbitration

has yet taken place. On this interpretation, it is not open to the plaintiff, as employer, to

have the damages quantified by the High Court, and the within proceedings are

accordingly bound to fail.

5. The resolution of this disagreement between the parties turns on the correct

interpretation of the bond. In particular, it turns on the meaning to be attributed to the

phrase “the damages sustained […] as established and ascertained pursuant to and in

accordance with the provisions of” the building contract. It will be necessary to decide

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whether this phrase requires that the damages can only be quantified—to use a neutral

term—by way of conciliation or arbitration under the building contract.

6. Before embarking upon any consideration of the correct interpretation of the bond,

however, it will be necessary first to address the following jurisdictional issue. The

defendant, by issuing a motion to dismiss the proceedings, is asking the court to exercise

an exceptional jurisdiction. The court is being invited to dismiss the proceedings in limine

without a full hearing on oral evidence. This jurisdiction is to be sparingly exercised, and

should only be adopted when it is clear that the proceedings are bound to fail, rather than

where the plaintiff’s case is very weak or where it is sought to have an early

determination on some point of fact or law (per Clarke J. in Keohane v. Hynes

[2014] IESC 66, [6.6]).

7. The application of these principles to the circumstances of the present case is discussed in

detail at page 7, paragraphs 22 et seq. below. The judgment will then turn to consider the

question of whether the proceedings are bound to fail.

Relevant facts

8. There is no factual dispute between the parties as to the events leading up to the

institution of these proceedings. The parties have very helpfully prepared an agreed

factual chronology which was handed in to the court at the hearing.

9. The plaintiff entered into a building contract with Sammon Contracting Ltd on 9

December 2011 (“the building contract”). For ease of exposition, I will refer to the plaintiff

as “the employer”, and to Sammon Contracting Ltd (and its successor in title, Sammon

Contracting Ireland Ltd) as “the contractor”, for the balance of this judgment. The

building contract related to the construction of a primary care centre and sports hall in

Newbridge, Co. Kildare (“the development”).

10. The clause of the building contract of most immediate relevance to the dispute which has

since arisen in respect of the “performance bond” or “contract guarantee bond” (discussed

below) is clause 38. This clause sets out the dispute resolution mechanisms pursuant to

the building contract as follows.

“38.(a) If a dispute arises between the parties with regard to any of the provisions of

the Contract such dispute shall be referred to conciliation in accordance with the

Conciliation Procedures published by the Royal Institution of the Architects of

Ireland in agreement with the Society of Chartered Surveyors and the Construction

Industry Federation.

If a settlement of the dispute is not reached under the Conciliation Procedures either

party may refer the dispute to arbitration in accordance with Clause 38(b).

(b) Provided always that in case any dispute or difference shall arise between the

Employer or the Architect on his behalf and the Contractor, either during the

progress of the Works or after the determination of the employment of the

Contractor under the Contract or the abandonment or breach of the Contract, as to

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the construction of the Contract or as to any matter or thing arising thereunder or

as to the withholding by the Architect of any certificate to which the Contractor may

claim to be entitled, then either party shall forthwith give to the other notice of

such dispute or difference and such dispute or difference shall be and is hereby

referred to the arbitration and final decision of such person as the parties hereunto

may agree to appoint as Arbitrator or, failing agreement, as may be nominated on

the request of either party by the President for the time being of the Royal Institute

of the Architects of Ireland after consultation with the President of the Construction

Industry Federation and the award of such Arbitrator shall be final and binding on

the parties. Such reference, except on Article 3 or Article 4 of the Articles of

Agreement or on the question of certificates, shall not be opened until after the

Practical Completion or alleged Practical Completion of the Works or determination

or alleged determination of the Contractors employment under this Contract, unless

with the written consent of the Employer or of the Architect on his behalf and the

Contractor. The Arbitrator shall have power to open up, review and revise any

opinion, decision, requisition or notice, and to determine all matters in dispute

which shall be submitted to him and of which notice shall have been given as

aforesaid in the same manner as if no such opinion, decision, requisition or notice

had been given. Every or any such reference shall be deemed to be a submission to

arbitration within the meaning of the Arbitration Act, 1954 (Number 26 of 1954), or

the Arbitration Act (Northern Ireland) 1957 (as the case may be) or any act

amending the same or either of them.”

