Simon Carves Ltd v Ensus UK Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Akenhead |
| Judgment Date | 23 March 2011 |
| Neutral Citation | [2011] EWHC 657 (TCC) |
| Docket Number | Case No: HT-1167 |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Date | 23 March 2011 |
[2011] EWHC 657 (TCC)
Mr Justice Akenhead
Case No: HT-1167
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Andrew White QC (instructed by Fenwick Elliott) for the Claimant
Marc Rowlands & Miss Gaynor Chambers (instructed by Clifford Chance) for the Defendant
Hearing dates: 15 March 2011
Mr Justice Akenhead:
This case relates to an "on demand" performance bond and raises issues, rarely addressed in the past, as to the extent to which, if at all, a party may be prevented from seeking payment under the bond by the terms of the very contract in respect of which the bond is provided by way of security.
The Facts and Background
I preface these findings by commenting that they are made only for the purpose of the applications with which I have to deal and are not intended to be binding on any tribunal which in the future has to resolve the underlying disputes between the parties.
By a written contract ("the Contract") dated 6 October 2006, Simon Carves Ltd ("SCL") as Contractor was employed by Ensus UK Ltd ("Ensus") as Purchaser to carry out and complete the Works as defined in the Contract at a site at Teesside. The Works related to the provision of a process plant to produce bioethanol. The Contract incorporated the General Conditions of Contract for Lump Sum Contracts published by the Institution of Chemical Engineers in 2001, known as the "Red Book", albeit that it was amended with special conditions agreed between the parties.
Under the Red Book requirements, when the project comes to completion, there are various steps which have to be taken. The first one is what is called a Take-Over certificate, which broadly means what it says. The Purchaser takes over the works when it has reached a certain level of completion. Following that, at least in this case, there is a period during which various performance and other type of tests are done or may be done and certain further work may be done, leading to a stage which is called Acceptance. For one year after the issue of the Take-Over Certificate, there follows the Defects Liability Period during which the Contractor is required by Clause 37.2 to make good defects in respect of which the named Project Manager has given it notice. If the Contractor fails to make good such defects, Clause 37.7 entitles the Purchaser to proceed to do the relevant remedial work. Clause 36.3 of the Red Book indicates that, as soon as the plant has passed all the performance tests, the Purchaser's project manager shall issue the Acceptance Certificate, which states that the plant is accepted by the Purchaser as from the date of that acceptance certificate. Clause 36.3 goes on to say that:
" The Acceptance Certificate shall list any known Defects which the Contractor is bound to make good under the provisions of Clause 37 (Liability for Defects) and any minor items still remaining to be completed following the issue of a Take-Over Certificate."
Some of the Special Conditions are of importance, relating as they do to the Bond which was to be provided:
"3.1 It is intended that the Contractor shall have delivered to the Purchaser…the Performance Bond prior to or on the Effective Date…
3.2 …the Performance Bond shall be provided as security for any and all of the Contractor's obligations and liabilities under the Contract…
3.5 The Performance Bond shall initially be for an amount equivalent to …12% of the Contract Price
3.7 Upon the issue of the Acceptance Certificate the Performance Bond shall become null and void (save in respect of any pending or previously notified claims).
3.8 The Performance Bond shall be returned to the Contractor immediately after it becomes null and void, save where there are pending claims (including previously notified claims) at such date, in which case it shall be returned following final determination and (if applicable) payment of such claims and shall in the meantime remained valid.
3.9 Where the Performance Bond is subject, pursuant to its terms, to a fixed expiry date, the Contractor shall, not less than…14 days prior to such expiry date, amend or replace the relevant bond with a duly executed amended or replacement Bond if the date upon which the Purchaser will be obliged to return the said bond to the Contractor is not certain to occur prior to such expiry date…
3.10 If the Contractor fails to provide an extension to a Performance Bond or replacement Performance Bond pursuant to clause SC 3.9, the Purchaser shall have the right to call the outstanding balance of the Performance Bond and hold the same on security for compliance by the Contractor with its obligations and liabilities under the Contract. The Purchaser shall be entitled to make deductions against any amounts so held in respect of any claim for which it would have been entitled to call against an extended or replacement Performance Bond…but shall otherwise return to the Contractor the remaining balance of such amounts (without any interest) if the Contractor provides the relevant extended or replacement Performance Bond or, if no extended or replacement Performance Bond is provided, following the date on which the relevant Performance Bond becomes null and void."
