If you've said you'll do it - do it! Specific performance ordered despite a few difficulties

19 November 2014

The decision provides an interesting example of when the court will be minded to order specific performance and provides a useful reminder of when such an order is an appropriate remedy.

Contractors, developers and beneficiaries alike will be interested in the practical applications of the third judgment; namely, that a contractor can be ordered to procure a sub-contractor collateral warranty even though both the main contract has been terminated and the sub-contractor is insolvent. In addition, the court has shown itself willing to take a pragmatic approach in making an order for equivalent performance where circumstances show that obtaining a performance bond in the terms required is practically not possible.

The case serves as a salutary warning to parties that procuring so-called ancillary documents is not an obligation to be easily dismissed or taken lightly, and that difficulties in procuring the documents do not make the requirement disappear.

The facts

Liberty Mercian Limited (Liberty Mercian) entered into an NEC3 form of contract for the construction of a new retail plateau in 2010 with an entity trading as 'Cuddy Group'. Defects arose in the earthworks of the project which resulted in the termination of the contract.

Liberty Mercian initially commenced proceedings to obtain a declaration that Cuddy Civil Engineering Limited (CCEL) was obliged to deliver a parent company guarantee, a performance bond and two deeds of warranty under the terms of the building contract, notwithstanding that the contract had been terminated. It then sought a further declaration that the building contract was entered into by Cuddy Demolition and Dismantling Limited (CDDL), rather than CCEL, as a result of mistake. The confusion arose over the use of the trading name 'Cuddy Group', which entity performed the contract and which entity was actually named in the contract. The rationale behind Liberty Mercian's application was that CCEL was at all material times dormant and had no assets, while the contract was performed by Cuddy Demolition and Dismantling Limited.

The first decision - who was the contracting party and what were its obligations?

Mr Justice Ramsey held that there was insufficient evidence to establish that a clear mistake had been made in naming CCEL in the contract. Accordingly, the contract was made between Liberty Mercian and CCEL.

Was the contractor still obliged to supply a parent company guarantee, performance bond and collateral warranties from a sub-contractor after termination of the main contract? Mr Justice Ramsey held that the obligation to provide the documents did not constitute a "primary obligation" commensurate with an obligation to provide the works themselves. Rather, the obligation was self-standing, independent and properly to be construed as "procedural and collateral or ancillary to the subject matter of the contract". Therefore, despite the termination of the main contract, the contractor was still 'on the hook' to provide the documents.

This is a key point for contractors and developers alike to note - termination of a contract will not relieve a party of its obligations under that contract to provide ancillary documents. Failure to provide these documents exposes the defaulting party to a claim for damages and also to a court order for specific performance.

Having established that an order for specific performance was still very much on the cards, Mr Justice Ramsey noted that there were several factors that the court needed to take into consideration, including whether damages would constitute an adequate remedy and whether the obligation itself was impossible to perform. The court reserved the point pending further submissions.

The second decision - was the obligation practically possible?

CCEL argued that the obligations to provide the sub-contractor collateral warranties and the performance bond were impossible to perform for various reasons, which included (in brief) CCEL's own impecuniosity (and thereby its practical inability to obtain a bond in the marketplace) and the fact that the sub-contractor was in administration.

Mr Justice Ramsey felt that, although he was inclined to make an order for specific performance, there was a chance that the obligations would prove impossible to perform. He instead chose to "proceed by stages" to ascertain whether the obligations were practically possible. CCEL was therefore ordered to use best endeavours to obtain a performance bond in the form required and the two sub-contractor collateral warranties.

The third decision - specific performance of an equivalent obligation

In relation to the performance bond, both Liberty Mercian and CCEL cooperated in consulting underwriters and bondsmen across the market.

The sole expressions of interest in providing the bond required by the contract required 100% cash-backed or tangible security, given that the bond was likely to be called upon and CCEL's impecuniosity. Although there was one potential bond offered, it was argued that this was in a different form to that required in the contract and would not, therefore, constitute specific performance.

The court conceded that it was, in practical terms, impossible for it to order specific performance of the obligation to provide a performance bond in the terms annexed to the contract. However, it also confirmed that its discretion to order specific performance extended to an ability to order the specific performance of an equivalent obligation. Consequently, the mere fact that the only bond offered was different to that required under the contract was not a barrier to the court ordering that it be procured, if that would provide Liberty Mercian with equivalent rights.

However, despite this power to order specific performance of equivalent obligations, the court did have sympathy with CCEL's concerns as to the origin of the bond. The bondsman was an unrated entity located in Gibraltar and required a 100% cash deposit to secure the bond. Mr Justice Ramsey accepted that a financially prudent party would not enter into such an arrangement, and it would be remiss of the court to order CCEL to do what such a party would not.

Nevertheless, Mr Justice Ramsey was determined not to be defeated - if there could be some form of performance which would provide Liberty Mercian with equivalent rights, then there could, in principle, be an order for specific performance by way of substituted performance. The defence of impossibility can only apply when the court cannot grant either specific performance or performance by way of substituted performance. Therfore, even though a bond was not available, the court would be able to make an order for equivalent performance.

The court considered whether a payment into court would be a viable alternative to the provision of a bond. The power to order a payment into court, although procedural in nature, is one that could give effect to rights in substantive law and the court's power to grant specific performance. In principle, it was possible, and the court could see no reason not to make such an order. CCEL was therefore ordered to pay £420,000 (the amount of the bond) into court.

In terms of the collateral warranties, the court considered that, notwithstanding the fact that the sub-contractor was insolvent and had been dissolved, the sub-contractor had no valid defence to any potential claim by CCEL for it to provide the warranties. This, coupled with evidence that suggested the collateral warranties would potentially be backed by insurance cover, meant that it was appropriate for the court to grant an order for specific performance to procure the warranties. While there was some ambiguity over the position in relation to the sub-contractor's insurance, it was not enough to suggest that the warranties would be entirely useless.

In practice, obtaining a warranty from a company that has been dissolved has a number of procedural difficulties and costs. The order for specific performance will oblige CCEL to incur that cost in order to obtain a warranty that, if not backed by insurance, will be worthless. To find out if the sub-contractor has any insurance to back any warranty it gives, a request to its liquidator will be needed to disclose any such insurances.

Conclusion

The three decisions show that the court is willing to order specific performance in the right circumstances, and not just of the original obligation. If there is an alternative option that would provide equivalent rights, the court is prepared to entertain the suggestion in order to give effect to the rights the relevant beneficiary should have. This is a pragmatic approach that is to be welcomed.

The judgments provide a helpful reminder that termination does not extinguish positively all obligations under the relevant contract. The provision of documents such as a performance bond and collateral warranties can be considered as "self-standing, independent obligations" of a procedural and ancillary nature to the works themselves, and which termination will not extinguish.

Interestingly, in the second judgment the court also provided reassurance that the deduction of sums for the non-provision of collateral warranties, which is a relatively common contract amendment, operates as a separate contractual remedy and is irrelevant when considering whether to grant specific performance for the provision of the documents. Employers can therefore rest easy in the knowledge their retention wording is safe and specific performance is still possible.

Finally, the Mr Justice Ramsey's decision can be seen to serve as a warning to parties who have not provided 'ancillary' construction documents that termination, insolvency and difficulty in obtaining the documents will not necessarily absolve a party from the obligation to procure. Best practice would suggest that providing the documents when requested to do so is the way forward.


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