Trafalgar House Construction (Regions) v General Surety & Guarantee Company Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lord Keith of Kinkel,Lord Ackner,Lord Jauncey of Tullichettle,Lord Lloyd of Berwick,Lord Steyn |
| Judgment Date | 29 June 1995 |
| Judgment citation (vLex) | [1995] UKHL J0629-3 |
| Date | 29 June 1995 |
| Court | House of Lords |
[1995] UKHL J0629-3
Lord Keith of Kinkel
Lord Ackner
Lord Jauncey of Tullichettle
Lord Lloyd of Berwick
Lord Steyn
House of Lords
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE
My Lords,
For the reasons given in the speech to be delivered by my noble and learned friend, Lord Jauncey of Tullichettle, which I have read in draft and with which I agree, I would allow this appeal.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned, friend Lord Jauncey of Tullichettle. For the reasons he gives I, too, would allow the appeal.
My Lords,
This appeal concerns the effect of a bond granted to a main contractor by a sub-contractor who was unable to complete the sub-contract after administrative receivers had been called in.
On 31 October 1989 the respondents, in their former incarnation of Monk Building and Civil Engineering Limited, who were the main contractors for the construction of a leisure complex for Maidstone Borough Council, entered into a sub-contract with K.D. Chambers Ltd. ("Chambers") for the execution of the groundworks. In terms of the sub-contract Chambers were required to provide a bond for the sum of £101,285, being 10 per cent. of the value of the sub-contract. This they did jointly with the appellants. In September 1990 administrative receivers appointed over Chambers confirmed that the latter could not complete the sub-contract and thereafter the respondents completed the necessary works themselves. In October 1991 the respondents issued a writ against the appellants claiming £101,285 under the bond and on 9 February 1993 the Official Referee refused the appellants leave to defend and gave judgment under RSC, Ord. 14 for the sum claimed in the writ. On 22 February 1994 the Court of Appeal (Sir Thomas Bingham M.R., Beldam and Saville L.JJ.) (unreported); Court of Appeal (Civil Division) Transcript No. 172 of 1994, dismissed the appellants' appeal and affirmed the judgment of the Official Referee.
The Bond is in the following terms:
"BOND GENERAL SURETY & GUARANTEE CO.LIMITED
BY THIS BOND WE K.D. CHAMBERS LIMITED whose Registered Office is at 1 London Road Sittingbourne Kent (hereinafter called 'the Subcontractor') and GENERAL SURETY & GUARANTEE CO. LIMITED whose registered office is at Hawthorn Hall Hall Road Wilmslow Cheshire SK9 5BZ (hereinafter called 'the Surety') are held and firmly bound unto A. MONK BUILDING AND CIVIL ENGINEERING LIMITED (hereinafter called 'the Main Contractor') in the sum of £101,285.00 (One hundred and one thousand two hundred and eighty five pounds) for the payment of which sum the Subcontractor and the Surety bind themselves their successors and assigns jointly and severally by these presents SEALED with our respective Seals and dated this twenty seventh day of November 1989
WHEREAS:
(1) The Main Contractor has entered with THE MAIDSTONE BOROUGH COUNCIL for the construction of LEISURE CENTRE AT MOTE PARK MAIDSTONE KENT (hereinafter referred to as 'The Main Contract Works')
(2) The subcontractor by subcontract agreement evidenced by subcontract order no. SC1839/C5495 dated the Thirty first day of October 1989 made between the Main Contractor of the one part and the Subcontractor of the other part has entered into a subcontract (hereinafter referred to as 'the said Subcontract') for the construction and completion of the Subcontract Works (being part of the Main Contract Works) as therein mentioned in conformity with the provisions of the said Subcontract
NOW THE CONDITION of the above written Bond is such that if the Subcontractor shall duly perform and observe all the terms provisions conditions and stipulations of the said Subcontract on the Subcontractor's part to be performed and observed according to the true purport intent and meaning thereof or if on default by the Subcontractors the Surety shall satisfy and discharge the damages sustained by the Main Contractors thereby up to the amount of the above written Bond then this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration in terms of the said Subcontract made by agreement between the Main Contractor and the Subcontractor or in the extent or nature of the Subcontract Works to be constructed and completed thereunder and no allowance of time by the Main Contractor under the said Subcontract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the said Subcontract on the part of the Main Contractor shall in any way release the Surety from any liability under the above written Bond.