11. The employer and the contractor subsequently entered into a bond on 22

December 2011. The surety under the bond is HCC International Insurance Company plc,

i.e. the defendant to these proceedings. I propose to use the shorthand “the surety” to

refer to the defendant.

12. The title page to the bond refers to it as a “performance bond”, whereas the text refers to

it as a “contract guarantee bond”. It does not appear that anything turns on this

distinction. The rights and obligations of the parties must be determined by reference to

the terms of the bond and any label used is not conclusive. I propose to refer to this bond

simply as “the bond”.

13. The opening parts of the bond identify the parties, and recite the building contract. The

operative parts of the bond are then set out in numbered clauses. Insofar as relevant to

these proceedings, the key clauses are as follows.

“1. The Contractor and the Surety are hereby jointly and severally bound to the

Employer in the sum of €1,200,000.00 (one million two hundred thousand euro)

[hereinafter called ‘the Bond Amount’] provided that if the Contractor shall subject

to Clause 3 hereof duly perform and observe all the terms, conditions, stipulations

and provisions contained or referred to in the said Contract which are to be

performed or observed by the Contractor or if on default by the Contractor the

Surety shall satisfy and discharge the damages sustained by the Employer as

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established and ascertained pursuant to and in accordance with the provisions of

the said Contract and taking into account all sums due or to become due to the

Contractor thereunder and all retention monies held thereby up to the amount of

this Bond then this agreement shall be of no effect but otherwise shall remain in full

force and effect. The Bond Amount shall automatically reduce by half upon the

issue of the Certificate of Practical Completion of the said Works.

[…]

3. The Contractor and the Surety shall be released from their respective liabilities

under this bond twelve months after the date of Practical Completion of the said

Works as certified by the Architect/Engineer/Supervising Officer appointed under

the contract and then this Bond is automatically cancelled whether returned to the

Surety or not.

4. If any suits at law or proceedings in equity are brought against the Surety to

recover any claim hereunder the same must be instituted not later than Expiry in

Clause 3 above.

5. This Bond is executed by the Surety upon the following express conditions, which

shall be the conditions precedent to the right of the Employer to recover hereunder:

A. The Surety shall be notified in writing by registered or hand delivered letter

to its registered branch office of any serious breach of or default in any of the

terms and conditions contained in the said Contract and on the part of the

Contractor to be performed and observed as soon as possible but in any

event within three months after such breach or such default shall have come

to the knowledge of the Employer or his representative or representatives

having supervision of the said Contract and the Employer shall in so far as

may be lawful permit the Surety to perform the stipulations and provisions of

the said Contract which the Contractor shall have failed to perform and

observe.

B. In the event of the Surety being called upon to satisfy and discharge

damages sustained by the Employer, the Employer shall permit the Surety to

nominate a completion contractor to perform the stipulations and provisions

of the said Contract which the contractor shall have failed to perform and

observe provided the proposed completion contractor is acceptable to the

Employer; such acceptance shall not be withheld unreasonably.

C. No liability shall attach to the Surety under this Bond in respect of default by

the Contractor or breach of the conditions and terms of the said Contract

where such default or breach was directly or indirectly due to or arising out of

War, Invasion, Act of Foreign Enemy, Hostilities (whether War be declared or

not), Civil War, Rebellion, Revolution, Riot, Civil Commotion or Military or

Usurped Power.”

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14. Works pursuant to the building contract commenced on 4 January 2012. Thereafter, in

April 2012, Sammon Contracting Ltd assigned all obligations and interests in the building

contract to Sammon Contracting Ireland Ltd. For ease of exposition, the shorthand “the

contractor” is intended to refer to both of these companies.

