Yuanda v. Multiplex [2020] EWHC 468 (TCC): Construction Law Implications

This case examines the basis under which a main contractor, which in this case is Multiplex Construction Europe Limited (“Multiplex”), would be entitled to enforce payment under a performance bond or, alternatively put, whether an injunction against the Australia and New Zealand Banking Group Limited (the “Bank”) postponing exercise of the right, warrants continuation.

Deliberation turned on interpretation as to whether the underlying rights, which the performance bond sought to warrant, still hung in the balance as a result of a pending decision pursuant to an adjudication referral under the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”). The case also required critical dissection of the fabrication of the guarantee as well as the obligations arising under the subcontract.

The Honourable Mr Justice Fraser delivered a crisp and predicable ruling on 28 February 2020 that, on true construction, the guarantee created a “secondary liability” on the Bank in terms of the call on the bond to first identify a valid claim by Multiplex against Yuanda (UK) Company Limited (“Yuanda”) who was the subcontractor in this case, remarking:

“Establishing and ascertaining sums due under the sub-contract depends upon that underlying contract, not upon the terms of the Guarantee.”

The Honourable Justice shrewdly deferred to the decision of the adjudicator, expected some 7 days later, which would establish the answer to the question whether the sums under the guarantee were, de facto, ultimately due.

A stern warning was delivered by Justice Fraser in this decision not to treat fairly constructed performance bond obligations as being equivalent to an on-demand guarantee.

Justice Fraser also reinforced the notion that it would not be fair for the Court to usurp a deliberative process in motion under the Construction Act, where the Court is not compelled.

The decision leaned heavily on the decision of the Rt Hon Lord Justice Coulson in Ziggurat LLP v International Insurance Company plc [2017] EWHC 3286 wherein Coulson J considered a similar worded version of an ABI Model Form of Bond and declared it to be an “instrument of secondary liability” whereby the surety cannot be in a worse position, as against the employer than the contractor. Justice Fraser correctly distinguished that this Coulson decision involved insolvency of the contractor rather than underlying breach of contract but concluded that this did not change the fundamental principle laid down in Ziggurat which was that the secondary liability should, and must, be established before a claim under the performance guarantee will succeed.

“The Guarantor guarantees to the Contractor that in the event of breach of the Contract by the Sub-Contractor, the Guarantor shall subject to the provisions of this Guarantee Bond satisfy and discharge the damages sustained by the Contractor as established and ascertained pursuant to and in accordance with the provisions of or by reference to the Contract and taking into account all sums due or to become due to the Sub-Contractor”

The distinction between a performance bond and an on-demand bond was set out by Justice Fraser with crystal clarity distinguishing the fraud exception set out in Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31 from a performance bond which turned on a condition.

Justice Fraser also commented upon the withdrawn contention that Multiplex acted fraudulently when Yuanda made its earlier urgent granted injunction that a claim alleging fraud must: a) include a material fact that tilts the balance and justifies an inference of dishonesty (JCS Bank of Moscow v Kekhman [2015] EWHC 3073 (Comm); b) be based on a clear instruction to plead a claim in fraud based on reasonably credible material; and c) the claimant must be able to plead facts upon which a claim in fraud may be proven as the court will not allow a party to prove a claim in fraud other than on the those primary facts.