Owner of insolvent sub-contractor liable as primary obligor (Multiplex v Dunne)

In a summary judgment application, the court held that the defendant was liable as primary obligor under the terms of an agreement under which his company (the sub-contractor) had been provided with a £4m cash advance by the claimant contractor. It rejected the defendant’s argument that it only imposed secondary obligations on him.

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Multiplex Construction Europe Ltd (formerly Brookfield Multiplex Construction Europe Ltd) v Dunne [2017] EWHC 3073 (TCC)

What are the practical implications of this case?

The case provides an example of the court construing the terms of a suretyship agreement to determine whether it is an indemnity (under which the surety has primary liability), or a guarantee (under which its liability is secondary, arising only where another person is in breach).

In particular, the judgment indicates (albeit on a technically obiter basis) that the contra proferentum rule (ie that any ambiguity is to be resolved against the party who put it forward and seeks to rely on it) now has a very limited role when interpreting such documents entered into by companies of equal bargaining power. In fact, the court noted that it had ‘only skeletal, if any, remains’ in commercial cases generally. Earlier this year the Court of Appeal had confirmed the rule’s limited application in relation to exclusion clauses (see News Analysis: Court of Appeal considers limitation and exclusion clause (Persimmon Homes v Arup)).

It also suggests that, where a provision contains two triggers for the surety’s liability, there is no reason why one trigger cannot create a primary obligation and the other a secondary obligation.

What was the background?

Multiplex appointed Mr Dunne’s company, Dunne Building and Civil Engineering Limited (DBCE), as sub-contractor under a number sub-contracts relating to various projects. When DBCE encountered financial difficulties, Multiplex agreed to advance substantial sums to it so that it could continue work.

An ‘Advance Payment Deed’ (APD) was entered into by Multiplex, DBCE, Mr Dunne and DBCE’s parent company. Mr Dunne and DBCE’s parent were jointly described as the ‘Guarantor’. Under the APD, the sum of £3m was advanced to DBCE by Multiplex (this was later increased to £4m by a sale, hire-purchase and buy-back agreement).

The APD required DBCE to repay the advance payment immediately on receipt of a written demand by Multiplex. It also provided that:

‘3. GUARANTEE
3.1 The Guarantor irrevocably and unconditionally guarantees, warrants and undertakes jointly and severally to the Contractor that should the Sub-Contractor suffer an event of insolvency (including but not limited to administration...) or otherwise not be able to pay back the Advance Payment to the Contractor immediately upon receipt of a written demand from the Contractor, the Guarantor shall immediately be liable to the Contractor for the payment of the Advance Payment and shall indemnify and hold harmless the Contractor against any loss, damage, demands, charges, payments, liability, proceedings, claims, costs and expenses suffered or incurred by the Contractor arising therefrom or in connection therewith.’

(our emphasis)

DBCE (and its parent) went into administration, and Multiplex sought to recover the advance payment of £4m from Mr Dunne under clause 3.1 (relying on DBCE’s insolvency). Multiplex brought a claim for summary judgment for this amount, under CPR 24. The court had to consider whether the APD was a contract of indemnity under which Mr Dunne had primary obligations, or whether it was a contract of guarantee under which he only had secondary obligations.

The relevance of this was that, if the document amounted to a guarantee, it would have been necessary for Multiplex to establish the losses it suffered as a result of DBCE’s insolvency (which would take into account, for example, any claims DBCE had against Multiplex). Such an exercise would not have been appropriate at a summary judgment hearing.

What did the court decide?

Primary liability

Looking at the objective meaning of the language used, the court held that Mr Dunne was liable as primary obligor (jointly and severally with DBCE’s parent) to make the payment of £4m to Multiplex. The use of the word ‘immediately’ (as emphasised in bold above) played an important role in the court’s decision—it would not be possible to pay the advance payment immediately if some kind of accounting process was required with DBCE. Further, it would be contrary to the commercial purpose to say that if DBCE became insolvent the primary obligation to repay was on DBCE. The use of ‘indemnify and hold harmless’ reinforced the conclusion that there was a primary liability.

Neither the heading ‘GUARANTEE’, nor the use of the verb ‘to guarantee’, was determinative as to the nature of the obligation (per Bitumen Invest v Richmond Mercantile [2016] EWHC 2957 (Comm), and also the contract provided that headings were for convenience only).

In relation to the second trigger (‘or otherwise not be able to pay back the Advance Payment to the Contractor immediately upon receipt of a written demand’) the court noted that the position was not so straightforward. However, this trigger was not relied upon by Multiplex, and the court considered there was no reason why both triggers had to be construed in the same way (it was possible that the first trigger could create a primary obligation, and the second trigger could create a secondary obligation).

As there was no ambiguity in the words used, the court did not consider that the contra proferentum rule arose, but it thought that the rule would not have much, if any, application in the circumstances of this case. In its opinion, the statement in Persimmon Homes v Arup  [2017] EWCA Civ 373 (which concerned a exemption clause) that ‘the rule now has a very limited role’ was equally applicable to contracts of suretyship entered into in a commercial context between parties of equal bargaining power. The fact that Mr Dunne did not take legal advice was not relevant as that was his own choosing, nor was it relevant that DBCE was in financial difficulties.

Amount secured

Multiplex was entitled to recover the full £4m. The court rejected Mr Dunne’s argument that the amount of the ‘Advance Payment’ under the APD was reduced as and when DBCE became entitled to payments under the various sub-contracts. While Multiplex could elect not to pay sums otherwise due to DBCE, the APD did not provide for this to happen automatically (and such an automatic process would largely defeat the purpose of the APD by turning off DBCE’s cash flow).

Insolvency Rules

Finally, the court rejected Mr Dunne’s argument that it was not appropriate to give summary judgment in light of the Insolvency Rules and the principle that, in the event of insolvency, claims and cross-claims marge into a single debt. It was DBCE that was insolvent, not Mr Dunne, and his liability was not dependent on the state of the account between DBCE and Multiplex.

Case details

  • Court: High Court of Justice, Queen's Bench Division, Technology and Construction Court
  • Judge: Fraser J
  • Date of judgment: 1 December 2017

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Filed Under: Construction

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