15. The works under the building contract were certified by the employer’s architect as

practically complete on 2 March 2013. The term “practical completion” is defined as

follows at clause 31 of the building contract.

“When in the opinion of the Architect the Works are Practically Complete he shall

forthwith issue a certificate to that effect and Practical Completion of the Works

shall be deemed for all the purposes of this Contract to have taken place on the day

named in such certificate.

‘Practical Completion’ means that the Works have been carried to such a stage that they

can be taken over and used by the Employer for their intended purpose and that

any items of work or supply then outstanding or any defects then patent are of a

trivial nature only and are such that their completion or rectification does not

interfere with or interrupted such use.”

16. As appears from the final sentence of clause 1 of the bond (see paragraph 13 above), the

bond amount automatically reduced by half upon the issue of the certificate of practical

completion. The amount of the bond is now €600,000.

17. The employer issued the within proceedings on 18 February 2014. In brief, these

proceedings seek to enforce the performance bond as against the surety. Crucially, the

proceedings seek to have the High Court quantify the damages payable. One of the reliefs

sought is for accounts and inquiries to “establish” the sums due to the employer by the

surety. The within proceedings were not served until 12 February 2015, i.e. almost

twelve months after the date of the institution of the proceedings.

18. On the same date as the within proceedings were issued (18 February 2014), the

employer also issued proceedings against Sammon Contracting Ltd and Sammon

Contracting Ireland Ltd (“the contractor”). In brief, those proceedings seek an order

directing the contractor to refer the “proceedings” to arbitration. Damages for breach of

contract and negligence are sought in the alternative.

19. As appears, both sets of proceedings were issued within twelve months of the date of the

certificate of practical completion. This may be relevant for the purposes of clause 3 and

clause 4 of the bond.

20. SCLAD Construction Ltd (formerly Sammon Contracting Ltd) was placed into liquidation

by order of the High Court on 1 December 2017. Sammon Contracting Ireland Ltd was

placed into liquidation by order of the High Court on 5 June 2018.

21. Finally, it should be recorded that for the purposes of determining the application to

dismiss the proceedings, it will be assumed that were these proceedings to go to trial, the

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employer would be able to establish that the construction works had been carried out

defectively.

Jurisdiction to strike out or dismiss proceedings

22. Before embarking upon any consideration of the correct interpretation of the bond, it is

necessary first to identify the limitations attendant on the court’s jurisdiction to strike out

or to dismiss proceedings. The jurisdiction is intended to protect against an abuse of

process. The principal question for the court in determining such an application is whether

the institution of the proceedings represents an abuse of process. It is not enough that

the court might be satisfied that the case is a very weak one and is likely to be

successfully defended. Rather, the court must be satisfied that the proceedings disclose

no cause of action and/or are bound to fail.

23. As discussed presently, the case law suggests that a more exacting approach may be

appropriate in proceedings the outcome of which turns on the correct interpretation of

contractual documentation and where there is no dispute but that the documentation sets

out the entire of the agreement between the parties. Before turning to consider that case

law, it might be helpful to recall the general principles governing the jurisdiction to strike

out or to dismiss proceedings.

24. For the reasons explained by the Supreme Court in Lopes v. Minister for Justice Equality

and Law Reform [2014] IESC 21; [2014] 2 IR 301, [16] to [18], it is important to

distinguish between the jurisdiction to strike out and/or to dismiss proceedings pursuant

to (i) Order 19 of the Rules of the Superior Courts, and

(ii) the court’s inherent jurisdiction. An application under the Rules of the Superior

Courts is designed to deal with circumstances where the case as pleaded does not

disclose any cause of action. For this exercise, the court must assume that the

facts—however unlikely that they might appear—are as asserted in the pleadings.

25. By contrast, in an application pursuant to the court’s inherent jurisdiction, the court may

to a very limited extent consider the underlying merits of the case. If it can be established

that there is no credible basis for suggesting that the facts are as asserted, and that the

proceedings are bound to fail on the merits, then the proceedings can be dismissed as an

abuse of process. In order to defeat a suggestion that a claim is bound to fail on the facts,

all that a plaintiff needs to do is to put forward a credible basis for suggesting that it may,

at trial, be possible to establish the facts which are asserted and which are necessary for

success in the proceedings.

