Performance bonds: Judgement on the interpretation of an ABI type guarantee

On 28 February 2020, the English High Court issued a judgment regarding the construction of an Association of British Insurers (ABI) type performance guarantee, and its operation, in Yuanda (UK) Company Limited v Multiplex Construction Ltd & Australia and New Zealand Banking Group Ltd [2020] EWHC 468.

This judgment illustrates that where a guarantee requires the contractor’s damages to be “established and ascertained” before the guaranteed sums can be released indicates that the guarantee is not an “on demand” bond.  In this particular instance, the Court noted that words like “demand” or its synonyms were absent from the guarantee, which would otherwise be expected and required for it to be on-demand.

Instead, the court held that the guarantee required damages to be determined by a “decision-maker” under the contractual arrangement between the parties.  A decision-maker would be a person or entity under a legal duty to balance the competing interests between the contracting parties and act fairly. In this case, there was no provision for certification by a third party and an adjudication was already underway and the decision maker therefore was the adjudicator.

In the case of an international project, depending on the terms of the contract this might be the Engineer, Employer’s Representative or even a DAB.  In particular, whether under the terms of the contract they are required to balance the parties competing interests and act fairly.

The Court determined that the terms “established and ascertained” did not require the full and final determination of a High Court judgment.  It is interesting to speculate whether the same conclusion would have been reached in respect of an international project, where there would be no statutory adjudication, and if there was no independent decision maker prescribed by the contract - something we do see from time to time in international construction contracts.

Background

Multiplex Construction Europe Ltd (“Multiplex”) entered into a contract to carry out the main shell and core works at One Blackfriars, London (the “Contract”), with St George PLC and St George South London Ltd (jointly the “Employer”). Multiplex appointed Yuanda (UK) Company Ltd (“Yuanda”) to carry out the façade works under a sub-contract (the “Sub-Contract”). Yuanda, Multiplex and the Australian and New Zealand Banking Group Ltd (the “Bank”), entered into a guarantee agreement  as security for Yuanda’s performance of the Sub-Contract (the “Guarantee”).

Clause 1 of the Guarantee stated that:

"The Guarantor guarantees to the Contractor that in the event of a breach of the [Sub-Contract] by the Sub-Contractor, the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the damages sustained by the Contractor as established and ascertained pursuant to and in accordance with the provisions of or by reference to the [Sub-Contract] and taking into account all sums due or to become due to the Sub-Contractor." (emphasis added)

Both the Contract and the Sub-Contract works were delayed, with the parties in dispute over the cause of delay. Multiplex and the Employer entered into a compromise agreement in respect of matters arising from the Contract, and agreed that a sum of £7.5 million would be payable to the Employer as liquidated and ascertained damages (“LADs”). Multiplex demanded the same amount from Yuanda under the Sub-Contract, alleging that the delays were caused by Yuanda. Yuanda denied any responsibility.

Multiplex commenced an adjudication against Yuanda on 2 December 2019, claiming £7.5 million by way of LADs under the Sub-Contract. The parties agreed that the adjudicator would have until 6 March 2020 to produce his decision.

In the meantime, on 17 January 2020, Multiplex made a demand under the Guarantee for the full guaranteed amount of approximately £4.4 million (the “Sum”). An injunction was sought by Yuanda and granted on 20 January 2020, preventing Multiplex from pursuing the demand and the Bank from paying out the Sum.

Issues

The key issues in dispute before the Court were:

1. Whether the Guarantee is a performance bond or an on-demand bond;
2. If it is the former, what are the requirements in order for Multiplex to make a valid call on the Bank?; and
3. Whether Yuanda was entitled to an interim injunction on 20 January 2020 and/or is Yuanda entitled to continuation of the injunction.

This blog post focuses on the requirements for Multiplex to make a valid call on the Bank, where the Court outlined how the provisions of an ABI type guarantee must be interpreted.

In relation to the injunction, the Court was satisfied that Yuanda was entitled to the injunction on 20 January 2020, as Multiplex was behaving as though the Guarantee was an on-demand bond rather than a performance bond (see further below). The Court also found the continuation of the injunction unnecessary as there was only a narrow window between the date of handing down of the judgment (28 February 2020) and the date of the adjudicator’s decision being released (6 March 2020), and observed that the matter could potentially be dealt with by mutual undertakings between the parties.

Decision

On-demand bonds vs performance bonds

On-demand bonds (or unconditional bonds) are those where the bank or insurer will pay out on demand, creating a primary liability. Performance bonds (or conditional bonds) are used to guarantee the liability of one party to another up to the total sum available in the guarantee, creating a secondary liability.

While Multiplex attempted to treat the Guarantee as an on-demand bond, the Court was satisfied from the clear wording of the clause that it was a performance bond, creating only a secondary liability upon the Bank to the primary liability of Yuanda. The Court also noted that words like “demand” or its synonyms were absent, which would otherwise be expected and required in an on-demand bond.

Requirements for a valid call

For Multiplex to call the Guarantee, the Guarantee required (i) a breach of the Sub-Contract by Yuanda, and that (ii) the “damages sustained” by Multiplex must be “established and ascertained” under the Sub-Contract. The dispute centred upon the limb of requirement (ii).

Multiplex claimed that the sum had been established and ascertained as it was contained on a “certificate” issued by it. However, there were no contractual mechanisms in the Sub-Contract requiring any issuance of certificates. The Court criticised Multiplex for the use of the word “certificate”, which, on the court’s view, connoted the involvement of a third party certifier in a quasi-arbitral role.

The Court held that whether a sum was established and ascertained was dependent upon the terms of the underlying Sub-Contract and not the Guarantee, and a sum determined by a “decision-maker” could satisfy that requirement. A decision-maker is a person or entity under a legal duty to balance the competing interests between the contracting parties and act fairly, for instance, an adjudicator. It rejected Multiplex’s argument on this basis.

Yuanda submitted that no call could be made until its final account claim had been decided, either by agreement of the parties or in some future High Court proceedings. This was rejected by the Court as being wholly speculative as parties’ agreement may be unlikely and the future proceedings mentioned had not even been initiated yet.

The Court held that the decision by the adjudicator that awards Multiplex any sum would undoubtedly qualify as being an amount established and ascertained. Therefore, in order for Multiplex to make a valid call on the Guarantee, it needed to wait for the adjudication decision in its favour.