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OUTER HOUSE, COURT OF SESSION

[2008] CSOH 44

CA42/07

OPINION OF LORD GLENNIE

in the cause

SPIERSBRIDGE PROPERTY DEVELOPMENTS LIMITED

Pursuer;

against

MUIR CONSTRUCTION LIMITED

Defender:

________________

Pursuer: Walker; Maclay Murray & Spens

Defender: Howie, Q.C., Borland; Harper MacLeod

14 March 2008

Introduction

[1] The pursuer is a property development company. The defender is a construction company. In June 2005 the parties entered into a building contract ("the building contract") for the design and construction by the defender of a development of light industrial warehouses, office pavilions and associated works. The detailed provisions of the building contract are not relevant for present purposes. In this action the pursuer claims for alleged delays in completing the works whilst the defender counterclaims for an extension of time.

[2] By clause 2.10.2 of Appendix 1 to the building contract, the defender (as Contractor) undertook to execute and deliver to the pursuer (as Employer), no later than 14 days following a written request from the pursuer so to do,

"a performance bond in an amount not less than 10% of the Contract Sum in terms the same as the draft performance bond set out in Part Five of this Schedule, subject to such non-material variations as may be required by the Employer, and granted by a surety approved by the Employer (such approval not to be unreasonably withheld)."

In due course, at the defender's request, a performance bond in the form of a letter addressed to the pursuers was issued by the Bank of Scotland ("the bank") in the following terms:

"We, THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND ... are informed that MUIR CONSTRUCTION LIMITED ... (hereinafter called the Contractor) has entered into a contract with you in respect of the design and construction of two light industrial warehouses capable of sub-division and two office pavilions together with all associated car parking, access roads, service yard areas and external services at Spiersbridge Avenue, Thornliebank, Glasgow G46 8NL for the original contract sum of Five million nine hundred and thirty two thousand five hundred and six pounds and fifty two pence Sterling (£5,932,506.52) and that a Bank Guarantee for Five hundred and ninety three thousand two hundred and fifty pounds Sterling (£593,250) is required).

On behalf of the Contractor we hereby give you our guarantee and undertake to pay to you any amount or amounts not exceeding in total a maximum of Five hundred and ninety three thousand two hundred and fifty pounds Sterling (£593,250) in total inclusive of all interest and costs on receipt of your first demand in writing on us at this office with your signature thereon confirmed by your Bankers stating that the Contractor has failed to perform and observe all the conditions and stipulations of this said contract provided that such amount shall reduce to an amount not exceeding Fifty nine thousand three hundred and twenty five pounds Sterling (£59,325) in total inclusive of all interests (sic) and costs on receipt of any first demand as aforesaid which occurs after the date of issue of the certificate of practical completion under the contract. For the purposes of this Bank Guarantee, any determination of the Contractor's employment under the Contract and/or the legal extinction of the Contractor shall be conclusive evidence of the Contractor's breach of the contract.

This guarantee is valid for written demands received by us on or before the date of issue of the statement of making good defects under the contract after which date our liability to you under this guarantee will cease and this guarantee will be of no further effect.

This guarantee and the benefits conferred by it may not be assigned by you at any time without our prior written consent. We shall not be entitled to assign our rights, obligations or liabilities hereunder without your prior written consent.

This guarantee shall be governed by and construed according to the Laws of Scotland."

That bond was in substantially the same terms as the draft bond referred to in clause 2.10.2. I should note, in particular, that there was no change to the introductory wording of the second paragraph ("On behalf of the Contractor") or to the restriction in the penultimate paragraph on the bank's entitlement to assign its rights, obligations or liabilities under the bond.

[3] On 14 November 2006 the pursuer made a demand in writing requiring payment by the bank under the bond of an amount of £503,193.75. The bank made payment of that amount to the pursuer. It is averred by the defender, though as yet it is neither admitted nor proved, that the defender was obliged, in terms of a counter-indemnity granted by them to the bank, to pay to the bank that same amount and that it did so.

[4] The defender avers in its counterclaim that the grounds upon which the pursuer called on the bond, as set out in the demand served on the bank, were erroneous and without foundation in that it was not in breach of contract as alleged. In these circumstances, it contends that the pursuer is obliged to account to it for the sums received under the bond. The basis upon which the defender contends that the pursuer is obliged to account to it for such sums is a term which it says is to be implied into the building contract that "in the event that ... the pursuer should make a call on the bond it would account to the defender for the proceeds of the bond, retaining only the amount equivalent to any loss suffered by the pursuer as a result of the defender's breach of contract, if any". It is contended that such a term requires to be implied as a matter of business efficacy. This is supported by a number of averments. It is averred, in particular, that a reasonable man in the position of the defender would require such a term for his own protection; that no reasonable man in the position of the pursuer would refuse to accede to it; and that without such a term, the building contract would operate, relative to the bond, in a way which would not be the way in which practical business men in the construction industry on both sides of the transaction would reasonably have expected it to operate. The defender goes on to say that the bond conferred a considerable commercial advantage on the pursuer by providing an unquestionably solvent source from which the pursuer could claim monies for an alleged breach of the building contract. The monies could be obtained by the pursuer from the bank under the bond without proof of breach or damage and without prejudice to any further claims the pursuer may have for a greater sum by way of damages. In those circumstances, "the obligation on the pursuer to account to the defender ... is a necessary corrective if a balance of commercial fairness is to be maintained between the parties." That formulation borrows heavily from the cases to which I shall refer.

