Bonds

While an employer may wish to call on a bond in the event of the contractor's insolvency, the employer may not always be entitled to do so.

Under most standard form contracts, such as the JCT Standard Form of Building Contract 2005, while a contractor's insolvency may automatically determine the contractor's employment (and his/her obligations and entitlement to carry out the works) insolvency does not, in itself, constitute a breach of contract.

Therefore, in the case of Perar BV v General Surety and Guarantee Co Ltd (1994) 66 BLR 72, CA the Court of Appeal held that, where a bondsman undertakes, on the contractor's default, to satisfy and discharge damages sustained by the employer as a consequence of a breach of contract by the contractor, the bondsman is not liable to the employer for any additional costs incurred by them due to the contractor's insolvency where the insolvency itself did not constitute a breach of contract.

Even in a bond which is specifically worded to cater for the contractor's insolvency, the mere fact of the contractor's insolvency does not, in itself, give the employer an immediate right to call on the bond.

In Paddington Churches Housing Association v Technical and General Guarantee Company Limited Technology and Construction Court [1999] EWHC Technology 246 before His Honour Judge Peter Bowsher QC, the bond provided that in the event of 'a valid determination of the contractor's employment under clause 27', the bondsman would satisfy the 'net established and ascertained damages sustained by the employer'.

The employer's first contractor became insolvent and they appointed a second contractor. The employer attempted to call on the bond before the costs of the works completed by the second contractor had been ascertained. They presumed that this was permissible as the reason why they requested a bond in the first place was because:

'... it was foreseeable that the need to employ an alternative contractor would cause the [employer] to incur increased costs, including increased building costs and financial costs. The provision of a bond was required to provide the [employer] with a speedy and secure source of funds that could be used to meet those increased costs'.

The employer was mistaken. Clause 27.6.7 of the JCT98 contained a mechanism for 'ascertaining damages sustained by the employer'. It required the employer to prepare a statement of accounts within a reasonable time after completion of the works and the making good of defects which identifies the amount (if any) due to the employer. That amount due in turn was payable as a debt. Consequently, the bondsman's liability under the bond cannot arise until the employer has served their account (under clause 27.6.5.2, which is clause 8.7.4.2 in JCT 2005).

In Paddington, the employer was premature in calling on the bond.