Bonds and Guarantees

Herbert Smith acted for the defendant in the widely-reported case of OTV Birwelco Ltd v Technical & General Guarantee Co Ltd. This was an action by a main contractor for enforcement of a bond issued by the defendant bondsman in respect of the electrical sub-contractor, who went into liquidation without completing the works. It subsequently became apparent that the company name of the sub-contractor as stated on the bond was incorrect. The name on the bond was Woodbank UK Limited, whereas the name of the company entering into the sub-contract was Woodbank UK (Mechanical and Electrical) Limited ("M&E"). Companies under both these names had existed at different times and it was not clear which company was said to be in default. The bondsman denied liability. One contention was that the bond was either unenforceable or a nullity, since M&E was the actual party to the subcontract but was not named as the party to the bond. The bondsman also contended that the bond was a nullity owing to a failure by the sub-contractor to comply with Companies Act formalities: in particular, the related corporate documentation used to obtain the bond referred to the names, numbers and registered offices of both companies, including use of the corporate seal in the wrong name.

His Honour Judge Thornton Q.C. in the TCC found for the claimant. A key finding was that, on the facts, the Judge was prepared to accept that the company entering into both the subcontract and the bond was M&E. Woodbank UK Limited was found to be the trading name used by M&E and the defendant knew or should have known that M&E was the party to both, even though it was unaware of that name. The Judge found that M&E was in breach of s.350 of the 1985 Companies Act as it had its trading rather than its registered name engraved upon its common seal. However, on the wording of the statute this did not prevent the bondsman being held to the deed. As a party to the deed, the defendant was stopped from denying that the seal affixed in the name of Woodbank UK Limited was M&E's common seal. The Judge went on to say that the bond ought not to be rendered a nullity because there would be no proportionality between the failure to comply with the statute and the loss that would follow. He also pointed out that to find otherwise would be to unjustly enrich the bondsman and would cause the contractor, the "innocent party", to suffer.

The lengthy judgment bears careful study. Of particular interest is the final certificate aspect. Under the wording of the bond, the bondsman’s obligations became null and void when the final certificate was issued, which had happened in this case sometime after the original call was made on the bond, but also long before judgment was given. Had the claimant done enough to preserve its call on the bond before the final certificate was issued? The Judge found that it had: the bondsman’s liability crystallised on receiving notice from the contractor of the sub-contractor’s default with associated particulars: an agreement or judgment was unnecessary, so long as there was sufficient supporting material to enable the bondsman to be reasonably satisfied that there had been a default by the sub-contractor, leading to damages being incurred, and a failure by the sub-contractor to satisfy those damages. This was particularly relevant on the facts, as there had been extensive correspondence between the parties whereby the defendant sought to ascertain the quantum of the contractor’s claim. Eventually the court appointed a single joint expert to determine the quantum, and the expert’s assessment was markedly different from that claimed by the contractor (around 40% of what the contractor had claimed). Nonetheless the judge’s view was that summary particulars of loss submitted by the contractor with its notice to the bondsman were sufficient for liability to crystallise.

This case will be of interest to all involved in the performance bond industry. Whilst contractors may applaud the liberal interpretation that the court was prepared to give to both the identity of the party covered by the bond, and the level of detail required to support a call on the bond, bondsmen may be equally be disappointed that a stricter approach was not adopted.

Reported: [2002] EWHC 2240; [2002] 4 All E.R. 668; [2002] 2 All E.R. (Comm) 1116; [2002] 2 B.C.L.C. 723; 84 Con. L.R. 117; (2002) 152 N.L.J. 1530.

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