Yuanda & Establishing and Ascertaining under the ABI model form of UK Performance Bond: Conceptual & Practical Challenges (Part One)

In this two part series, Alexandra Bodnar and James Bradford explore the recent decision in Yuanda (UK) Company Limited v Multiplex Construction Europe Limited [2020] EWHC 468 which has the potential to shake up the UK construction performance bonds market with its conclusion that an adjudicator's decision is sufficient 'to establish and ascertain' the net sums due under the bond. In Part One, Alex and James will outline Fraser J's reasoning and the conceptual problems with his decision, before analysing in Part Two the practical difficulties which practitioners and market players will need to be alive to when negotiating and dealing with these bonds in the shadow of Yuanda.

Summary of relevant parts of the Decision

Yuanda concerned an amended ABI model form of performance bond. The ABI model form is commonly used in UK construction projects. It is a conditional (rather than an on-demand) form of bond. Clause 1 of the bond in Yuanda stated:

'The Guarantor guarantees to the Contractor that in the event of a 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 underlying building subcontract was based on a JCT Design and Build Sub-Contract 2011. A dispute arose between the main contractor and subcontractor. The main contractor considered that liquidated damages (equivalent to a sum agreed between main contract and employer) were due to it for delays which were the fault of the subcontractor. The subcontractor disputed this and considered that it was entitled to extensions of time, refusing to allow or pay liquidated damages. The subcontract contained common-place wording allowing the main contractor to require payment of/deduct liquidated damages (assuming various pre-conditions had been met), and the subcontractor's failure to pay/allow deduction would be a breach. There was also an indemnity provision which, in essence, required the subcontractor to indemnify the main contractor in respect of losses suffered by the main contractor under the main contract with the employer, arising out of the subcontractor's breach.

The main contractor made a claim on the bond as a result of the subcontractor's breaches. The facts included that the bond was shortly due to expire and, by the time of the final hearing in Yuanda, there was an adjudication already on foot between the main contractor and sub-contractor concerning responsibility for delays, with a decision from the adjudicator expected imminently.

Fraser J decided that a valid adjudicator's decision would establish and ascertain the net sums for the purpose of the main contractor's claim on the bond (assuming an adjudicator's decision in the main contractor's favour)[1]. Conversely, the main contractor's demand in accordance with the subcontract for payment of liquidated damages and the sub-contractor's failure to pay, would not. In his reasoning, Fraser J emphasised the importance of the terms of the underlying building contract, in particular the fact that the building contract provided for adjudication.[2] He also relied on the fact that the main contractor's demand by definition would not be an assessment by an independent third party/decision maker, in contrast to an independent adjudicator's valid decision.[3]

Conceptual Difficulties with the Decision

At first blush, the decision in Yuanda may seem unproblematic as a matter of theory. On the one hand, Fraser J is merely seeking to rely on a simple construction of the underlying building contract and his Lordship was merely following the contractual mechanism provided in said contract which, in the instant case, provided for adjudication. Indeed this is how his Lordship sought to reconcile the previous decision in the case of Ziggurat (Claremont Place) LLP v HCC International Insurance Company PLC [2017] EWHC 3286 (TCC).[4]

Of course, it is obviously right to look and interpret the contract in accordance with what the parties intended and to start from the position of prioritising the contractual mechanism within the building contract. However, in dismissing the 'non-independent route' as insufficient, this imposes a limitation to the efficacy of some terms. This gives rise to a number of conceptual difficulties.

Firstly, what happens when these two principles (of giving effect to the underlying building contract and ensuring an independent decision-maker) collide? In other words, what happens if the party has specifically established a non-independent means of certification and to give effect to their contractual intentions would mean permitting this mechanism for 'establishing and ascertaining'. For instance, as has been noted by commentators elsewhere[5], under the JCT 2016 Design & Build standard form, it is an employer who issues a statement (as opposed to a contract administrator issuing a certificate) after a contractor insolvency/defined breach situation. The equivalent clause in the JCT 2016 SBC standard form (which was in play in Ziggurat) provides two options – either the employer can issue a statement or the contract administrator can issue a certificate. In Ziggurat, perhaps fortunately, the contract administrator had issued a certificate. But there is no suggestion in Ziggurat that the answer would have been different if the employer had issued a statement.[6] The question arises whether, post-Yuanda, it will ever be permissible to rely on an employer's statement, despite this being the approach agreed in the building contract[7].

