Although the headlines are currently dominated by the demise of Carillion, it is not just large main contractors that have suffered financial difficulties.

The impact of sub-contractual insolvency on a main contractor can often be a considerable risk.  Likewise, the steps some sub-contractors take to keep their own company afloat can carry significant risk. These matters came into sharp focus in the November 2017 case of Multiplex Construction Europe Limited v Gordon Alan Dunne [1]

Contractor advanced monies to sub-contractor

Multiplex entered into 9 contracts with Dunne Building and Civil Engineering Limited (“DBCE”), a concrete frame sub-contractor. Its parent company was Dunne Group Limited (“DGL”) owned by Mr Dunne.

Unfortunately DBCE encountered financial problems.

Although we do not know from the judgment the specific terms of the subcontracts in question, standard forms of construction contracts have detailed provisions setting out the consequences of insolvency related circumstances.  But rather than go down that contractual route, which normally would have resulted in the termination of DBCE’s employment, Multiplex agreed to advance what became a total of £4 million to DBCE.

The scale of that cash advance shows the commercial importance to Multiplex of helping DBCE to carry on trading so as to complete its works on their projects.

Sub-contractor placed in administration

The advances to DBCE were made pursuant to two written agreements involving Mr Dunne personally, and his two companies, DBCE and its parent DGL. DGL and Mr Dunne were described in the first agreement as guarantors.

Subsequently both DBCE and DGL were placed into administration in July 2016 by its bank.  Faced with no realistic prospect of recovery from either of those two companies, Multiplex sought recovery of its £4million from Mr Dunne personally, pursuant to the above agreements to which he was a party.

Unsurprisingly Mr Dunne did not repay the £4m owed to Multiplex. He argued that the true nature of the first agreement he entered into (which effectively governed the nature of the liability under the two agreements) was that it was a contract of guarantee. If correct, this meant he could raise the same set offs or counterclaims that DBCE could have raised, and Multiplex would have to prove the losses it claimed to have suffered. He said the set offs/counterclaims exceeded the £4m claimed by Multiplex, so there was nothing for him to pay.

By contrast, Multiplex said it was a contract of indemnity. If correct, this meant that Mr Dunne had to pay the £4m regardless of the nature of the account as between DBCE and Multiplex, so that he could not raise any set off or counterclaim, and Multiplex did not have to prove its losses.

Was the agreement between the parties one of guarantee or indemnity?

Multiplex commenced court proceeding and applied for summary judgment. The key issue for the court was as above: was the agreement one of guarantee, or one of indemnity?

The court looked at the wording of the agreement and its commercial context. Key here was the use of the phrase that Mr Dunne “irrevocably and unconditionally guarantees, warrants and undertakes jointly and severally to the Contractor that should the Sub-Contractor suffer an event of insolvency ….. or otherwise not be able to pay back the Advance Payment to the Contractor ….. the Guarantor shall immediately be liable to the Contractor for the payment of the Advance Payment …”.

The judge found that the commercial purpose of the agreement was that Multiplex was advancing cash by way of assistance to DBCE.  Multiplex, in turn, was to be given assurance in the agreement that it would be repaid “immediately” by Mr Dunne if DBCE was unable to pay the monies advanced. The use of the word “immediately” was inconsistent with the contention by Dunne that before any payment was made, the final account had to be resolved, including any set offs and counterclaims.

Decision: Mr Dunne liable for £4m owed to Multiplex

As a result of the wording of the agreement, the judge found that it was in the form of an indemnity. As a result Mr Dunne was held liable to Multiplex for the £4 million. Multiplex did not have to prove its losses, and the value of the final account, including any set off and counterclaim, was irrelevant to Mr Dunne’s obligation to pay.

Given the sums involved in the advance payment agreements that Mr Dunne entered into, readers may be surprised to know that he did not take any legal advice on the wording of the agreement with Multiplex before he signed it.

The clear message from this decision is that those considering acting as a guarantor in respect of payments to their company should give very careful consideration to the wording of the proposed agreement, which includes giving consideration to taking legal advice. 

[1] [2017] EWHC 3073 (TCC)

About the author

Stuart Thwaites Legal Director

Stuart is a lawyer specialising in construction and engineering work in relation to resolving disputes and in the drafting and negotiation of contractual documentation.