Established and ascertained under the ABI form of bond: will an adjudication decision suffice?

A recent TCC decision has considered the meaning of the standard requirement in the ABI form of Guarantee Bond for damages to be “established and ascertained … taking in account all sums due to or to become due to the sub-contractor” in accordance with the underlying contract. The decision finds that adjudication decisions are sufficient for this purpose without the need for the conclusion of a final accounting process or court proceedings. The decision will provide welcome clarity as to the meaning of this popular form of bond.

The ABI Guarantee Bond

The Association of British Insurers (“ABI”) published its standard form contract Guarantee Bond back in 1995 and it has been widely used on UK construction projects ever since. ABI’s intention in supplying this model wording was to update the antiquated phraseology used by the bond market at the time which had been roundly criticised by the House of Lords in the (still leading) case of Trafalgar House.

The ABI Guarantee Bond is prefaced on performance rather than being ‘on-demand’ (which are much more common securities in non-UK jurisdictions and on international projects). On-demand bonds create a primary obligation for the surety to ‘pay up’ provided that the conditions (usually the provision of specified paperwork) are met. Conversely, performance bonds are derivative contracts that depend on the compliance with the obligation under the contract which is being guaranteed and clause 1 of the ABI bond is worded accordingly -

“The Guarantor guarantees to the Employer that in the event of a breach of the Contract by the Contractor the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the damages sustained by the Employer 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 Contractor.”

On the drafting of the bond, the surety’s obligation is to pay out on the guarantee when the Employer’s losses resulting from the Contractor’s breach of contract are “established and ascertained”. Until relatively recently, there was no guidance from the courts as to what events would mean that the damages were to be considered ‘established and ascertained’. In 2017, clarity as to the circumstances in which a contractor’s insolvency might trigger payment under the ABI form of bond was provided by Coulson J (as he then was) in Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc (for our Law-Now on that case, please click here). A recent case has now considered to what extent an adjudication decision can satisfy the requirement for “established and ascertained” damages.

Yuanda v Multiplex and ANZ Banking Group

Multiplex, as the main contractor in respect of the project at One Blackfriars Road, contracted with Yuanda for the completion of the façade package in 2014 (the “Sub-Contract”). In May 2015, Yuanda procured a slightly amended ABI form guarantee bond from ANZ Bank to stand surety for its performance under the Sub-Contract (the “Bond”). The Bond also included a long stop expiry date of the earlier of either 28 days following the date of issue of the Notice of Completion of Making Good under the main contract or 4 April 2020.

The project suffered significant delays which Multiplex held Yuanda responsible for and which had resulted in Multiplex being liable for significant liquidated damages to the Employer (the “LADs”). In December 2019, Multiplex commenced an adjudication against Yuanda in order to recover the LADs and on 17 January 2020, a call on the Bond was made for the entirety of the guaranteed sum. Yuanda sought (and was granted) injunctive relief which prevented ANZ from paying out immediately. During the course of the injunction proceedings, the court proceeded to determine (among other matters) whether a decision in Multiplex’s favour in the adjudication would render the LADs “established and ascertained” within the meaning of clause 1 of the ABI wording quoted above.

The court rejected Yuanda’s position that clause 1 required Multiplex to wait until the final account under the Sub-contract had either been agreed, or finally determined by court proceedings. Although it was not sufficient merely for Multiplex to demand payment of the LADs, where the parties had followed a certification process set out in the contract, that may be enough and an adjudication decision in its favour would be sufficient. Further, when considering “taking in account all sums due to or to become due to the sub-contractor” where the matter was being determined by an adjudicator, there was no need for Multiplex to await the conclusion of the final account process. Mr Justice Fraser found that “a decision by the adjudicator that awards Multiplex any sum, when one considers the scope of the dispute referred to him, would undoubtedly qualify as being an amount “established and ascertained pursuant to and in accordance with the provisions of the of by reference to the Contract”. It would take into account such defences as Yuanda would have available to it to defend, in the adjudication, the claim for claim for £7,500,000.”

Therefore, overall, Mr Justice Fraser held that:

“The requirements are that the sum claimed under the [Bond] must have been established and ascertained under the sub-contract. In the factual circumstances between the parties on this project, that means that Multiplex must obtain an adjudicator's decision in its favour in respect of the LADs claimed against Yuanda.”

Conclusions and implications

This decision provides welcome clarity as to the meaning of the ABI form of bond and resolves a long debate as to whether an adjudicator’s decision (being binding but not final) would be sufficient to trigger payment under the bond. While some might question whether the speedy and ”imperfect” justice offered by adjudication should be enough to allow a call on a bond which can have significant consequences for a contractor in terms of its creditworthiness and ability to win future work, to find that an adjudication decision is not enough would undermine adjudication as a means for resolving disputes. When one considers that the alternative would be that the overall reconciliation under the final account process and/or any subsequent court proceedings would need to be completed before the bond would bite, which in this instance (as in many cases) would have meant that the bond had expired before it could be called, one can see the sense in the court’s judgement.

The present decision, combined with the Zuggurat case, provide a good deal of clarity as to the circumstances in which a bondsman will be required to pay under the ABI form of bond. This ought to promote the continued use of the form, but also provides pause for thought as to bespoke amendments that parties may wish to introduce. Contractors wishing to avoid the consequences of the present decision may seek to insert the word “finally” before “established and ascertained”. Employers faced with such amendments, if they are prepared to accept them, will need to give careful thought to the expiry provisions in the bond to avoid a result whereby claims are unable to be established and ascertained in sufficient time before expiry.

* CMS acted for the successful party in the proceedings.

References

Yuanda (UK) Company Limited v Multiplex Construction Europe Limited (formerly known as Brookfield Multiplex Construction Europe Limited), Australia and New Zealand Banking Group Limited [2020] EWHC 468 (TCC).

Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc [2017] EWHC 3286 (TCC).

Trafalgar House Construction (Regions) Limited v General Surety & Guarantee Co Limited [1995] 3 WLR 204.