Just such a case is Alstom vs Boot and Aegon in which judgment was handed down in the Technology and Construction Court on 1 May. The scenario is familiar enough: an employer, Alstom, was suing its contractor, Henry Boot Construction, for liquidated damages. Henry Boot had been charged with putting up a power station in North Wales on an ICE 6 contract, and it had overrun the contract period without being given any extension of time.
The reasons for that were hotly contested. Henry Boot asked for and received an engineer's decision about the time issue, which went against it – and then embarked on arbitration proceedings, claiming that time was "at large" and that the engineer was to blame for the delay.
In the midst of all this, the employer issued proceedings in the courts against Henry Boot under its parent company guarantee and against Aegon, the bondsman, which had issued (jointly with the contractor) a conditional bond in ICE format.
The interesting point here is that the contractor has not been sued at all, although the effect of the engineer's decision was to create a debt payable straight away by the contractor.
So why was Henry Boot bypassed? Indeed, can the employer properly proceed against the parent and the bondsman, which are both sureties and whose liability therefore is secondary to that of the contractor, before that liability has been established under the construction contract?
The beneficiary can seek to prove the contractor’s liability in proceedings to which the contractor is not a party
The answer to that question is clear enough. Unless the guarantee or bond makes liability conditional on a judgment (or perhaps an adjudicator's decision) under the construction contract itself, the beneficiary can sue directly and seek to prove the contractor's liability in court proceedings, to which the contractor is not a party, without taking the contractor to arbitration first.
His Honour Judge Seymour was asked to stay the proceedings under the court's inherent powers, because the issues about the defendants' liability raised identical questions to those in the arbitration proceedings begun by Henry Boot. He concluded that, in these circumstances: "It would be right, proportionate and in the interests of justice to grant a stay until the arbitration was concluded."
That way the risk of duplicate proceedings and inconsistent findings would be removed. Since the defendants had undertaken to be bound by the outcome of the arbitration proceedings, justice would be done by granting a stay. The judge sensed that the actions before him were "manoeuvres in a larger war".
An action against a parent company on the basis of a parent company guarantee can be a very effective way of getting results in a dispute with a subsidiary. Indeed, in this case, although the action was stayed, the claimant secured valuable undertakings from the defendants – valuable because had Alstom succeeded in the eventual arbitration, there was nothing in the parent company guarantee or the bond to make that decision binding on the parent or the bondsman.
Parent companies negotiating the terms of parent company guarantees should perhaps consider a clause that reinforces the secondary nature of their liability by stating that it is conditional on an award under the underlying contract. The trade-off for this could be a clause binding the parent or bondsman by any decision of the construction contract arbitrator – the equivalent of the undertaking obtained in the Alstom case.
Postscript
Tony Blackler is a partner in solicitor Macfarlanes.
