.png)
Some of these special conditions related to the provision of a performance bond. Although there was no definition of “claim” in definitions clause (Clause 1 (as supplemented by Special Condition 1), clause 19.5 stated:
“Any claim made by either party under the Contract, whether covered by Sub-clause 19.1 or otherwise, shall be supported by a written statement of grounds and a summary of material facts upon which it is based.”
SCL obtained a performance bond for the sum of £18,480,000 from the Standard Chartered Bank, which was in a standard form. A Taking-Over Certificate was issued for the works on 17 February 2010, and Ensus began operating the plant. Not long after, complaints were made to Ensus about foul smelling emissions from the plant. The Environment Agency issued enforcement notices against Ensus. The emissions stack had to be doubled in height.
Ensus issued a Defects Notice against SCL, but it issued an Acceptance Certificate which testified that the plant had passed the 5-Day Performance Test as defined in the contract, and accepted the plant subject to the 45 outstanding defects being remedied as specified in an attached Schedule, and subject to the resolution of liability of some of the rectification works.
There were some negotiations between the parties in an attempt to resolve the problem. Part of this was SCL agreeing to extend the performance bond, although for a lesser sum. It was later to claim that this had been done under duress.
When Ensus tried to make a claim on the bond, SCL argued that Special Conditions 3.7 and 3.8 of the contact meant that the issuing of the Acceptance Certificate made the performance bond null and void, and that it should be returned to them. It sought an injunction restraining Ensus from calling upon the bond.
Ensus submitted that, under English law, there was only one ground upon which an on-demand bond could be restrained, and that was on grounds of fraud. Previous authority showed that the courts have required the clearest evidence of fraud before they will intervene and grant an injunction.
In the judge’s view, SCL had established a strong case that the bond was to be treated as null and void and should be returned. Special Conditions 3.7 and 3.8 were clear. They stated that once the Acceptance Certificate was issued, the bond was to become “null and void” in respect of “any pending or previously notified claims”, and mandatorily returned to SCL. On its face and as between Ensus and the bank, the bond remained valid, but as between Ensus and SCL the bond was null and void. Once the original was returned to SCL, Ensus could not call upon it.
The judge then turned to the question of whether Ensus had made a claim prior to the issuing of the Acceptance Certificate. The definitions clause in the Red Book did not define “claim”, but clause 19.5 made it clear that “any claim by either party” should be “supported by a written statement of grounds and a summary of material facts upon which it is based”. Each party should know where it stood, and it must be clear that a claim was being made.
In issuing Defects Notice DN072, Ensus was operating clause 37.2 of the contract and trying to get SCL to remedy the defects under the contract, not trying to make a claim as such. Indeed, in a later revision dated 1 June 2010, Ensus had said that it “would submit a claim”. Nothing else had been advanced by way of a claim, and there was no evidence that a claim had been made before the Acceptance Notice had been issued. If that were correct, then, as between the parties, the bond was null and void.
There was a strong case in evidence, that although the parties had reached an agreement that the bond would be extended, although for a lower amount, SCL had reserved its right to argue at any stage that the bond was and remained null and void and should have been returned. There was a serious issue to be tried and SCL’s case was a strong one.
In the judge’s view, damages would not be an adequate remedy for SCL. Bonds, both conditional and unconditional, are regularly provided for substantial or public procurement projects. If a bond is called, it may be difficult for a contractor to obtain another bond from the same bank for a later project. Damages would not be an adequate remedy because calling of the bond gave rise to a real risk that a contractor’s reputation and credit worthiness would be damaged. SCL might not be able to pre-qualify for tenders because often tenderers have to disclose whether there have been recent calls on any bonds.
Simon Carves v Ensus UK Ltd., [2011] EWHC 657 (TCC)
10% discount on all JCT & new engineering contracts, plus free UK postage**
Got a story? Email news@theconstructionindex.co.uk
