Calling up a bond – Grounds for opposing a call

Mainzeal was engaged to construct Vector Arena. The contract required Mainzeal to provide a bond to secure Mainzeal’s performance under the contract. Mainzeal arranged for Great Lakes Reinsurance to provide this bond to the principal.

Payment of the bond was conditional on an engineer’s certificate which was to state:

  1. that the contractor had defaulted;
  2. that this default had not been remedied; and
  3. the sum demanded was reasonable.

Provided the above condition was satisfied, Great Lakes Reinsurance was to pay the principal the amount specified in the engineer’s certificate. Payment was to be made unconditionally, and without enquiry as to the position between the principal and the contractor.

When Mainzeal entered liquidation there were a number of alleged defects in Vector Arena. The engineer provided a certificate and the principal made a call for the full amount of the bond. Great Lakes Reinsurance applied to the Court to restrain the call on the bond and the principal applied for summary judgment on the basis that there was no arguable defence to the bond call.

The Court confirmed that where an unconditional promise to pay has been made (as was the case here) the bond provider could not normally refuse a demand or inquire into the contractual position (one accepted exception is fraud by the principal).

As an engineer’s certificate had been provided the conditions appeared to have been satisfied. However, on analysis the Court found that:

  1. the engineer’s certificate was a key feature of the bond call;
  2. the engineer had obligations to principal and contractor to act reasonably and in good faith within the parameters of their contractual obligation in providing the certificate, and
  3. the provision of the certificate by the engineer was able to be reviewed by the Court.

Although the engineer’s certificate did not need to be perfect, the Court found that it was arguable in this case that the engineer’s certificate contained items outside the engineer’s scope. To determine the scope of the engineer required the matter to go to trial and the summary judgment application failed.

My thoughts:

  • While only a summary judgment decision, it imports commercial uncertainty into what the parties probably thought was an unconditional payment.
  • Both parties approved the engineer as the appropriate person to give the certificate.
  • Principals should seek to make bonds as unconditional as possible, however, there is a question whether any bond.
  • This summary judgment decision is from 2014 and there have been other recent decisions (in NZ and in other jurisdictions) around the ability to call up a bond.

Case: QPAM Ltd v GLR (UK) Plc

Construction of Vector Arena credit: Grayson Engineering

Construction of Vector Arena credit: Grayson Engineering

 

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