26. Whereas it is correct to say that—in the context of an application made pursuant to the

court’s inherent jurisdiction—it is open to the court to consider the credibility of the

plaintiff’s case to a limited extent, the court is not entitled to determine disputed

questions of fact. The limitation on the assessment of credibility has been explained as

follows by the Supreme Court in Lopes v. Minister for Justice Equality and Law Reform

[2014] IESC 21; [2014] 2 IR 301.

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“[19] It is also important to remember that a plaintiff does not necessarily have to prove

by evidence all of the facts asserted in resisting an application to dismiss as being

bound to fail. It must be recalled that a plaintiff, like any other party, has available

the range of procedures provided for in the RSC to assist in establishing the facts at

trial. Documents can be discovered both from opposing parties and, indeed, third

parties. Interrogatories can be delivered. Witnesses can be subpoenaed and can, if

appropriate, be required to bring their documents with them. Other devices may be

available in particular types of cases. In order to defeat a suggestion that a claim is

bound to fail on the facts, all that a plaintiff needs to do is to put forward a credible

basis for suggesting that it may, at trial, be possible to establish the facts which are

asserted and which are necessary for success in the proceedings. Any assessment

of the credibility of such an assertion has to be made in the context of the

undoubted fact, as pointed out by McCarthy J. in Sun Fat Chan v. Osseous Ltd.

[1992] I.R. 425, at p. 428, that experience has shown that cases which go to trial

often take unusual turns on the facts which might not have been anticipated in

advance.”

27. The judgment in Lopes went on then to address the position of what might be described

as “document cases” as follows.

“[20] At the same time, it is clear that certain types of cases are more amenable to an

assessment of the facts at an early stage than others. Where the case is wholly, or

significantly, dependent on documents, then it may be much easier for a court to

reach an assessment as to whether the proceedings are bound to fail within the

confines of a motion to dismiss.* In that context, it is important to keep in mind

the distinction, which I sought to analyse in Salthill Properties Ltd. v. Royal Bank of

Scotland plc [2009] IEHC 207, (Unreported, High Court, Clarke J., 30th April,

2009), between cases which are dependent in themselves on documents and cases

where documents may form an important part of the evidence but where there is

likely to be significant and potentially influential other evidence as well.”

*Emphasis (italics) added.

28. The relevant passages from the judgment in Salthill Properties Ltd v. Royal Bank of

Scotland plc [2009] IEHC 207, cited in Lopes, include the following.

“3.9 So far as the general question of whether proceedings are, on their merits, bound

to fail it seems to me that it is necessary to address the question which arose for

debate between the parties as to the approach which the court should take to the

evidence as presented on an application to dismiss such as that with which I am

involved. It has often been noted that an application to dismiss as being bound to

fail may be of particular relevance to cases involving the existence or construction

of documents. For example, in claims based on written agreements it may be

possible for a party to persuade the court that no reasonable construction of the

document concerned could give rise to a claim on the part of the plaintiff, even if all

of the facts alleged by the plaintiff were established.* Likewise, a defendant in a

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specific performance action may be able to persuade the court that the only

document put forward as being a note or memorandum to satisfy the Statute of

Frauds, could not possibly meet the established criteria for such a document. More

difficult issues are likely to arise in an application to dismiss when there is at least

some potential for material factual dispute between the parties capable of

resolution only on oral evidence. At this end of the spectrum, it is difficult to

envisage circumstances where an application to dismiss as bound to fail could

succeed. In between are a range of cases which may be supported to a greater or

lesser extent by documentation.

3.10 However, it is important to emphasise the different role which documents may play

in proceedings. In cases, such as the examples which I have given earlier,

involving contracts and the like, the document itself may govern the legal relations

between the parties so that the court can consider the terms of the document on its

face and may be able to come to a clear view as to the legal consequences flowing

from the parties having governed their relations by the document concerned.* ”

*Emphasis (italics) added.