There is no reference to the word "claim" in the definitions clause (Clause 1 (as supplemented by Special Condition 1). However, Clause 19.5 states:
"Any claim made by either party under the Contract, whether covered by Sub-clause 19.1 or otherwise, shall be supported by a written statement of grounds and a summary of material facts upon which it is based."
SCL duly procured from Standard Chartered Bank a performance bond in the due amount (£18,480,000). It was very much in the standard form of such documents:
"2. The Bank hereby irrevocably and unconditionally undertakes to pay to the Purchaser upon the fifth business day immediately following that on which it receives a written demand from the Purchaser in accordance with Clause 4 below an amount equal to the lesser of:
2.1 the amount specified in such demand and
2.2 the Bond Amount less the aggregate of all amounts previously paid under this Bond.
3. The Bank's obligation to make payments under this Bond shall arise on receipt of a demand made in accordance with the provisions of this Bond without any further proof or condition and without any right of set-off or counterclaim, and the Bank shall not be required or permitted to make any other investigation or enquiry. For the avoidance of doubt this Bond is not a guarantee and the bank's obligations hereunder do not have the character of suretyship…
6. This Bond is irrevocable. This Bond will be valid up to the earlier of:
6.1 14.00 hrs London time on 31 August 2010…
6.2 the date on which all payments under this Bond equal the bond amount.
The Bank shall be liable to pay the Bond Amount or any part thereof under this Bond only if the Purchaser serves a written claim or demand on the Bank (and which should be received by the bank) on or before 14.00 hrs London time on 31 August 2010, after which time this Bond shall cease to be ineffective in all respects whether or not the original of this Bond is returned to the bank…"
The Take-Over Certificate was issued on 17 February 2010 and Ensus has been operating the plant since then. In March 2010, Ensus received complaints from individuals in the area that the Plant was producing foul smelling emissions, whereupon it embarked upon analysis and sampling which confirmed that certain emissions exceeded the specification requirements. The Environment Agency issued an Enforcement Notice on 26 March 2010 on Ensus which imposed nine conditions. On 16 March 2010, Ensus issued to SCL a Defect Notice (DN072) pursuant to Clause 37.2 (b) of the Red Book Conditions; this identified the odour problem and suggested that it might be a breach of certain statutory requirements. Ensus called for a solution from SCL. There is evidence that Ensus issued a Variation Order (VO152) on 26 April 2010, agreed to by SCL, whereby the emissions stack would be doubled in height to 80 metres, amongst other things; there was some agreement that at least temporarily each party would bear its own costs in achieving this work with subcontractors being paid by Ensus and SCL bearing its own costs. On 1 June 2010, Ensus re-issued DN072 pointing out that the defect was a problem for which SCL was responsible and stating that, if SCL did not remedy the defect within a reasonable time, Ensus would proceed to do the requisite remedial work; it then went on to say:
"Ensus would recover its costs under clause 37.9 and keep contemporaneous substantiating records in compliance with clause 4.3 and submit a claim in accordance with clause 19.5."
It is not absolutely clear what work if any SCL did in relation to the Defect Notice DN072 or to the Variation Order VO152 but the inference is that it did not do much or enough to satisfy Ensus. On the evidence put before the Court, nothing happened which is of significance to these court proceedings before 19 August 2010 when Ensus' Project Director, Mr Henniker Major, issued the Acceptance Certificate under Clause 36.3 of the Contract, in these terms:
"Ensus certifies that the Plant, as described in the EPC Contract and the Variations to the Contract passed the 5 Day Performance Test as defined in Schedules 16 and 17 of the Contract on 5 th August 2010.
In accordance with clause 36.3 of the Contract, as of the 19 th August 2010, the Plant is accepted by the Purchaser subject to outstanding defects being rectified as per the attached schedule and subject to resolution of liability of certain of the rectification works…"
The "attached schedule" contains a list of some 45 "defects" which had been...
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