Construction projects are fraught with risks. Delays, defects and disputes over variation works are par for the course.
To compound matters (or to make things more interesting) is the risk of insolvency. Due to the sheer size of the capital investment that is required for construction and the cyclical nature of the industry, contractors face risks of insolvency far more regularly than companies in other industries (with the exception being shipping possibly).
An insolvent contractor leaves employers in a terrible situation. Building works may go uncompleted, defects may not be remedied and employers may be left with little recourse. Employers therefore devise ways to protect themselves against such situations.
A popular one is to ask the contractor to provide a performance bond. The bondsman is obligated to pay out the sum of money stipulated in the performance bond once certain conditions in the performance bond are fulfilled.
Remedies for failure to provide a bond
An interesting question that arises is the following – What is the employer’s remedy if the contractor fails to provide a performance bond?
Should the employer terminate the contract and look for another contractor? However, this approach comes with the risk of the employer being charged with wrongful termination especially when the contract does not provide for termination on this ground.
Another approach may be to seek a court order compelling the contractor to pay to the employer the full amount of the performance bond. However, this approach could be disproportionate especially when the project is still on-going and it may not be clear that the contractor has defaulted in respect of its other obligations which the performance bond is to safeguard against e.g. defects in its work, delay in completion of the project.
The case of Liberty Mercian
This issue was considered in Liberty Mercian Limited v Cuddy Civil Engineering Limited & Others  EWHC 3584 (“Liberty Mercian”).
In Liberty Mercian, the claimant employer sought remedies for the defendant contractor’s failure to provide a performance bond. To this end, the claimant wanted specific performance to be ordered.
In an earlier decision in the same proceedings (Liberty Mercian Limited v Cuddy Civil Engineering Limited & Others  EWHC 4110 (TCC)), the court found that specific performance would be an appropriate remedy given that the defendant was found to have no assets and so, damages may not be an adequate remedy.
Accordingly, the court decided to proceed by stages and ordered the defendant to use its best endeavours to obtain the performance bond so that the position on the alleged impossibility can be considered at another hearing.
In the subsequent hearing which the judgment in Liberty Mercian related to, evidence was tendered to show that the defendant could not obtain a performance bond. The court accepted that the defendant did use its best endeavours and that it was impossible for the court to order specific performance.
However, the court considered that the defendant had not fully disclosed how it was able to fund the litigation if it had no assets. It appeared that the defendant had access to third party funding.
Faced with this conundrum, the court adopted a creative solution: It ordered the defendant to pay into court the amount of £420,000 representing the value of the bond to be issued.
The defendant submitted that the court should not be asked to act as a bondman and to administer the fund in accordance with the terms of the bond. The court dismissed the objection and considered that it was within the court’s powers to do so.
Thoughts on Liberty Mercian
The case is notable for the novel way that the court treated the issue of what remedy to award when a contractor fails to provide a performance bond. It is submitted that the order is a sensible one in the light of the unsatisfactory alternative – damages.
Generally, the purpose of damages is to put a party in the position they would have been if the contract had been performed. However, the issue can be vexing in the case of performance bonds. What is the loss suffered from the non-provision of the performance bond if the project is still on-going and there are no major defects in the contractor’s works? What if the contractor has its own claims against the employer for non-payment for work done?
The remedy of specific performance is attractive as it directly brings parties to the position they promised the other would be in if the contract was performed. Provided that the contractor’s insurer is willing to provide a performance bond, this is the remedy that should be sought and ordered.
The difficulty that arises is when the contractor is no longer in a position to obtain a performance bond. This could happen for a variety of reasons e.g. there may be a downturn in the market or the credit standing of the contractor may have taken a hit due to recent events.
Therefore, the court’s solution of ordering the contractor to pay into the court the amount representing the value of the bond is really the only viable alternative. The contractor may complain that such a remedy is draconian. However, the contractor has only itself to blame for not providing the performance bond in the first place.
The performance bond in Liberty Mercian appeared to be an on-demand bond. Therefore, it should be relatively simple for the court to administer the monies deposited with the court.
Things could be different in the case of a conditional bond. The court would have to look closely at the demand to see if the conditions of the demand are met. There could be numerous hearings and a significant amount of judicial resources could be expended in the process. It is uncertain whether a court would be willing to take on such a role.
It will be interesting to see how the Singapore courts will approach the issue. It may very well be possible that the Singapore courts may even adopt a third approach – e.g. the appointment of a receiver over the monies under the performance bond.
It is unlikely that Liberty Mercian will be the final word on the issue and there is much room for argument on what the appropriate court order should be.
Contributed by: Ashok Rai - Eversheds Harry Elias