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Provision of Bonds and Warranties – No Hiding Place!

31 Jul 2015

It is now common place for Employers to require Main Contractors to provide various documents to increase the Employers financial security for a project such as collateral warranties to third parties, sub-contractor warranties, performance bonds and parent company guarantees. Those documents are often attached in draft to the Building Contract so that the obligation to provide finalised documents becomes contractual requirements.

There is little benefit to be gained by the Main Contractor in providing the documents as they are generally all “one sided” in favour of the Employer. It is therefore not surprising that many Main Contractors fail to provide the documents in the hope that the project will be completed before the documents have been 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 contractually agreed to provide a performance bond and sub-contractor warranties in favour of Liberty, the Employer. However, CCEL argued that despite its best endeavours, it had been unable to obtain a performance bond from the funders it had approached in the format required by the contract. In addition, 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. Not surprisingly, that was not a commercially attractive proposition.

The matter came before Ramsey J in the Technology and Construction Court, and although the Judge did not technically order a performance bond to be provided, he ordered CCEL to make a payment of £420,000 into Court which was 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 been provided.

Sub-Contractor Warranties

CCEL also informed the court that despite its best endeavours it had been unable to obtain warranties from a sub-contractor who had now become insolvent and had been dissolved. Surely that would be a good enough reason for non–production of the warranties? Not so, as the Court was informed that there was evidence that the sub-contractor had held professional indemnity insurance prior to his financial demise and it was possible that the insurers may respond to a claim under the warranties. The Judge therefore ordered CCEL to obtain the warranties.

Lesson to be learned

As the Liberty case shows, there is clearly now some 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 irrespective of the stage of the works or the practical or commercial difficulties that may be involved.

Leaving the matter for the Court to decide can clearly have dire financial consequences!         

For further information, please contact Graham Sutton, Associate Solicitor at Hay & Kilner

Call: 0191 232 8345

Email: Graham.Sutton@hay-kilner.co.uk