International Construction Law Review
ARE THE COURTS’ INTERPRETATIONS OF BONDS AND GUARANTEES RESTRICTING THE SECURITY ENVISAGED?
MIRANDA RAMPHUL AND MICHAEL MENDELBLAT1
Herbert Smith LLP, London
1. Introduction
In the current economic climate, the risk of construction contractors facing insolvency and not being able to complete the project has never been more acute. Although some quarters consider the worst of the downturn is over, insolvency figures released in May 2011 suggest otherwise for the construction sector in the United Kingdom, with voluntary insolvencies increasing by 20% in the first quarter of 2011. 586 construction firms went into voluntary liquidation in the first three months of this year compared to 468 in the previous quarter,2 which quarter included the insolvencies of substantial concerns such as Rok and Connaught. Inevitably, developers entering into construction and engineering contracts are keen to obtain security from their contractors, such as bonds and guarantees.
The providers of such security are also reacting to the economic climate; the premiums for bonds have escalated and sureties are checking their exposure under the terms of these instruments.
It is therefore, perhaps, not surprising that tension has grown between surety and creditor in recent times, as some developers seek to push the bar to recover losses sustained under bonds and guarantees, whilst sureties attempt to point to terms which, they argue, limit their liability.
This article looks at some recent judgments regarding the interpretation of express provisions in bonds and guarantees. In some instances the decisions, may appear to be rather surprising.
In the United Kingdom, the terms and conditions of a contract are generally regarded to be supreme (although they may be overridden by statute and implied terms, terms necessary to rectify the contract, unfair
1 Professional Support Consultant and Professional Support Lawyer, respectively.
2 Statistics taken from the Insolvency Service.
The International Construction Law Review [2011
482