Any proceedings against the Surety to recover any claim hereunder must be served within six months after the fourth day of February 1991 or such other date as may be certified by the Architect as the date of Practical Completion of the Main Contract Works.
The Common Seal of …."
In the Court of Appeal Saville L.J. reached the following conclusion:
(1) that the bond was not a guarantee in the ordinary sense whereby the guarantor agrees to "see to it" that the obligation of the principle obliger will be performed (Lep Air Services Ltd. v. Rolloswin Investments Ltd. [1973] A.C. 331) but imposed:
"… upon the Surety an independent obligation to pay the damages sustained by the Main Contractors (up to the amount of the bond) from a failure of the Subcontractors to carry out the subcontract."
when called upon to do so by the respondents:
(2) that the sum payable under the bond was the additional expenditure incurred or to be incurred by the respondents as a result of the failure of Chambers to perform and that in calculating this sum no account was to be taken of debts and credits including the value of any set-offs and counter claims due to or by the respective party, and
(3) that the obligation under the bond was to pay what the respondents asserted in good faith to be the amount of damages.
To summarise the Lord Justice's conclusion, on a failure to perform by Chambers the respondents were to be paid on demand a gross sum representing the additional expenditure incurred by the respondents as a result of Chamber's breach. In reaching this conclusion Saville L.J. identified the commercial purpose of the bond as being to provide immediate funds for the respondents in the event of failure of performance by Chambers, a view shared by Beldam L.J. The Master of the Rolls rejected the argument that the bond was a guarantee and, endorsing Saville L.J.'s identification of its commercial purpose, concluded that the gross sum of damages was payable on demand in good faith. Your Lordships were informed that the respondents did not argue in the Court of Appeal that a mere demand in good faith was sufficient to entitle them to payment under the bond.
Two principal issues arise in this appeal namely, first whether the bond is a guarantee with the consequent result that the appellants are entitled to rely on defences which would be available to Chambers and second whether the affidavits lodged by the appellants raise an issue which ought to be tried (the "Triable Issue"). For reasons which will become apparent it is appropriate to divide the first issue into two parts namely (1) whether the bond without the second part of the Condition which I have underlined would be a guarantee (the "Guarantee Issue") and (2) if so, whether the addition of that second part alters the position (the "Construction Issue").
The Guarantee Issue
In reaching the conclusion that the bond was not a guarantee in the ordinary sense of a "see to it" obligation Saville L.J. had regard to Lep Air Services Ltd. v. Rolloswin Investments Ltd. [1973] A.C. 331 wherein the guarantor personally guaranteed the performance by the principal debtor of its obligation to make regular instalment payments. There is, however, nothing in that case which suggests that a guarantee can only take the form of a "see to it" obligation and Lord Reid, at p.345F, went no further then to say that "the authorities appear to recognise that at least most contracts of guarantee are of this nature."
There is however other material far more germane to this issue than Lep Air Services Ltd. v. Rolloswin Investments Ltd. Bonds in similar form have existed for more than 150 years and have been treated by the parties thereto and by the courts as guarantees. Indeed the current standard I.C.E. Conditions of Contract contain a specimen bond in terms identical to those in the Chambers bond. In the first place the bond itself contains indications that it was intended to be a guarantee. The appellants are described as "The Surety." There is a provision to the effect that no alteration in the terms of the sub-contract should release the Surety from liability. In the absence of such provision a Surety would normally be released from his obligation by any subsequent material alteration to the contractual provisions agreed between the contractor and sub-contractor. In the second place there is relevant authority. In Calvert v. London Dock Co. (1838) 2 Keen 638, 639 the bond was in the following terms:
"On the 3d of November 1829, Streather, and Warburton, and Laycock, as his sureties, executed to James Warre, as treasurer of the Company, their joint and several bond for the sum of 50001., conditioned to be void, if Streather should well and truly observe, perform, and keep, the promises and agreements contained in the contract, which, on the part of Streather were and ought to be performed, according to the true intent and meaning of the contract."
On the failure of Streather to complete the contract, Calvert the personal representative of Laycock and Warburton sought an...
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