Court construes bond based on ABI Model Form

Court construes bond based on ABI Model Form

In Yuanda v Multiplex [2020] EWHC 468 (TCC), the Technology and Construction Court held that a bond, based on the ABI Model Form of Guarantee Bond, was a performance bond and not an on demand bond. It also held that an adjudicator’s decision (as to the sub-contractor’s liability to the contractor for delay damages) would be sufficient to establish liability to pay under the bond.

What are the practical implications of this case?

The case provides an example of the court construing security to determine whether it is an on demand bond or a performance bond. More information on the differences between these two types of bond can be found in Practice Notes: Performance bonds—construction projects and  On demand performance bonds—construction projects. The finding that the bond in question was a performance bond was not surprising, and the court had reached the same conclusion in respect of a bond based on the ABI Model Form in Ziggurat v CC International [2017] EWHC 3286 (TCC).

The ruling also indicates that, where a performance bond requires the amount of damages to be established in accordance with the underlying contract, a valid adjudication decision may well be sufficient for this purpose (depending on the breach in question).

What was the background?

Multiplex, the main contractor on the ‘One Blackfriars’ tower project in London, appointed Yuanda as its sub-contractor under a JCT Design and Build Sub-Contract 2011. Yuanda provided a bond to Multiplex based on the ABI Model Form of Guarantee Bond. The sub-contract works were delayed and Multiplex commenced an adjudication against Yuanda seeking to recover substantial liquidated and ascertained damages (LADs) for delay levied against it by Multiplex’s employer.

While the adjudication was on foot, Multiplex made a call on the bond. Yuanda obtained an interim injunction against Multiplex and the bank restraining the call and/or payment out on the bond. In the present case, the court was required to determine whether the bond was a performance or on demand bond, and, if it was a performance bond, what was necessary for a valid call to be made. The following provisions of the bond were relevant in this regard:

  • recital 2: ‘The Guarantor has agreed with the Contractor, at the request of the SubContractor, to guarantee the performance of the obligations of the Sub-Contractor under the Contract…’
  • clause 1: ‘The Guarantor guarantees to the Contractor that in the event of a breach of the 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 Contract and taking into account all sums due or to become due to the Sub-Contractor’ [emphasis added]
  • clause 4: ‘…the obligations of the Guarantor under this Guarantee Bond shall be released and discharged absolutely upon Expiry (as defined in the Schedule). Any claim in writing containing particulars of the Sub-Contractor’s breach of his obligation(s) under the Contract must be made upon the Guarantor before Expiry, or would be deemed invalid otherwise’

Recital 2 and clause 1 were the same as in the standard form (save for the description of the parties). Clause 4 had been amended.

What did the court decide?

In the view of the court, it was clear that the bond was a performance bond. Recital 2, and the parts of clause 1 in emphasis above, made it very clear that the bond was establishing secondary liability on the part of the bank to the primary liability of Yuanda. Multiplex was in no better position under the bond than it was under the sub-contract. There was also a complete absence of the words that would be expected or required in an on demand bond—in particular ‘demand’ (or a synonym).

Further still, the court had reached the same conclusion in Ziggurat v CC International—a case which also concerned a bond based on the ABI Model Form (and in which the parties’ amendments had not had an impact on the characterisation of the bond).

In reaching its conclusion, the court declined to refer to the ABI’s Guidance Notes as an aid to construction—doing so would come ‘perilously close’ to construing the bond in accordance with the subjective intention of one of the parties, and (as noted above) clause 4 was not the same as in the Model Form.

In order for a valid call to be made, clause 1 required the damages to be ‘established and ascertained pursuant to and in accordance with the provisions of or by reference to the Contract’. The court emphasised the importance of considering the terms of the sub-contract in this regard. Under the sub-contract, for Yuanda to be liable to Multiple for delay damages it was necessary that Yuanda had been late in completing the sub-contract works, that Multiplex had given the requisite notice under clause 2.21 and that Multiplex had suffered direct loss and/or expense. The adjudication commenced by Multiplex alleged that Yuanda had been in delay and that this had caused Multiplex to incur loss and expense in the form of LADs levied by its employer. In the view of the court, if the adjudicator awarded Multiplex any sum this would undoubtedly qualify as an amount ‘established and ascertained’ in accordance with the sub-contract.

The court rejected Yuanda’s argument that the effect of the words ‘taking into account all sums due or to become due to the Sub-Contractor’ in clause 1 of the bond was that no valid call could be made until the final account had been decided. Such an interpretation was inconsistent with the obligation on Yuanda in clause 2.21 of the sub-contract to ‘pay or allow’ the amount of any direct loss and/or expense suffered, and inconsistent with such amount being ‘recoverable as a debt’ under clause 4.21.1 of the sub-contract.

The bespoke wording in clause 4 of the bond—that any claim to the bank had to be made before expiry of the bond—did not mean that, provided a claim was made prior to expiry, the bond would remain in force in respect of such a claim well beyond the expiry date. Such an interpretation would require the court to ignore the phrase ‘released and discharged absolutely upon expiry’ in clause 4, and such an arrangement would be ‘extraordinarily non-commercial’ and require extremely clear words. Rather, the wording was to address the rare but possible situation where a claim was made prior to expiry but payment was only possible shortly after (eg due to parties being in different time zones).

Accordingly, the court held that Yuanda was entitled to continuation of the injunction against Multiplex, who had ‘been behaving as though the Guarantee was an on demand bond’. However, there was no basis for maintaining the injunction against the bank, such injunctions only being appropriate where fraud was alleged.

Case details

  • Court: High Court of Justice, Business and Property Courts, Technology and Construction Court (QBD)
  • Judge: Fraser J
  • Date of judgment: 28 February 2020

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About the author:

Jon is Head of the Built Environment Group at Lexis®PSL.

Jon trained at Hogan Lovells and qualified into the firm's construction disputes team. Jon has experience of acting for various parties in relation to disputes arising out of construction and engineering projects in various jurisdictions. Jon has acted for clients in TCC litigation, arbitration, adjudication and mediation as well as providing advice on various aspects of construction and engineering projects.