29. The Supreme Court, per Clarke J., subsequently elaborated upon this theme in Keohane

v. Hynes [2014] IESC 66 as follows.

“6.8 In summary, it is important to emphasise the significant limitations on the extent to

which a court can engage with the facts in an application to dismiss on the grounds

of being bound to fail. In cases where the legal rights and obligations of the parties

are governed by documents, then the court can examine those documents to

consider whether the plaintiff’s claim is bound to fail and may, in that regard, have

to ask the question as to whether there is any evidence outside of that

documentary record which could realistically have a bearing on the rights and

obligations concerned. Second, where the only evidence which could be put forward

concerning essential factual allegations made on behalf of the plaintiff is

documentary evidence, then the court can examine that evidence to see if there is

any basis on which it could provide support for a plaintiff’s allegations. Third, and

finally, a court may examine an allegation to determine whether it is a mere

assertion and, if so, to consider whether any credible basis has been put forward

for suggesting that evidence might be available at trial to substantiate it. While

there may be other unusual circumstances in which it would be appropriate for the

court to engage with the facts, it does not seem to me that the proper

determination of an application to dismiss as being bound to fail can, ordinarily, go

beyond the limited form of factual analysis to which I have referred.

6.10 It is an abuse of process to bring a claim based on a breach of rights or failure to

observe obligations where those rights and obligations are defined by documents

and where there is no reasonable basis for suggesting that the relevant documents

could establish the rights and obligations asserted.* Likewise, it is an abuse of

process to maintain a claim based on facts which can only be established by a

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documentary record and where that record could not sustain any necessary part of

the factual assertions which underlie the case. Finally, it is an abuse of process to

maintain a claim based on a factual assertion in circumstances where there is no

evidence available for that assertion and, importantly, where there is no reasonable

basis for believing that evidence could become available at the trial to substantiate

the relevant assertion. However, the bringing of a claim based on a factual

assertion for which there is or may be evidence (even if the defendant can point to

many reasons why it might be argued that a successful challenge could be mounted

to the credibility of the evidence concerned) is not an abuse of process. It is for

that reason that a court cannot properly engage with the credibility of evidence on

a motion to dismiss as being bound to fail and it is for that reason that the very

significant limitations which I have sought to identify exist in relation to the extent

to which a court can properly engage with the facts on such an application.”

*Emphasis (italics) added.

30. An example of the practical application of these principles to a case involving a claim

pursuant to a bond—on the facts, a “HomeBond” guarantee issued in respect of a new

dwelling house—is provided by Wilkinson v. Ardbrook Homes Ltd [2016] IEHC 434. The

High Court (Baker J.) dismissed the proceedings pursuant to the court’s inherent

jurisdiction in circumstances where a claim in respect of any negligence in inspecting or

failing to inspect a dwelling the subject matter of the warranty had been expressly

excluded under the bond.

“46. For all of the reasons stated above, because this is a claim which is founded in a

contract of warranty contained in a written document, and because that contract

expressly excluded liability for the claim as pleaded, and because no special

relationship is claimed to have come into existence, either as a result of a

representation or the assumption of additional liabilities by the third defendant, I

propose in the exercise of my inherent jurisdiction to strike out the claim of the

plaintiffs against HomeBond, the third named defendant in the proceedings, on the

grounds that the claim is bound to fail.”

Findings of the court on jurisdictional issue

31. It appears from the case law discussed above that the approach to be taken to an

application to strike out or to dismiss proceedings will differ slightly in circumstances

where the underlying proceedings turn on the interpretation of (agreed) contractual

documents. More specifically, the court may be able to resolve straightforward issues of

contractual interpretation on a summary application without the risk of injustice to the

parties. This is subject to a number of provisos as follows. First, there must be no factual

dispute as to the validity of the contractual documents. Secondly, it must be accepted

that the contractual documents represent the entire agreement between the parties. If,

for example, one of the parties alleges that the interpretation of the contract must be

informed by oral representations or that a collateral contract exists between the parties,

then these are issues which can normally only be properly resolved by a plenary hearing

on oral evidence. Thirdly, the contractual documentation must be capable of

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interpretation on its own terms, i.e. without resort to extrinsic evidence. Finally, the legal

issues must be straightforward.

