14th August Journal Column

HK Logo - smallBy Graham Sutton, Associate Solicitor at Hay & Kilner

It is now common place for main contractors to have to provide various documents to increase an employer’s financial security for a project. Documents including collateral warranties to third parties, sub-contractor warranties, performance bonds and parent company guarantees are all items now required by an employer at the beginning of a contract.

Investors are often wary of funding construction projects due to exposure to various risks, but these bonds, guarantees and warranties should offer some security.

The purpose of providing the documents is only beneficial to the employer, with little to be gained by the main contractor, so it’s therefore not surprising that many contractors fail to provide the documents in the hope that the project will be completed before the documents are requested.

This tactic has now effectively been “scuppered” by the recent case of Liberty Mercian Limited -v- Cuddy Civil Engineering Limited (CCEL). In this case CCEL, the main contractor, had agreed to provide a performance bond and sub-contractor warranties in favour of Liberty. In cases where contractors fail to comply with obligations in accordance with the building contract, performance bonds offer a secure fund for the employer. However, CCEL argued that despite its best efforts, it had been unable to obtain a performance bond from the funders it had approached in the format required by the contract. A number of the funders would only issue a bond if CCEL made a cash deposit equal to the value of the proposed bond, plus a premium for issuing the bond.

The matter was taken to court and the judge ordered CCEL to make a payment of £420,000, the equivalent to the financial value of the performance bond. The court placed Liberty in the same position as it would have been if the bond had originally been provided.

CCEL told the court that it had been unable to obtain warranties from a sub-contractor who had now gone bust. The court was also told that there was evidence that the sub-contractor had held professional indemnity insurance and it was possible that the insurers may respond to a claim under the warranties. The court therefore ordered CCEL to obtain the warranties. The case is a clear example of the real danger in ignoring requests to provide contractual documentation. The court has shown it is prepared to order parties to honour their obligation to provide agreed documentation, regardless of the stage of the works or the difficulties that may be involved.

Leaving the matter for the court to decide can clearly have dire financial consequences, so it’s best for all parties involved to make sure the issue is resolved before reaching this stage.

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