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Performance bonds following Yuanda – A contractor’s perspective

The recent case of Yuanda (UK) Company Ltd v Multiplex Construction Europe Ltd and another [2020] EWHC 468 (TCC) brought into sharp focus the challenge that can be faced by contractors obtaining payment under a performance bond and raised a key question around what is needed to satisfy a sum being “established and ascertained”.

Background

Yuanda was a sub-contractor to Multiplex for the carrying out of sub-contract works at One Blackfriars Road, one of Multiplex’s construction projects in central London.

Multiplex brought a demand on 17 January 2020 to Australia and New Zealand Banking Group (the “Bank”) under the performance bond which had been provided by Yuanda to Multiplex regarding Yuanda’s performance under the sub-contract, in the sum of £4,411,490.70 accompanied by a statement from Multiplex alleging breach of the sub-contract. Yuanda in response made an urgent application to court on 20 January 2020 for an injunction preventing the bank paying out under the performance bond.

The key issues

1. What type of instrument is the guarantee? Is it a performance bond, or an on-demand bond?

2. If it is the former, as a matter of construction, what are the requirements in order for the beneficiary (Multiplex) to make a valid call on the guarantor (the bank) which the bank must pay?

Regarding (1) it was decided that the guarantee was a performance bond that created a secondary liability upon the bank in respect of Yuanda’s liabilities to Multiplex under the sub-contract.

It is point (2) which formed the key focus of the judgment. Clauses 1 and 4 of the performance bond were important here, as follows:

"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.

4. Whether or not this guarantee bond shall be returned to the guarantor, 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."

Established and ascertained

The judge decided to ensure the sum claimed was established and ascertained, Multiplex needed to obtain an adjudicator’s decision in its favour in respect of the LAD’s claimed against Yuanda. An adjudication had been commenced by Multiplex by serving a notice of adjudication on 2 December 2019, with the decision expected around 6 March 2020. The statement of sums due to Multiplex which it issued with its demand made to the bank on 17 January 2020 could not be equated to “the establishment and ascertainment of damages due to Multiplex pursuant to and in accordance with the terms of the sub-contract”.

Expiry

The Honourable Mr Justice Fraser studied the wording of clause 4, noting this may give rise to a scenario where parties could be in a position at expiry where they have made a claim under the guarantee, including particulars of breach, but no payment has yet been made. The judge did not like the idea of this giving the parties an indefinite amount of time to reach agreement of a final account or obtain judgment before a bank makes a payment (him acknowledging the length of time it can take to reach final judgment in the courts or in arbitration). Care must therefore be exercised going forwards for claims made prior to expiry of a bond because this will likely not give parties an indefinite amount of time to obtain a judgment and a subsequent payment made under the performance bond.

Comment: Take away points

  • This case shines a light on the fact contractors may struggle to achieve a successful return under a performance bond without an adjudicator’s decision in their favour;
  • A performance bond is security for the contractor in the event of poor performance by members of its supply chain. It is not necessarily an instrument which can be relied to deliver a solution quickly, particularly where it does not have an independent third-party judgment in support;
  • This case concerned a contract based on the JCT Design and Build 2016 contract. The judge suggested the position may be different under a contract where a decision maker is appointed. The precise role and duties will be determined by the terms of the contract but the key duty for these purposes would be carrying out an ascertainment exercise. This person is required to act in a manner which is independent, impartial, fair and honest, as opposed to a decision which favours the interests of the employer under a main contract or contractor under a sub-contract;
  • Will this be the start of a shift in the UK performance bond market, with more uptake for on demand bonds, as is the case in some international construction markets? ;
  • It is important to ensure we consider expiry under a performance bond carefully. When fixing expiry ensure it has a sufficiently reasonable float to accommodate for extensions of time for completion. Using an expiry event (for example, “three months after practical completion”) instead of an actual date allows the bond to “move” with extensions. It would indeed be unhelpful for the contractor, already penalised under its main contract with the employer for delay to completion, to then find out it cannot make a claim under the performance bond from the member of the supply chain responsible, due to the very same fact of the project being delayed in completing.

Yuanda (UK) Company Ltd v Multiplex Construction Europe Ltd & Anor [2020] EWHC 468 (TCC) (28 February 2020)

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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