Construction consultancy Sweett has won a legal dispute with a house-builder client after a contractor went into liquidation. The court ruled that Cyril Sweet (now just Sweett), was not negligent as employer’s agent for Michael Wight Homes in failing to procure a performance bond for its client.

The dispute blew up after the contractor on a housing project, Diamond Property Construction, was liquidated. The decision sets a precedent for future rulings and has major implications for the construction industry, according to Kim Teichmann from law firm Thomas Eggar.

Sweett had to “prepare contract documentation and arrange for such documents to be executed” under the JCT 2005 Design and Build Revision 1 2007. It was an obligation of the firm’s appointment but it failed to deliver. When Diamond Property Construction went into liquidation, it left Michael Wight Homes without a performance bond.

According to Teichmann, “the employer’s agent persistently chased the contractor for the bond and kept the employer informed of this, as well as the consequences of not having it.

“The court had to decide whether all these actions were irrelevant because there was an absolute obligation to provide a bond, or whether the obligation to arrange for the execution of a bond was limited to the taking and exercise of reasonable care.

“Looking at the contract wording, the court found that the word ‘arrange’ did not mean ‘ensure’ so it was not an absolute obligation. The employer’s agent was not negligent.”

Also, the court did not think that the employer’s agent should have withheld payment to incentivise the contractor to provide the bond, said Teichmann. “However, this conclusion was made in the context of the fact that the contractor was being underpaid on the job, progressing the works well and had provided assurances that the bond would be provided.”

The employer’s agent’s appointment was terminated prior to the point where it may have become necessary, in the court’s view, to withhold money. The court commented that it thought it was perfectly legal under the JCT to withhold the entire amount of the performance bond under an interim payment.

“There are important lessons for employer’s agents, contract administrators, project managers, quantity surveyors and architects, all of whom administer projects and agree to provide documents and arrange for their execution,” Teichmann said.

These are:

Make sure that you agree to “arrange” for the execution of documents; do not agree to “ensure” that documents are executed.
Include the obligation to provide documents as a term of the building contract.
Advise the client in writing of the risks of not obtaining a performance bond (or any other document such as a warranty), if it is not forthcoming.
Chase the performance bond and do not give up.
When considering whether to withhold monies to incentivise the provision of a performance bond, weigh up all the factors and apply common sense. There are a number of ways to put pressure on a contractor to provide documents; normally discussions with the contractor are the first course of action, which if unsuccessful can then lead to withholding payments.

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