32. In cases where these provisos are fulfilled, it may be legitimate for the court to consider

the terms of the contractual documentation. If the court concludes that no reasonable

interpretation of the contractual documentation could give rise to a claim on the part of a

plaintiff—even assuming that all of the facts alleged by the plaintiff would be established

at trial—then the proceedings can be dismissed as an abuse of process.

33. Counsel on behalf of the employer in the present case does not demur from the

proposition that this case can, in principle, be approached for the purposes of the

application to strike out or to dismiss the proceedings as one involving primarily the

interpretation of a contract. (See paragraph 10 of the employer’s written legal

submissions). Counsel goes on, however, to stress that the issue of contractual

interpretation in the present case is not necessarily simple and straightforward. In

particular, it is submitted that the arguments advanced on behalf of the surety are, of

necessity, of “considerable intricacy” and fall well short of the standard of conviction

required to have an action dismissed on a summary basis.

34. In this regard, counsel has placed emphasis on the very recent judgment of the Supreme

Court in Jeffrey v. Minister for Justice Equality and Defence [2019] IESC 27. The Supreme

Court held that proceedings should not be dismissed pursuant to the court’s inherent

jurisdiction in circumstances where the legal issues were complex.

“7.4 It is now well settled that, in the context of a summary judgment motion in which a

plaintiff seeks judgment in summary proceedings, a court can resolve

straightforward issues of law or the interpretation of documents, where there is no

real risk that attempting to resolve those issues within the limited confines of a

summary judgment motion might lead to an injustice. By analogy, I would not rule

out the possibility, without so deciding, that it may be possible to resolve a simple

and straightforward issue of law within the confines of a Barry v. Buckley

application. However, even if that should be possible, it could only be appropriate

where the issue was very straightforward and where there was no risk of injustice

by adopting that course of action. […] However, a Barry v. Buckley application

cannot be used to dismiss a case simply because it might be said that there is a

strong defence. Rather, such applications can only be used in cases where it is clear

that the claim is bound to fail. In my view, this case is not such a case. […]”

35. The facts of the case were unusual. Mr Jeffrey had been prosecuted in the District Court

for a road traffic offence. The presenting guard had erroneously informed the District

Court judge that the accused had a series of previous convictions, and purported to

outline these offences to the judge. This was then reported in the local media. In fact, the

offences outlined were referable to an entirely different person who happened to have the

same surname as Mr Jeffrey. Mr Jeffrey subsequently instituted High Court proceedings

against the State seeking damages for negligence, breach of duty and negligent

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statement. (An action for defamation could not have succeeded in circumstances where

absolute privilege attaches to court proceedings under the Defamation Act 2009).

36. The State respondents sought to have the proceedings dismissed on the basis

(i) that a person cannot bring an action for damage to reputation other than through

an action for defamation; (ii) that the presenting guard did not owe a duty of care

to the accused; and (iii) that the conduct of court proceedings attracts immunity.

The Supreme Court refused to dismiss the proceedings in circumstances where the

legal issues were complex and it was not clear that Mr Jeffrey’s claim was bound to

fail.

37. Having carefully considered the terms of the Supreme Court judgment in Jeffrey, I am

satisfied that the circumstances of the present case are distinguishable. The legal issues

raised in the within proceedings can properly be characterised as simple and

straightforward. The case largely turns on the interpretation of a single provision of a

contract. As explained at paragraphs 53 et seq., I am satisfied that the interpretation of

the bond in the present case is obvious. By contrast, the issues arising in Jeffrey

presented difficult questions of law and public policy. Such issues could not properly be

determined on an application to strike out proceedings in limine.

