The most famous case was Perar BV vs General Surety and Guarantee Company Limited in 1994. Here, the Court of Appeal held that insolvency did not constitute a default under the building contract and therefore did not trigger the bond. Thus, the event that most employers would consider the reason for the bond was excluded.
The employer in the case of Paddington Churches Housing Association vs Technical and General Guarantee Company Limited (Technology and Construction Court, 22 March 1999) had taken steps to amend its bond to take account of the Perar decision. It specifically provided that determination under the contract would be an event giving rise to liability under the bond. However, having overcome that obstacle their claim against the insurers fell under further provisions of the bond.
The facts of the case are that Paddington was the employer under a Contractor’s Design Contract (JCT81) with amendments 1 to 6. The contractor was Woodward & Co. Before practical completion, the contractor went into liquidation, and Paddington determined Woodward’s employment under the building contract. They then employed a second contractor to complete the works. The action was raised against the insurance company for the full amount of the bond.
“This is 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 needed”
The bond was not an “on-demand” bond. It followed the traditional wording of an obligation on the surety (the insurance company) to remain bound to the employer for a fixed sum (£160 000) until (a) the contractor has performed the building contract, (b) the contractor has defaulted, or (c) the contractor’s employment under the building contract has been determined. In the event of (b) or (c), the obligation on the surety was to “satisfy and discharge the net established and ascertained damages sustained by the Employer up to the amount of the … Bond.” The contract provided a specific mechanism for determining the net amount due, either to the employer or the contractor, following determination. The employer was obliged to prepare a statement that included its expenses incurred as a result of the determination, payments made to the contractor and the amount that would have been payable had the contractor completed the works. The balance was then payable to either the employer or the contractor.
The court held that the damages referred to in the bond must be calculated by reference to the procedure laid down in the contract (although this was unlikely to be different from the common law assessment of damages). That procedure required the employer to prepare a statement. Until the employer’s statement was prepared, the damages could not be said to be ascertained as the bond required. No statement had been prepared by the employer and therefore at the date of the issue of the writ, the insurers had no liability to pay the employer. The action was premature and was dismissed.
Fraser McMillan is a senior associate at Masons’ Glasgow office, 0141-248 4858.