The Latest On Bonds And Guarantees

We last looked at bonds and guarantees in the 20th issue of Insight in February 2013 (http://www.fenwickelliott.com/files/insight_issue_20. pdf)

But three recent decisions in this area, Liberty Mercian Ltd v (1) Cuddy Civil Engineering Ltd (2) Cuddy Demolition and Dismantling Ltd EWHC 411 (TCC), Wuhan Gouyu Logistics Group C Ltd and another v Emporiki Bank of Greece SA [2013] EWCA Civ 1679 and Doosan Babcock Ltd v Comercializadora de Eqipos y Materiales Mabe Limitada [2013] EWHC 3010 (TCC), [2013] EWHC 3201 (TCC) warrant an update.

The first case, Cuddy, examines what happens in practice when a contractor fails to provide the bonds and warranties required of it by the contract. The second, Wuhan, considers the approach of the Court of Appeal to a bank which attempted to circumvent its obligation to make payment once the bond had been called. The third case, Doosan, provides a possible exception to the general rule that ondemand bonds are payable on demand (save for a clear case of fraud by the beneficiary), provided that there is strong evidence that the terms of the underlying contract clearly and expressly prevent the beneficiary from a making a call.

Each decision and its practical implications are considered in detail.

Cuddy (TCC, 3 September 2013)

The facts

In October 2009, Liberty Mercian Limited ("Liberty") invited the Cuddy Group ("Cuddy") to tender for works relating to the construction of a new supermarket in Cardigan. The works were to be carried out under an amended NEC3 form, the terms of which required a parent company guarantee, performance bond and subcontractor warranties to be provided in favour of Liberty and also the contract administrator, Waterman Transport & Development Limited.

Following correspondence between Cuddy and two of its subsidiaries, Cuddy Civil Engineering Limited ("CCEL") and Cuddy Demolition and Dismantling Limited ("CDDL"), the works commenced towards the end of 2010. Liberty requested that CCEL provide the warranties on 6 June 2011 and the performance bond on 29 November 2011 but CCEL provided neither.

It was not clear whether a contract had been formed between Liberty and CCEL or Liberty and CDDL, and a dispute subsequently arose in relation to whether a valid contract had been formed, and if so, between whom.

Liberty issued a termination notice on 7 January 2012, and later, legal proceedings against Cuddy, CCEL and CDDL. The issue the court had to decide was (i) if a contract had been formed with CCEL, whether CCEL was obliged to procure the parent company guarantee, performance bond and warranties from its subcontractor, Quantum Limited ("Quantum") and (ii) whether specific performance should be ordered in relation to their provision.

CCEL sought to argue that (i) specific performance was inappropriate and that damages were an adequate remedy as the bond provided for a liquidated sum that was easy to express in terms of damages (ii) it had a £2m breach of contract claim against Liberty and (iii) it was not practically possible for it to...