Construction contract – Surety – Bond – Defendant being held liable under bond – Claimant claiming interest on full amount of bond – Whether delay in bringing proceedings affecting defendant’s liability to pay interest – Claim allowed in part
The claimant employed a contractor, on a construction contract in the JCT standard form (1998 ed), to carry out works on a major renovation of the Hackney Empire theatre. The performance of the contractor’s contractual obligations was secured by a bond for nearly £1.107m executed in favour of the claimant by the contractor and the defendant as its surety. The contractor went into administration in July 2003 before completing the work.
The claimant’s claim against the defendant for the full sum secured by the bond was allowed in the High Court: [2011] EWHC 2378 (TCC). The defendant’s appeal against that decision was dismissed by the Court of Appeal: [2012] EWCA (Civ) 1716; [2013] 1 EGLR 101.
The court then had to deal with the question of interest. The claimant claimed interest from 1 July 2003 to 3 November 2011 on the full bond amount of £1,106,852, and on the sum of £901,852 thereafter, at a rate of 8.08%, being the average of 4.25% above Barclays base rate from 2003 to 8 April 2013. That equated to a sum of approximately £845,000. In its opening note for the trial served on 30 June 2011, he claimant had accepted that compound interest was not appropriate. However, it submitted that in the circumstances the claimant should be awarded interest from when the sum owing should have been paid. A suitable date was said to be 8 March 2004 when a schedule of losses was submitted to the defendant at a commercial rate of base rate plus 1%.
Held: The claim was allowed in part.
(1) Interest payments for the use of money were calculated on a compound basis. If the law was to achieve a fair and just outcome when assessing financial loss it had to recognise and give effect to that reality. The starting point was that interest would normally start running when the cause of action accrued. Interest was paid because the defendant had had the use of the money for a time for which he should not have had that use. In the present case the claimant had been kept out of its money since March 2004. Although its cause of action might have accrued on or before 1 July 2003, its loss was caused when the defendant failed to pay on the bond as it should have done which was three weeks from the date of the demand, namely 29 March 2004: Claymore Services Ltd v Nautilus Properties Ltd [2007] BLR 452 and Sycamore Bidco Ltd v Breslin [2013] EWHC 174 (Ch) considered.
(2) Where a claimant assured had been guilty of excessive delay, the rate of interest might be adjusted adversely to him. Where a claimant had delayed unreasonably in commencing or prosecuting proceedings, the court might exercise its discretion either to disallow interest for a period or to reduce the rate of interest. Delay should only be characterised as unreasonable when, after making due allowance for the circumstances, it could be seen that the claimant had neglected or declined to pursue his claim for a significant period. When determining what disallowance or reduction should be made, the court had to bear in mind that the defendant had had the use of the money during that period of delay which had to be truly exceptional and inexcusable, allowing for the fact that delays and lulls did occur in litigation: Kuwait Airways v Kuwait Insurance [2001] 1 All ER (Comm) 972 and Challinor v Juliet Bellis & Co [2013] EWHC 620 (Ch); [2013] PLSCS 347 considered.
(3) The evidence in this case showed that the claimant was not a completely free agent but had to manage its affairs in a way that would not attract the disapproval of its major funders or its principal benefactor. Further, the claimant was in the business of providing entertainment, not project management in the construction industry. Before it could embark on litigation, the claimant had to be sure that it had the means to do so. In all the circumstances, although the long delay between June 2004 and September 2008 when the letter of claim was issued might be said to be exceptional, it could not be categorised as inexcusable. On the evidence, the court was satisfied that, after the contractor left the site, the claimant had done its best to move forward in what it saw as the most expedient manner. Where a claimant was being kept out of money that it had actually spent, to deprive it of interest was to give the defendant a windfall. However, it was appropriate to consider the extent of the delay as a factor to be taken into account when deciding on the appropriate rate of interest.
(4) Although a generally broad brush approach was appropriate to determining what rate of interest was just and appropriate, the individual characteristics of the claimant were not to be ignored altogether. The court had to consider the class of litigant to which the claimant belonged and then treat it as a typical member of that class. In the present case, the claimant obtained much of its funding by way of grants or interest free loans. The extent to which it had to borrow money was very much less than the amount owed by the defendant. It was a fairly typical small to medium-sized charity funded largely by donations, grants or interest free loans and funded to a lesser extent by commercial borrowing. It would be inappropriate to treat the claimant as having commercial characteristics that it did not possess. The claimant would probably have to borrow money on the open market to make up a proportion of any shortfall in funds, whilst looking to private donors and grant giving bodies to provide the rest by way of either gift or interest free loan. To award interest at a rate that would be appropriate for a small business would be to give it a substantial windfall. In all the circumstances, the appropriate rate of interest for the full period from 29 March 2004 to the date of payment of the principal sum was 2% over the Barclays base rate.
David Thomas QC and Rupert Choat (instructed by CMS Cameron McKenna LLP) appeared for the claimant; Alexandra Bodnar (instructed by Gateley LLP) appeared for the defendant.
Eileen O’Grady, barrister