Trafalgar House Construction Limited -v- General Surety Guarantee Company Limited (1995) HL

© Daniel Atkinson 2000

In Trafalgar House v General Surety(1994) the Court of Appeal decided that a bond similar to the ICE bond was in effect an on demand bond. This came as some surprise to the construction industry and has prompted a re-examination of the drafting of such bonds, particularly in view of the adverse comments by the Court of Appeal on the style of drafting. The House of Lords have recently considered the matter in Trafalgar House Construction Limited -v- General Surety Guarantee Company Limited (June 1995). The essential question was whether the bond was in the form of a guarantee which would allow the surety to take into account unpaid sums due for work done and cross claims for set off.

In the Court of Appeal it was concluded that the bond was not a guarantee in the ordinary sense of seeing to it that obligations were performed. Instead it imposed an obligation to pay the damages sustained by the injured party when called upon to do so. The Court of Appeal also held that the calculation of the sum payable under the bond should not take into account any debts or credits including the value of any set offs and counter claims. Finally, the Court held that the obligation under the bond was to pay what the injured party asserted in good faith to be the amount of damages.

The Court of Appeal therefore considered the bond to be an on demand bond. This conclusion was reached because the commercial purpose of the bond was identified as being the provision of immediate funds for the injured party in the event of failure of performance by the other party. This effectively meant that the injured party need only make the demand in the proper form and payment would have to be made. If payment was not made then application could be made to the courts under Order 14 of the Rules of the Supreme Court. This had occurred in the present case. The Official Referee who had first been seized with the issue, had taken the view that the surety had raised no arguable defence to the claim to be entitled to the maximum sum under the bond. The Court of Appeal agreed with the decision and dismissed the appeal. The issue then went to the House of Lords.

The House of Lords took a different view. In the first place the bond itself contained indications that it was intended to be a guarantee. So, for instance, the description "the surety" was used. Also there was provision that alteration of the terms of the construction contract would not release the surety from liability. This pointed to the bond being a guarantee. In addition there was relevant authority in decided cases which supported the view that the bond was a guarantee. The terms of the bonds in these cases could not be distinguished from the terms of the bond in the instant case.

Since the bond was a guarantee this meant that the surety could raise all questions of sums due and cross claims in the Order 14 application.

The House of Lords also considered whether the particular words "damages sustained by the contractor thereby" were sufficient to limit the liability of the surety. It was held that in order to do so the words used must the clear and unambiguous. That was not the case here. The use of the word "damages" was more consistent with compensation arrived at after taking into account all sums due. If the parties had intended the obligation to apply solely to the additional expenditure incurred by the injured party, without reference to any sums normally set against it in an action of damages, this would have been simple. A form of words such as "the additional expenditure incurred" would have sufficed.

The House of Lords decision is to be welcomed in clarifying this area of the law. The construction industry now has a clear interpretation of a form of bond which is used throughout the industry.