38. In summary, therefore, I am satisfied that the present case gives rise to a straightforward

issue of contractual interpretation which admits of an obvious answer. This issue can

safely be resolved on an application to dismiss the proceedings without any risk of

injustice to the parties. There is no factual dispute which requires to be determined. The

parties are both agreed that the bond represents the entire agreement between the

parties. The outcome of the proceedings is not contingent on oral evidence, cross-

examination or the discovery of documents.

Submissions on interpretation of bond

39. The employer and the surety both agree that the bond is a “conditional” bond as opposed

to an “on demand” bond. Both parties also agree that the damages must be quantified—

to use a neutral term—before liability to make payment under the bond arises. There is,

however, a fundamental disagreement between the parties as to the mechanism by which

damages are to be quantified. The resolution of this dispute turns primarily on the

interpretation of clause 1 of the performance bond.

40. The rival interpretations of the parties can be summarised as follows. The surety contends

that the quantum of damages sustained must be established and ascertained pursuant to

the dispute resolution mechanisms provided for under the building contract. On this

interpretation, the damages can only be quantified in accordance with clause 38 of the

building contract. This clause has been set out in full at paragraph 10 above. As appears,

any dispute between the employer and the contractor is to be referred to conciliation,

and, if this is unsuccessful, to arbitration. It is submitted that the dispute resolution

mechanisms are exhaustive, and that it is not open to an employer to by-pass these

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procedures, and, instead, to invite the High Court to quantify the damages in plenary

proceedings against the surety.

41. Conversely, the employer contends that clause 1 of the performance bond simply requires

that the quantum of damages be established and ascertained in accordance with what

counsel characterises as the “substantive provisions” of the building contract. The High

Court can quantify the damages but in doing so must apply the “substantive provisions”

of the building contract. The liability of the surety is to be ascertained by reference to the

rights and obligations of the employer and the contractor under the “substantive

provisions” of their contract, i.e. the building contract. It is submitted that one practical

effect of this is that the surety can avail of any defence under the building contract upon

which the contractor could have relied. Similarly, it is said that the provisions of the

building contract in respect of any claim for set-off could also be relied upon.

42. Counsel cites certain passages from O’Donovan and Philips, The Modern Contract of

Guarantee (3rd edition, English edition, 2016, Courtney and Philips) in support of an

argument that the liability of a surety can be determined in separate proceedings and that

a surety is not bound by an arbitration award made pursuant to a building contract. I will

return to consider this submission at paragraph 64 below.

43. Counsel on behalf of the employer also argued that to interpret clause 1 as requiring

damages to be established pursuant to conciliation or arbitration under the building

contract would result in an unrealistic timeframe. The combined effect of clause 3 and

clause 4 of the bond appears to be that any proceedings against the surety must be

instituted within twelve months of the date of certification of practical completion. This

would mean that in order to avail of the bond (as interpreted by the surety), any defects

in the building works would have had to emerge in sufficient time to allow for a

conciliation or arbitration to be completed within twelve months of certification.

44. Counsel placed some reliance on clause 5 of the bond. This clause has been set out in full

at paragraph 13 above. As appears, same sets out a number of conditions which are

stated to be conditions precedent to the right of the employer to recover under the bond.

Counsel observes that there is no express requirement under clause 5 that damages be

established and ascertained by way of conciliation or arbitration, and seeks to infer from

this that same is not a condition precedent to recovery under the bond. I will return to

this argument at paragraph 71 below.

45. Despite extensive research by both Mr O’Doherty and Mr Cole, neither side was able to

identify any case law directly of assistance on the interpretation of the phrase

“established and ascertained pursuant to and in accordance with the provisions of” the

contract. The judgment closest in point is that in Paddington Churches Housing

Association v. Technical and General Guarantee Co Ltd (1999) 65 Con LR 132. The case

concerned a performance bond entered into between a main contractor, a sub-contractor

and a surety. The wording of the performance bond required the surety, in the event of a

valid determination of the building contract, to satisfy and discharge the net established

and ascertained damages sustained by the main contractor. The phrase “net established

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and ascertained damages” has some limited resonance with the wording at issue in the

present case. Of course, the additional wording to the effect that the damages must be

established and ascertained “pursuant to and in accordance with the provisions of” the

building contract was absent.

