Guaranteeing the guarantees

Hands up those who thought the courts would never award specific performance of obligations to deliver documents such as parent company guarantees, performance bonds or collateral warranties where, say, a contractor or consultant had undertaken to provide them but had not done so? Judging by the various remedies drafted into contracts, most construction lawyers will have put up their hands …

None of the alternative remedies that we all dreamt up were very satisfactory:

• in the case of performance bonds, we provided for the employer to accumulate a pile of cash up to the amount of the bond. Is that a penalty? Some of us thought so - the losses arising from failure to provide a bond are not cash since there is no loss at all until the bond is called and the surety should have paid;
• for collateral warranties, we applied similar penalties;
• some of us thought it might be a good idea to ask the contractor to give the employer a power of attorney to execute the collateral warranty on the contractor’s behalf if he failed to do so. That at least was a useful threat - sign it yourself or we sign it for you. But contractors usually resisted;
• we drafted blanket provisions making the provision of these documents a condition precedent to any liability on the part of the employer. So a contractor could design and construct the works and the employer had no obligation to pay? Any court would surely decide the employer had waived the condition or was stopped from relying on it in these circumstances?

It seems we were all wasting brain power. In my post-Christmas column I hoped someone would pick up on Mr Justice Ramsey’s helpful hint in Liberty Mercian vs Cuddy Civil Engineering Limited that he might consider specific performance of an obligation to deliver collateral warranties – a wonderful new year present. In fact, even before that column was published, Mr Justice Ramsey, in a decision on 19 December 2013, had taken this one step further. In a second judgment he reviewed grounds on which Cuddy – the defendant – opposed specific performance:

• damages were an adequate remedy
• it was impossible for a bond or the collateral warranties to be provided by it
• as a matter of discretion, specific performance should not be ordered.

In my post-Christmas column I hoped someone would pick up on Mr Justice Ramsey’s hint that he might consider specific performance of an obligation to deliver collateral warranties – a wonderful new year present

Mr Justice Ramsey dismissed all of these arguments except one. He concluded that damages were not an adequate remedy. In the case of a performance bond, the whole point of is it was supplied by an insurance company or bank, whereas a remedy in damages would lie against Cuddy which was a dormant company, and therefore would be difficult to recover damages from. So damages were not an adequate remedy. Similarly in the case of the lack of provision of the collateral warranties.

On the exercise of discretion Mr Justice Ramsey seems to have had little difficulty in persuading himself he should allow specific performance even though there were deficiencies in the drafting of the performance bond which was annexed to the contract. He thought that the court would be able to deal with points such as this without difficulty.

It was only the question whether it was impossible for Cuddy to provide the bond or the collateral warranties which caused him to hesitate. The difficulty here was evidential rather than one of legal principle. Cuddy argued that they could not provide a performance bond because the contract between the parties had been terminated. Can a contractor secure a performance bond relating to a contract which had been terminated? He sent Cuddy off to find out.

In the case of collateral warranties, there was similar doubt as to whether Cuddy had rights to procure collateral warranties. Cuddy argued that, due to a mistake, it did not have a subcontract with either company so it was impossible for it to procure anything. Mr Justice Ramsey felt he had seen no evidence that Cuddy had even tried. So, as he put it, he decided to proceed by stages – he ordered Cuddy to use “best endeavours” to obtain both the bond and the warranties so that the position on alleged impossibility could be properly considered.

He was giving Cuddy “a final chance”.

In normal circumstances the issues which gave rise to arguments about impossibility in this case would not arise. The usual reason given by contractors for not delivering bonds or collateral warranties when requested is to secure some sort of leverage with the employer or to save money.

That threat may now no longer be available.

Ann Minogue is a partner in Macfarlanes