Secondly and somewhat similarly, how does the decision of Fraser J fit with some of the older case law and in particular the decision of HHJ Peter Bowsher QC in Paddington Churches Housing Association v Technical & General Guarantee Company Ltd [1999] BLR 244. There the underlying building contract provided for the employer to issue a statement setting out an account of what was due between the parties following a determination of the contractor's employment for insolvency or breach. HHJ Peter Bowsher QC reasoned that since no statement had been provided pursuant to that clause, the right to make a call on the bond had not arisen but such a right would exist once the employer had issued that certificate:

'… the damages [under the bond] are calculated by reference to the code of the contract which are in any event unlikely to be different to the damages at common law. The accuracy of the employer's statement might be challenged in the courts, but the employer's statement is required before the damages can be said to be ascertained and there is no liability on the defendants until those damages are ascertained'[8]

It is unclear how the decision in Yuanda squares with this earlier judgment in Paddington Churches.

Thirdly, where different contractual mechanisms are provided for, is adjudication always the preferred route or mechanism? It is not entirely clear what would happen if the contract provided for different mechanisms and this raises the question whether adjudication per se is always the preferable solution in all cases whenever it is provided for within the underlying contract. This is particularly important given that the right to adjudicate will be an express or implied right in most UK construction contracts. It is common to see tiered dispute resolution clauses or a menu of dispute resolution options – agreement between chief executives, adjudication, litigation/arbitration, expert determination – in addition to (in some cases) a contract administrator's certificate.

How is an employer to choose? Would chief executives pass the 'independent decision-maker' test? Probably not. What if a contract administrator's independence is challenged? Does a tribunal then have to deal with the merits of that argument in order to decide whether a certificate issued by that person is valid?

Fourthly, it isn't entirely clear how the concept of adjudication can be reconciled with the fact that, as per the relevant part of the ABI model bond wording ('taking into account all sums due or to become due to the Contractor'), it is only the net damages which the beneficiary can claim under the bond. Indeed as will be familiar to practitioners, it is for the referring party to set the terms of reference in an adjudication. Frequently, one sees narrow or very specific disputes referred to adjudication, precisely with a view to shutting-out arguments about other matters which may be less advantageous to the referring party. Whilst a responding party is free to raise any relevant defence, that will often not include freedom to ask the adjudicator to determine any cross-claim or determine exactly why sum might be due to the responding party. Consequently, an adjudicator's decision will often (quite legitimately) not consider fully or at all a contractor's cross-claims and so will not result in a Decision which establishes the 'net' sum due.

In Yuanda, Fraser J considered the terms of reference in the adjudication at paragraphs 82 - 83 and noted at paragraph 83: 'a decision by the adjudicator, when one considers the scope of the dispute referred to him, would undoubtedly qualify …' (emphasis added). There, the scope of the dispute was wide enough to allow the subcontractor to raise any defences available to it in respect of the claim for LADs. Perhaps, if the nature or scope of the dispute had been different, Fraser J's answer may have been different. But the subcontractor argued before Fraser J that, in addition to its claim for extensions of time, it had additional claims as set out in a final account which had been submitted to the main contractor – which would not be considered in the adjudication.[9] That point was dismissed by Fraser J, albeit it is not entirely clear how the adjudication could have resulted in a true "net" position in these circumstances.

These points highlight the problems that will be explored in the second article in this series: namely that Fraser J's endorsement of adjudication as the answer to the question of how damages are to be 'established and ascertained' might have some real, practical consequences for litigants which need to be considered.

[1]               [2020] EWHC 468, paragraph 83

[2]               [2020] EWHC 468, paragraph 68

[3]               [2020] EWHC 468, paragraphs 69 - 70

[4]               [2020] EWHC 468, paragraph 90

[5]               See Steven Carey's blog on http://constructionblog.practicallaw.com/yuanda-v-multiplex-ascertaining-damages-pre-adjudication-under-abi-bond/

[6]               See Ziggurat [2017] EWHC 3286 (TCC), paragraphs 56 - 57

[7]               See also http://constructionblog.practicallaw.com/yuanda-v-multiplex-ascertaining-damages-pre-adjudication-under-abi-bond/

[8]               Paddington Churches Housing Association v Technical & General Guarantee Company Ltd [1999] BLR 244, per Peter Bowsher QC at paragraph 24

[9]               [2020] EWHC 468, paragraphs 85 - 86