46. It appears from the reported judgment in Paddington Churches Housing Association that

the main contractor was under the mistaken impression that the bond would have allowed

for an interim payment to help the main contractor to finance the contract as it

progressed. The court observed that if this is what had been intended, then the main

contractor should have obtained a specific insolvency bond or an “on demand” bond.

47. The High Court of England and Wales held that, on its correct interpretation, the

performance bond imposed no liability to make a payment on account. Rather, the liability

of the surety did not arise until the net liability had been ascertained. The High Court

indicated that the damages were to be calculated by reference to the code of the contract.

In particular, the employer’s statement envisaged under the contract was required before

the damages could be said to be ascertained.

“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.”

*Emphasis (italics) added.

48. The judgment does not address the precise issue in dispute in the present case.

It is, however, suggestive of the fact that liability must be ascertained by reference to

the mechanism provided for under the building contract. To this extent, it lends some

support to the surety’s arguments.

49. Both sides also referred to the judgment of the House of Lords in Trafalgar House

Construction (Regions) Ltd v. General Surety and Guarantee Co Ltd [1995] 3 All E.R. 737.

This judgment is of little assistance in that the principal issue in dispute there turned on

the distinction between an “on demand” bond and a performance bond. It seems that the

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Court of Appeal had—mistakenly— held that a mere demand in good faith was sufficient

to obtain payment under the bond. The House of Lords held that proof of damage and not

mere assertion thereof was required before liability under such a bond arises. It was not

necessary for the purpose of that finding for the House of Lords to consider the separate

question as to the precise basis on which damages are to be proved (or established). The

parties in the present case are both agreed that the bond is a “conditional” as opposed to

an “on demand” bond.

50. Finally, Mr Cole did turn up one case from England and Wales, Russell v. Stone [2019]

EWHC 831 (TCC) which concerned contractual language similar to that in issue in the

present case. The proceedings involved a claim for negligence against a firm of quantity

surveyors. One of the complaints made was that the quantity surveyors had been

negligent in failing to obtain a performance bond. The draft form of bond included the

following wording.

“[The Guarantor] … shall in the event of a proven breach of the Contract by the

Contractor (which definition shall include insolvency or other events listed in

Contract Clauses) … satisfy and discharge the damages costs and expenses

sustained by the Employer as established and ascertained pursuant to and in

accordance with the provisions of the Contract.”

51. The High Court of England and Wales indicated (at paragraph 203) that the effect of the

bond, had it been procured, would have been that the beneficiary would have to prove a

default on the underlying contract and prove the loss and damage suffered as a result of

that default.

52. Reference to this judgment does not greatly advance matters in that it leaves open the

very issue which is in dispute in these proceedings, namely the identification of the

mechanism by which damages must be established and ascertained.

Findings of the court on interpretation of the bond

53. The compass of the dispute in the present case is very narrow. It turns on the

interpretation of clause 1 of the bond. More specifically, the dispute turns on whether the

use of the phrase “established and ascertained pursuant to and in accordance with the

provisions of the” building contract (i) requires that the quantification of damages be

carried out pursuant to the dispute resolution mechanisms provided under the building

contract, or (ii) merely requires that the rules for reckoning damages provided under the

building contract are to be applied but that the quantification can be carried out by the

High Court.

54. The surety, by having elected to apply to dismiss the proceedings in limine, has

undertaken the heavy burden of persuading this court that its (the surety’s) interpretation

of the bond is so obviously the correct one that the employer cannot succeed at full

hearing. For the reasons which follow, I am satisfied that the correct interpretation of the

bond is obvious, and is capable of being fairly and properly determined on an application

to dismiss the proceedings.

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55. It may be useful to commence this analysis by recalling the precise terms of clause 1 of

the bond.