We recently commented on the TCC’s decision in relation to due diligence obligations in the SABIC v Punj Lloyd decision (see our law-now here). The decision also made important findings as to how monies paid out under a bond should be accounted for in the context of a cap on liability. Such sums were held to be outside the liability cap and the decision potentially gives rise to exposure for contractors which may not previously have been envisaged.
In 2006, SABIC UK Petrochemicals Limited (“SABIC”) entered into a contract with Simon Carves Limited (“SCL”) to design, procure and construct a petrochemical plant. As part of the contractual arrangements, SCL was required to provide a performance bond for £13.5 million.
The project encountered substantial delays as a result of SCL’s financial difficulties. SABIC and SCL negotiated a variation to the contract by which SABIC agreed to pay the balance of the contract sum to SCL in advance and also a further £15m (i.e. an increase in the contract sum). In return, SCL provided an advanced payment guarantee for £15m. Despite this, SABIC terminated the contract due to continued delay and completed the works itself. SABIC then issued proceedings to recover the additional costs it had incurred against SCL’s parent company (“PLL”) under a parent company guarantee.
Around the time of termination, SABIC called upon the advanced payment guarantee and the performance bond. SCL/PLL disputed SABIC’s right to terminate the contract and counterclaimed the sums called under the bonds. The contract between SABIC and SCL also contained a standard limitation clause which capped liability at 20% of the contract sum. The parties disagreed whether the bonds ought to be accounted for before or after the application of the cap.
SABIC argued that in calculating its losses it should deduct the amount it had received under the bonds before the cap was applied. SCL/PLL disagreed. The court preferred SABIC’s interpretation and made the following observations:
- SABIC was entitled to recover its additional costs “reasonably incurred” in completing the works. Ignoring the monies obtained under the bonds would result in these costs appearing artificially low. The bonds reduced the outlays from SABIC’s own resources. Had SCL completed the works, SABIC would not have had the benefit of the bond monies but it would not have had to pay for the works (having already paid the contract sum).
- It would have been counter intuitive to regard the cost of completion of the works as a “loss” without taking account of the fact the parties had made arrangements to obviate the losses by providing bonds.
- SABIC had called on the bonds before completing the works and it therefore made more sense to say that SABIC had exhausted the bond monies before incurring losses (rather than the other way around).
- If it was to agree with SCL/PLL’s interpretation (that the bond monies formed part of the cap), it would unfairly punish SABIC for making the advance payment of £15m to SCL which assisted with SCL’s financial difficulties before termination.
Although part of the court’s reasoning was based upon the specific provisions of the termination clause in the contract between SABIC and SCL, other parts apply more generally. As such, the decision raises a question mark as to whether in other circumstances, such as in relation to defective work or contractual indemnities, monies received through calls under performance securities will diminish the amount of any cap on liability.
The form of liability cap in this contract was in a relatively standard form and parties may now wish to ensure that the position is sufficiently clear when bonds or other forms of financial security are involved in a project. In particular, parties may wish to be certain whether bonds monies are to be included within any cap on liability and how any cap is to operate in the event of a claim.
Reference: Sabic Petrochemicals Limited v Punj Lloyd Limited [2013] EWHC 2916 (TCC)
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