Do payments under performance bonds/guarantees count against caps on liability?
SABIC UK PETROCHEMICALS v PUNJ (Part 2) [2013]
In addition to the issues set out in Part 1 of the SABIC case, the Court had to consider whether payments made under a performance bond and a guarantee would count against a supplier’s limit on liability.
Facts:
- Alongside the facts set out in Part 1, the contractor (C) had put in place a Performance Bond (PB) and an Advance Payment Guarantee (APG). The PB was a requirement of the initial contract. The Contractor was required to provide to SABIC (S) "a performance bond … for the due performance by the Contractor of all of its obligations under [the] contract”. The PB was for a total of £13.5 million (10% of the total initial contract price).
- The issue of an APG only came up subsequently when C was in financial difficulties and the parties were negotiating the terms of a contract variation under which the scope of C’s obligations was clarified. Realising that C had financial difficulties, S agreed to make certain payments in advance of when they were strictly due under the contract. In total S made advance payments of nearly £30 million in the hope that this would enable C to complete the work. As part of this variation C agreed to put in place an APG for £13 million.
- The wording of both the PB and the APG were virtually identical in key respects. The PB said: “We, [the Bank] … give our guarantee and irrevocably undertake to pay any amount not exceeding in total a maximum of GBP 13,500,000… to you on receipt of your demand in writing accompanied by your signed statement certifying that the contractor is in breach of its obligations in the underlying contract”.
- The APG was in identical terms except for the amount being £15 million.
- The purpose of the two bonds was, however, different. The PB was expressly stated to be a bond in respect of due performance whereas the APG was security against the advance payment. This latter point might possibly explain the approach the Court took. The Court said that the primary purpose of the bonds was to provide the claimant with immediate access to funds. S contended that the APG and PB monies should be incorporated in the clause 30.9 calculation before the application of the 20% limitation. C argued that the purpose of the bonds was merely to secure the liabilities arising on non-performance.
Decision:
- The Court agreed with S and held that the bond monies should be brought into account when calculating the total cost to S which it reasonably incurred in completing the works but before the application of the 20% limitation. In other words, when computing the costs that S incurred, the fact that S had the benefit of the proceeds of the bonds should be considered first in reducing the costs it incurred on a pound for pound basis. This would have the effect of allowing S to reclaim the 20% limitation from C in full.
- One of the reasons given by the Court was that it would be perverse for S’s ability to recover losses in full up to the agreed cap to be materially, adversely affected by whether an advance payment had been made backed by an APG. The Court gave the example of a loss of £40 million. If no advance payment had been made and no APG was given, S would have been entitled to claim £31 million (assuming the 20% limit applied – which, as we have seen above the Court held it did not). However, with the advance payment having been made and the APG funds received, S would only have been entitled to £16 million (with the remaining £15 million being received under the APG.
Points to Note:
- Whilst this may be perfectly reasonable in the context of the APG, it seems strange to regard the sums received under the APG and the PB in exactly the same way. Ultimately, because the Court decided that no 20% limit applied, this aspect of the judgment is strictly not binding on subsequent cases and it is only a High Court decision (being the lowest Court and therefore of limited authority). However, what it does mean is that, for the time being at least, we are left with the rather unexpected position that any financial cap on liability will not seemingly be partially or wholly satisfied by sums received under a performance bond leaving the whole of the stated amount available for an additional damages claim.
- Contract drafters need to be very explicit therefore in making it clear whether any stated limitation includes sums received under any relevant performance bond. We strongly suspect that most contract drafters would previously have assumed that any damages suffered would be quantified and assessed against the stated liability limit and that amounts received under any PB would count towards the satisfaction of that limit. The overall impact of this is that the overall liability of a contracting party could be significantly increased.