Guaranteeing performance: Yuanda v Multiplex & Anor

Fraser J’s recent decision in Yuanda (UK) Co Ltd v Multiplex Construction Europe Ltd (formerly known as Brookfield Multiplex Construction Europe Ltd) & Anor [2020] EWHC 468 (TCC) provides useful guidance for banks and financial institutions when determining whether a call on a bond or guarantee is valid. The decision particularly addresses the question of whether a guarantee should be construed as an on–demand bond or as a performance bond.

The Claimant, Yuanda (UK) Co Limited, was a subcontractor on a major construction project in which the First Respondent, Multiplex Construction Europe Limited, held the main contract. The performance of Yuanda’s obligations under its contract with Multiplex (the “Subcontract”) was guaranteed to a maximum amount of £4,411,490.70 by way of a guarantee (the “Guarantee”) issued by the Second Respondent, Australia and New Zealand Banking Group Limited (the “Bank”). The Guarantee was substantially in the form of the ABI Model Form of Guarantee Bond.

Following delays caused to the sub-contracted works (the cause of which was in dispute between the parties and being adjudicated pursuant to the terms of the Subcontract) Multiplex sought to call on the Guarantee for the maximum sum on 17 January 2020. Following this call Yuanda obtained an injunction preventing Multiplex from pursuing the demand it had made on the Bank and preventing the Bank from paying out on that demand until the return date or further order. Fraser J’s decision relates to Yuanda’s application for the continuance of the injunction heard at the return date hearing on 19 February 2020.

In determining whether the injunction should be continued Fraser J addressed two main issues:

1. Was the guarantee an on-demand or a performance bond?

2. If the guarantee was a performance bond, what were the requirements that needed to be satisfied before Multiplex could validly call on the guarantee?

On-demand or performance bond?

In making the call on the Guarantee Multiplex had treated it as an on-demand bond; a type of bond that creates an unconditional obligation on the institution providing the guarantee to pay out on the bond when a call is made. On-demand bonds create a primary liability between the institution giving the bond and the beneficiary of the bond.

Fraser J found that Yuanda had been entitled to an injunction against Multiplex, preventing it from calling on the Guarantee, because the Guarantee was not an on-demand bond but a performance bond. Performance bonds, or “conditional” bonds, are instruments of secondary liability and payment out on such guarantees depends upon liability arising out of the contract underlying the guarantee, in the present case the Subcontract. Crucially, a performance bond (the Guarantee) should not put the beneficiary (Multiplex) in a better position than it would be under the terms of the underlying contract (the Subcontract).

Fraser J found that the language of the Guarantee made it plain that the Guarantee was a performance bond and that payment out was conditional on liability arising as a result of Yuanda breaching the Subcontract. Further, damage sustained by such breach had to be “established and ascertained pursuant to and in accordance with the provisions of or by reference to the [Subcontract]” before a right to payment could be made out under the Guarantee.

In giving his judgment Fraser relied on Ziggurat LLP v Internationl Insurance Company plc [2017], EWHC 3286 (TCC), which also addresses the construction of a guarantee in substantially the form of an ABI Model Form of Guarantee Bond, confirming that bonds in this form are instruments of secondary liability and, therefore, are performance bonds.

Requirement to make a valid call on the Guarantee

Fraser J found that the liability (damages arising out of delays in completion of the sub-contracted works) that Multiplex sought to rely on when calling on the Guarantee had not been  “established and ascertained” under the terms of the Subcontract, as required by the Guarantee. Although Multiplex had made a claim in respect of this liability, this had not been accepted or agreed by Yuanda and it was presently the subject of an adjudication, pursuant to the terms of the Subcontract.

Fraser J held that any liability determined by this adjudication would be “established and ascertained” under the terms of the Subcontract and, in this event, Multiplex would then be able to make a valid call on the Guarantee.

Comment

This case highlights the importance of parties considering carefully the terms of a guarantee at the time of drafting, even if they are using industry standard documents. If the intention is that the guarantee be in the form of an on-demand bond, then this must be made clear by the wording used. The decision is also helpful in clarifying that (at least as far as the ABI form of Guarantee Bond is concerned) an adjudication decision would be sufficient for the purposes of establishing that damages have been sustained, without the need for court proceedings in addition to the adjudication process.