Liberty Mercian Ltd v Cuddy Civil Engineering Ltd & Anor

The claimant sought specific performance of the contractor's contractual obligations to provide a performance bond and two collateral warranties. The court found that CCEL had used its best endeavours but it was effectively impossible to obtain a bond in the form annexed to the contract because of post-termination events, market refusal and the practical position summarised by market advisers. The court held that substituted performance was available in principle and, exercising its procedural powers (including under s.19 of the Senior Courts Act 1981), ordered CCEL to pay £420,000 into court to stand as equivalent security to the performance bond, on terms equivalent to the bond and with liberty to apply. The court also ordered specific performance requiring CCEL to procure the two warranties from Quantum (subject to practical points about Quantum's insolvency and any insurance cover). The court declined to order CCEL to enter the particular bond proposed by an unrated Gibraltar insurer (Evolution) because that arrangement posed financial risks a prudent party would not reasonably be compelled to accept. The judgment resolved costs by allocating liability in stages: CCEL recovered costs of the 3 April 2012 hearing; Liberty Mercian must pay 65% of defendants' costs from April 2012 to September 2013; CCEL must pay Liberty Mercian's costs since 3 September 2013; and Liberty Mercian was ordered to pay a £50,000 payment on account to CCEL.

Background and parties. Liberty Mercian, the employer under a development contract, claimed specific performance against Cuddy Civil Engineering Limited (CCEL) (and Cuddy Demolition and Dismantling Limited (CCDL) as relevant) to obtain a performance bond and two collateral warranties alleged to be obligations under the contract. Earlier interlocutory judgments had determined that CCEL was the contracting party and that its obligations to supply the bond and warranties survived termination; CCEL was found in breach for failing to supply them.

Nature of the application. Liberty Mercian sought final orders for specific performance to compel delivery of the performance bond (in the form annexed to the contract) and two warranties (substantially in the form annexed). CCEL argued impossibility and commercial impracticability; alternative forms of relief and substituted performance (including payment into court or a bond on the terms offered by an insurer) were canvassed.

Issues framed by the court.

• Whether specific performance should be ordered compelling CCEL to provide the performance bond in the contract form or in an alternative, substituted form.
• Whether specific performance should be ordered compelling CCEL to procure the two warranties from Quantum (GB) Limited.
• The appropriate allocation of costs.

Evidence and practical steps taken. The court summarised steps taken by CCEL to secure a bond: enquiries by a specialist broker (Oval) to a panel of underwriters, engagement of a corporate finance adviser (HMT) to approach banks, meeting with Henderson Surety Services and an insurer representative (Evolution), and further contact with banks. Responses showed market unwillingness to underwrite a bond on a terminated contract and/or only on onerous terms including 100% cash collateral and a shortstop date. Oval reported lack of market appetite; HMT indicated banks would only consider fully cash-covered bonds. Henderson/Evolution indicated they would not underwrite a bond guaranteeing performance on a contract that no longer exists; an alternative offer required a full cash deposit and raised other onerous terms. Parallel efforts to procure warranties from Quantum encountered refusal from the liquidator and subsequent dissolution of Quantum, although there was evidence Quantum previously had insurance cover and had provided warranties in other contracts.

Court reasoning on the bond. The court accepted CCEL had used best endeavours and that obtaining the original form of performance bond was practically impossible due to termination and market reaction. However, the court considered established equitable principles allowing substituted performance where literal performance is impossible but the substance can be secured. Procedurally the court may order payment into court to give effect to substituted performance, using its powers (s.19 Senior Courts Act 1981 and Court Fund Rules), because such an order is procedural and effectuates substantive rights rather than creating new substantive rights. The court rejected compelling CCEL to enter the specific bond offered by Evolution because Evolution was an unrated Gibraltar insurer and the proposed arrangement (depositing the full bond sum with an insurer able to withdraw funds on its own director's certificate) would impose material and imprudent financial risk on CCEL or depositors; the parties contemplated a bondsman "strong enough to carry the bond." The court therefore ordered substituted performance by requiring CCEL to lodge £420,000 into court as equivalent security to the contract bond, payable out on equivalent terms and repayable to CCEL if no proceedings were commenced within six months (with liberty to apply to extend).

Court reasoning on the warranties. The court reviewed the attempts to obtain warranties from Quantum's liquidator. Although Quantum became insolvent and dissolved, there was evidence that warranties might be backed by insurance and that the outstanding issues would not necessarily involve difficult or uncertain litigation. On this basis the court ordered specific performance requiring CCEL to procure the warranties from Quantum (subject to any practicalities as to insurance and enforcement), considering that enforcement would not be futile.

Costs. The court divided costs into three periods and allocated them to reflect partial successes and failures: CCEL to recover costs of the 3 April 2012 hearing; Liberty Mercian to pay 65% of defendants' costs from April 2012 until judgment on 3 September 2013; CCEL to pay Liberty Mercian's costs since 3 September 2013; Liberty Mercian to make a payment on account of £50,000 to CCEL. The court explained the reasoning for awarding partial and staged costs rather than a simple winner-takes-all approach.

Subsidiary findings and wider context. The court emphasised that substituted performance is an equitable, flexible remedy but not unlimited: a court will not compel a party to enter an imprudent commercial arrangement with an unsatisfactory guarantor. The decision illustrates the court's willingness to use procedural mechanisms (payment into court) to achieve substantive equivalence where literal performance has become impossible.

At first instance the court ordered substituted specific performance for the performance bond and specific performance for the warranties. CCEL was ordered to pay £420,000 into court as equivalent security to the contractual performance bond because a bond in the contract form was practically impossible to obtain; CCEL was ordered to procure the two warranties from Quantum (subject to the practicalities of Quantum's insolvency and any insurance). The court declined to order CCEL to enter the bond offered by an unrated insurer because that arrangement was commercially imprudent. Costs were allocated in stages as set out in the court's conclusion.