If you alter the terms of the contract, your Bond protection may be lost.

If you alter the terms of the contract, your Bond protection may be lost. Hackney Empire agreed with a Contractor that it had employed to enter into a “side agreement” in respect of making three stage payments to the Contractor to cover, in part, a claim for loss and expense that the Contractor had submitted while the Contractor, in accordance with the contract, provided further particulars of its loss and expense claim, whilst at the same time attempted to progress regularly and diligently to meet a newly agreed completion date, at which time the final stage payment would be released. However, and despite this “side agreement”, the Contractor fell into administration.

Hackney Empire had a Performance Bond in place with Aviva, and, because of the failure of the Contractor as outlined above, called upon that Bond. However, Aviva refused to honour the Bond because it said that the “side agreement” that Hackney Empire had reached with its Contractor, was a material variation of the contract between Hackney Empire and its Contractor, and that meant that the Bond was invalidated.

The matter was referred to the Technology and Construction Court in London, and the Court found that the Bond was still valid and Aviva was required to honour the Bond as the “side agreement” had not in fact varied the terms of the contract between Hackney Empire and its Contractor.

However, if the “side agreement” had varied the terms of the contract, the matter may well have been different. Therefore the risk is that a “side agreement” could invalidate a Performance Bond, or it could be that Bond providers may amend the wording of Bonds to “define” what type of “side agreement” in respect of the operative contract would have the effect of invalidating the Bond.

In the present economic climate, “side agreements” are becoming more and more common. Therefore, if you are tempted to enter into some form of “side agreement”, particularly where you have a Performance Bond in place, proceed with extreme caution, as you may repent at leisure over the action you took in haste.

Therefore, if you are considering entering into a “side agreement” and are unsure if this would have an impact on a live Performance Bond, then you need to contact us (i.e. Melbury Construction Consultants Ltd) to find out how this may affect your contractual and/or legal rights and/or obligations.

Do you want to risk losing money?

An Employer or a Contractor sends out a tender enquiry which consists of several lever arch files and CD’s. They ask you to provide a price within a particular, normally tight, timescale. You win the job, but you lose money because you did not price the ‘risk’ factor.

So, what is the ‘risk’ factor?

This can only be determined by inspecting the documentation issued, and will vary for every project that you price. A party will often attempt to pass on its own ‘risk’ factor onto another party. Typical examples of risk are full and partial design responsibilities, payment conditions, erroneous clauses, bond requirements etc. These types of risks occur frequently, and nearly always have a cost implication, but they are overlooked or are not given any priority at all in the rush of the tendering process. Because of this, it is often these very risk factors that turn what would have been a profitable contract into a loss making project.

But you may say, if we priced the risk factor in the first place we may not have won the work. Putting aside the obvious comment that why would you want to win a loss making project (particularly remembering the old mantra that ‘turnover is vanity, cash-flow is sanity’); there is another way.

That other way is to negotiate the risk factors during the tender process to ensure that the more onerous of those risk factors are modified such that they are included within your tendered sum. If the risk is highlighted in this way, it can be to the benefit of both parties, and the risk can then be managed correctly or even removed, resulting in good relationships and repeat agreements.

To this end, Melbury Construction Consultants Ltd offers a pre-contract vetting service that identifies risk; identifies the financial consequences of the risk; helps the contracting parties to achieve their appropriate risk balance; avoids parties accepting risks they don’t understand; and helps provide a successful execution and effective monitoring of the project.

Do you want to lose your rights to claim for damages?

Do you want to lose your rights to claim for damages when your contractor or sub-contractor breach the contract and then shortly after falls into administration?

Of course not! So how do you protect your rights?

In the recent Hackney Empire v Aviva Insurance case the courts had to decide if there was a right to recovery of damages under a performance bond due to Hackney Empire’s contractor entering into administration.

In that case, the court found that Hackney Empire’s contractor was in breach of the contract as it was no longer able to continue work on site in a meaningful way and had no possibility of being able to do so in the future; and also found that this breach occurred before an Administrator was appointed in respect of Hackney Empire’s contractor.

Under the contract between Hackney Empire and its contractor it was made clear that the termination clauses were ‘without prejudice to any other rights and remedies Hackney may possess’. This therefore meant that Hackney Empire would, in the normal course of events, be able to claim damages from its contractor for a breach of contract, irrespective of the fact that the breach in question may have been relied upon to terminate the contractor’s contract in the first place.

Obviously, because Hackney Empire’s contractor ceased trading it was not possible for Hackney Empire to recover the damages from the contractor, and, rather than simply be added to an unsecured creditors list with the administrator, sought to recover the damages through the performance bond in place.

Hackney Empire successfully argued to the court that as the bondsman (Aviva Insurance) was aware of the right of Hackney Empire to recover damages in the event of a breach of contract by Hackney Empire’s contractor, being a breach that also caused Hackney Empire to evoke the termination clauses, the said damages were recoverable through the performance bond.

The court agreed with Hackney Empire in respect of this matter, even though an earlier court case (Perar BV v General Surety) found that the recovery of damages relating to termination clauses was not allowed. The court in the Hackney Empire case decided that the Pera BV case was not relevant as in that earlier case the wording used in respect of this matter only related to one termination clause, and that particular termination clause had not been relied to terminate the contract.

Based upon the above background, it is clear that it is vital that you are properly protected in respect of the recovery of damages in a case where a contractor breaches the contract which results in you evoking the termination clauses, and where that contractor subsequently ceases trading, and where you have a performance bond in place.

Therefore, if you are considering using bespoke or amended contracts along with the use of a performance bond, and are unsure if your rights are protected in the event of termination of the contractor, then you need to contact us (i.e. Melbury Construction Consultants Ltd) to find out how this may affect your contractual and/or legal rights and/or obligations.