Cast iron guarantee?

A subbie agreed under a performance bond that in the event of a default under the subcontract, the contractor could force the subcontractor’s guarantor to pay just over £1.5m — 10% of the subcontract fee. The performance bond had an expiry date of October 11, 2001. The contractor called for payment out of time. The court held that a late demand is no demand. The subbie was able to prevent his guarantor from paying.² Take care, timing of your demand may be critical.

Ensure guarantees are in writing
Subbies claim fails because there was no evidence of the agreement to make payment

A subbie, involved in the construction of a float glass factory in Yorkshire, threatened to stop working because of late payment by the contractor. The employer orally agreed that if the workers remained on site he would ensure that the subbie was paid. When the contractor failed to pay, the subbie looked to the employer for payment. The employer refused to pay too. Fortunately for the employer, the Court decided that the guarantee was unenforceable because there was no note or memorandum of the guarantee. Remember that guarantees need to be in writing.³

Bond failures can’t be wiped out
Does completion of a project wipe out earlier claims against the performance bond?

A contractor provided his employer with a performance bond during the course of constructing a power station in North Wales. The bond was to be discharged when the works were complete and the defects correction certificate had been issued. When the contractor failed to complete sections of the work by specified dates, his employer demanded some £2.4m under the bond. Several months later, when the works were finished, the engineer issued the certificate stating that the works had been completed to his satisfaction. The contractor argued that this discharged the bond and retrospectively defeated the employer’s demands. The Court disagreed. Notwithstanding issue of the certificate, the employer could still pursue his earlier demands made under the bond.¹ Beware, you cannot rely on a certificate to defeat claims retrospectively.

Beware ‘Pay when paid’ clauses
Clauses are prohibited unless employer is insolvent

A contract between a subbie and a contractor involved in the construction of 36 flats in East London contained a “pay when paid” clause. The contractor refused to pay the subbie because the employer had not paid him. The subbie took the contractor to court and won. Note that “pay when paid” clauses are now prohibited unless the employer is insolvent. However, where they apply, two points are now clear. First, reliable evidence is needed to prove that the employer has not paid the contractor for the subbie’s work. Secondly, the clause cannot be relied upon if the reason for the employer withholding payment was due to the contractor’s own default.⁴

Contractor clear over Dome roof
Reasons for termination can affect compensation issues

When the Dome was being built, The New Millennium Experience Company terminated its contract with roofing contractor Chiemgauer because the materials specifications changed.

NME then tried to argue that it wasn't liable to pay compensation because Chiemgauer failed to provide a performance bond and guarantee, as the contract stipulated.

Chiemgauer thought it was doomed. But the Court found that the employer had waived its right to rely on this failure because it had terminated the contract for a different reason. The contractor was, therefore, entitled to compensation.⁵ Take care you do not waive your security.

Don’t waive rights
Be careful not to waive an employer's right to liquidated damages

In a recent case involving improvements to Lewisham town centre, the completion of the work was substantially delayed. The employer claimed that it was entitled to liquidated damages of more than £500,000 for the delay. However, during the course of the works the employer had made representations to the effect that no liquidated damages would be sought. The court found, therefore, that the employer had forgone its right to claim liquidated damages and the contractor could breathe a sigh of relief!⁶