January 24, 2018

Summary: This Expert Insight looks at the case of Ziggurat (Claremont Place) v HCC International Insurance Company PLC [2017] and considers the implications of the case for the surety industry generally, particularly in the context of construction insolvency. I read the decision in Ziggurat with some incredulity. Overall I’d agree with the conclusion of Karen Spencer of Gateley that the amendments made to the ABI form seem to have confused rather than clarified matters. I’d also agree that more radical surgery is needed if the employer wishes to secure earlier payment following the contractor’s insolvency. But I did want to offer some thoughts on what the decision tells us about wider issues in the surety bonding market. The Perar issue: debt and breach Most commentaries on the case (including Karen’s) have focussed on the Perar point. This is the point that, under the JCT forms insolvency is not in itself a breach and will not therefore trigger a call on the bond. That is why many employers (and their advisers) seek to amend the ABI form to include insolvency as a ground on which a call may be made. All well and good. But in this case, as Coulson J makes clear, the point had become a non-issue by the time the call was made, since the contract administrator had issued a certificate under JCT clause 8.7.4 stating a balance due from the contractor to the employer. That created a debt, and the contractor’s failure to pay constituted a breach to which (as Peter Gibson LJ noted in Perar) the ABI bond would respond. In short, an open and shut case. So why did the matter come to court at all? Even accepting (as Coulson J noted) that it was open to the surety to challenge the amount of the debt, why did it not accept liability and pursue its case on quantum only? That, to me, is the real question raised by this decision. Sureties: teeth and nails Try as I may, I can’t avoid the conclusion that the surety was desperate to try and avoid liability, at (almost) any cost. We have seen this many times before, the Hackney Empire saga being a recent precedent that springs to mind. But Ziggurat does seem to be a particularly egregious example. accept that it is entirely appropriate for sureties to resist spurious claims, and that they do not wish to set an unwelcome precedent by paying out too easily. But (I’d suggest) that is very far from the position in this case. Putting the claimant to proof is one thing; defending the indefensible is quite another. Put another way, is the surety’s premium income better spent on settling obviously meritorious claims, or in fighting a hopeless cause tooth and nail? As most readers will know, to mount a TCC action does not come cheap, especially if you lose. Is the surety industry really so stressed that it needs to conduct itself in this way? Is this case a one-off, or an indication of a hardening in attitude among sureties generally? Only time will tell, but the signs are not promising. We are seeing sureties push back on terms that have become market standard in recent years; for example, refusing to accept an adjudicator’s decision as the basis for a call, even where the bond includes a reconciliation mechanism should the decision later be overturned in court or arbitration proceedings. Of course, it is up to them. But, assuming they wish to continue providing bonds for construction projects at all, I’d suggest that sureties should think very carefully before biting the hand that feeds them. Employers are increasingly aware of the tactics that sureties commonly use to avoid payment, and many are already unwilling to incur costs on an instrument that in reality offers little value. The “Carillion effect” is only likely to focus minds, on both sides of the debate. Final thoughts/b> In summary, I think the right question is not whether (and, if so, how) to amend the ABI form, but whether a surety bond is really worth having at all. My closing advice? By all means ask for a bond at tender stage, if only as an informal credit check. But, assuming an on demand bond is not available (and, in the UK at least, it rarely will be), clients may be well advised to look elsewhere for the security they need. https://www.lexology.com/library/detail.aspx?g=839a1b1c-d190-4d32-a6f4-3b6af2591dfd