For further information, please contact David Weare, Partner, Fladgate LLP (email@example.com)
A court order for specific performance is a particularly effective means of securing performance of contractual obligations, because it comes with the threat of possible imprisonment if it is not complied with. However, it will only be granted where the court considers it to be appropriate in the circumstances.
It is often suggested that the courts would be unlikely to order specific performance of an obligation to enter into collateral warranties. This is because the remedy of specific performance is not available where damages would be an adequate remedy. It could be argued that the loss resulting from the non availability of collateral warranties is capable of being quantified in monetary terms, either as the cost of remedying the defects which the collateral warranty was intended to cover or as the loss of value in the event of a sale due to non availability of collateral warranties.
In White Property Company Limited v Birse Construction Limited (1999) the court considered the fallout from a refusal by Birse to provide collateral warranties in order to put pressure on Whites to agree Birse’s claim for loss and expense. As a result Whites held on to the building for a period of 15 months until the warranties were provided. The court found that Whites had suffered no loss, because during that period Whites had benefited from receipt of rental income and an increase in the capital value of the property.
Significantly, although the reported judgment is concerned with the losses suffered by Whites as a result of the delay by Birse in providing the warranties, it followed an earlier (unreported) hearing in which the court did actually order specific performance, and Birse eventually complied. It is not clear why the court came to the view that damages would not be an adequate remedy, but it is relevant that, so long as the warranties were not forthcoming, Whites would have been placed in the invidious position of having to choose between retaining the property in an uncertain market and selling it at a significant discount of about £2.5 million. It is also relevant that the financial position of Birse itself was uncertain.
A more recent case, Liberty Mercian Limited v Cuddy Civil Engineering Ltd and another (2013), has now addressed the considerations affecting a decision whether to award specific performance of an obligation to provide collateral warranties. In an earlier hearing the court had decided that, although the contract between Liberty Mercian and the contractor, Cuddy Civil Engineering Limited (CCEL), had been terminated, CCEL’s obligation to provide a performance bond and two collateral warranties from a subcontractor survived. The court now had to decide whether to order specific performance of those obligations.
CCEL put forward three arguments why specific performance was not appropriate. Firstly, damages were an adequate remedy; secondly, it was impossible for CCEL to provide the bond and warranties; and thirdly, as a matter of discretion, specific performance should not be ordered.
On the first point, the court referred to earlier case law which suggested that the real issue was whether it was just in all the circumstances that the claimant should be restricted to his remedy in damages. A relevant factor was whether there were doubts about the solvency of the defendant. Here, as CCEL was a dormant company with no assets, the court found that damages would not be an adequate remedy. The purpose of both types of document was to provide recourse against third parties in the event of default by CCEL, in the case of the performance bond against a bank or insurance company, and in the case of the collateral warranties against a subcontractor with professional indemnity cover.
On the question of impossibility, CCEL argued that it would be unable to obtain a performance bond where the contract in question had been terminated. It would also be impossible to obtain the collateral warranties because (1) the subcontract had been entered into by a different, though associated, company, Cuddy Demolition and Dismantling Limited (CDDL), so that CCEL had no means of enforcing the subcontractor’s obligation to enter into the warranties; and (2) the subcontractor was in administration and the administrator had indicated that it was not prepared to provide the warranties. The court accepted that specific performance should not be ordered where, on proper investigation, the relevant obligations might prove to be impossible. However, on the evidence, CCEL had not established its contention that they were impossible.
The court therefore opted for a halfway house, falling short of full specific performance, by ordering CCEL to use best endeavours to obtain both the performance bond and the warranties. In this way CCEL would still have the chance to establish that the obligations to provide the performance bond and the warranties were impossible.
So the message is that the courts will order specific performance of an obligation to provide collateral warranties in appropriate circumstances, but not always. One of the key advantages of using third party rights over collateral warranties is that the former do not require parties to sign additional documents and therefore do not need a court order for specific performance to be effective. Does the latest case law change that balance of advantage? Not really.
It is clear that the financial position of the defendant was a major consideration for the court in deciding whether damages would be an adequate remedy. In many cases the party in default of an obligation to provide warranties will have substantial assets, and may therefore succeed in arguing that damages are an adequate remedy. Nevertheless, the prospect of being confined to a claim in damages is likely to be unattractive for a developer. Also, by leaving some scope for establishing the defence of impossibility, the courts may further restrict the availability of specific performance. These difficulties could be avoided by using third party rights with appropriate drafting.