Building Blocks: Case Law Update

Introduction

The idea of sitting and reading a judgment in a case is not everyone's cup of tea. But case law shouldn't be overlooked. Amongst other things, cases set precedents, help us to understand and interpret legislation and wording used in agreements. It should be understood that the guidance given in judgments doesn't just help us when in the midst of a case to support or discredit an argument, but, arguably more importantly, help parties entering into a contract to understand what is meant by the particular terminology they want to use.

In this paper, I have explored the judgments handed down over the last year and sought to interpret them as guidance. I also dedicate some time to the Adjudication cases that have been referred to the TCC to examine the particular objections made to Adjudicator's decisions and the grounds that they have been made and the more creative arguments that have been used in order to delay enforcement of Adjudicator's decisions.

Commercial issues

Performance bonds

It is often the case that parties to a building contract will enter into side agreements in relation to settlement of payment or future payments. This issue was reviewed in the case of Hackney Empire Limited v Aviva Insurance UK Ltd [2011] EWHC 2378 whereby Hackney Empire engaged a contractor to refurbish the theatre. As part of the contract documents there was a performance bond executed between Hackney Empire and the contractor which secured the performance of the contractor's obligations under the building contract. During the course of the work the contractor made numerous claims and in December 2002, in an attempt to ensure that the works were completed as soon as possible, Hackney Empire agreed to advance the contractor £1m in 3 instalments as payment on account in respect of its claims. Hackney Empire paid 2 out of the 3 instalments. The contractor then went into administration and the final instalment was never paid. Under the JCT contract, Hackney Empire elected to determine the contractor's employment. Hackney Empire sought to call in the bond and to get repayment of the 2 payments made to the contractor as the claims had never been substantiated.

As was expected, the bondsman attempted to argue that the payments should not be made and that the advance payments were the result of agreements between the contractor and Hackney Empire made without its knowledge in circumstances that were prejudicial to it as a bondsman. The bond contained the usual "indulgence clause" stating that no alteration in the terms of the building contract or the extent of the works and no allowance of time would in any way release the surety from liability under the bond. The bondsman argued that a variation to a contract will discharge the guarantor's liability unless the guarantor consents to the variation or the variation is patently insubstantial or incapable of adversely effecting the guarantor.

The TCC found that the bond remained valid and was not affected by variations made by the side letter. Although the side letter did vary the building contract, it did so in only 2 minor ways. One variation in the side letter was that the amount of liquidated damages was to be reduced, a provision which was to the benefit of the surety. The second was that neither party would refer a dispute to adjudication for a period, something that was of minimal consequence to the surety. The court also found that conduct that does not actually vary the principal contract (eg entering into the side letter in this case) can only discharge a surety if it is prime facie prejudicial to the surety. Here, the making of payments under the side letter was not prejudicial conduct.

The importance of this case is to ensure that when entering into side agreements under building contracts you are fully aware of the provisions of any performance bonds that may have been provided under the contract. The drafting of the indulgence clause is extremely important. The drafting of the Charles Russell performance bond is very wide in this respect. Other standard bonds may not be so accommodating.

"Best endeavours" and "all reasonable endeavours"

The phrases "best endeavours" and "all reasonable endeavours" that feature in many contracts were recently considered in the Court of Appeal judgment of Jet2.com Ltd v. Blackpool Airport Limited [2012] EWCA Civ 417. This was...