[5] There is a dispute between the parties as to whether the defender was in breach of the building contract as alleged and, if so, as to the amount of any damages to which the pursuer is entitled. That dispute has yet to be resolved. A proof before answer has been appointed. However, the parties are also at issue as to whether, assuming that the pursuer is ultimately found to be entitled to less than it demanded and was paid under the bond, it is obliged to account to the defender for that excess. The pursuer's case is not that it is entitled to hold on to any such excess but that its duty to account is owed to the bank and not to the defender. Its concern is that if it were to make payment of that excess to the defender, it would run the risk of being sued for the same amount by the bank. The parties have agreed that it is sensible to have this issue decided at debate before the proof.

The performance bond issue

[6] The question for decision at debate before me is this: where a demand has been made on a performance bond in an amount which is ultimately found to exceed the sum due to the party making the demand, is that party obliged to account for that excess (a) to the bank or (b) to his opposite contracting party?

Submissions

[7] For the pursuer, Mr Walker said that there were three contracts to be considered, namely: the bond contract, i.e. the contract on the performance bond between the pursuer and the bank; the building contract, between the pursuer and the defender; and the banking contract, between the defender and the bank, pursuant to which the bank agreed to issue the performance bond. All had to be taken into account, since any term implied into one of those contracts might impinge upon the others; and, in any event, the entire contractual framework is relevant to deciding whether the implication of a term in one of the contracts is necessary or appropriate. The pursuer accepted that if the amount of damages to which it was found entitled was less than the sum paid to it by the bank pursuant to the demand under the bond, it could not keep that excess. The question was: to whom should it account for the excess and what was the route by which that could be achieved? Both sides accepted that none of the contracts provided expressly for such an event. Accordingly, it was necessary to imply a term. But into which contract? He submitted that the most sensible route was by implication of a term into the bond contract that in such circumstances the pursuer would repay the excess to the bank, matched by a corresponding term to be implied into the banking contract under which, if it had already been paid by the defender, the bank would repay the like amount to the defender. If it was accepted that such terms were to be implied into the bond contract and the banking contract, there was no need for any implication into the building contract.

[8] Mr Walker reminded me, under reference to McBryde, The Law of Contract in Scotland, 3^rd ed. at para.9-68 - 9-71, of the test for implication of terms. The defender's pleaded case was that the term was to be implied for reasons of business efficacy. For this approach to succeed, it must be shown inter alia (a) that the term was necessary to make the contract work in the way the parties must have intended it to work (or, as it sometimes put, to give it the business efficacy which the parties must both have intended that it should have); (b) that the suggested term was reasonable; and (c) that the term was so obvious ("it goes without saying") that the parties would readily have agreed to it had it been suggested to them. Those tests, he submitted, were readily satisfied so far as concerns the terms which he argued were to be implied into the bond contract and banking contract. They were less easily satisfied in relation to the building contract. As an example of the potential difficulty of implying the term into the building contract, Mr Walker raised the spectre of insolvency. If, in such a case, the pursuer was required to account for the excess to the defender, and the defender was insolvent, the payment by the pursuer would go into the pot for the general body of creditors of the defender. Unless it had been paid already by the defender, the bank would lose out. He posed the question whether, having regard to that factor, it could be said that at the time of entering into the contract the bank would readily have agreed that the excess would be paid not to it but to the defender; and answered it in the negative. By contrast, if the terms were implied into the bond contract and the banking contract, the bank would be able to sue the pursuer for the excess and the overpayment would be truly reversed. If the bank had already received payment from the defender, it would then account to the defender for the amount received. As to whether the liquidator could force the bank to sue, Mr Walker said that this presented no difficulty, since the bank would obviously grant an assignation to the defender in a case where it was already in funds from the defender; and there was, he argued, an implied term in the banking contract that the bank would do so in such an event.

[9] For the defender, Mr Howie Q.C. did not dissent from Mr Walker's submission as to the test for implication taken from McBryde, but he drew my attention to the case of Mosvolds Rederi A/S v Food Corporation of India (The "Damodar General T. J. Park" and "King Theras") [1986] 2 Lloyd's Rep. 68 where Steyn J, as he then was, pointed out, at p.70, that the "obviousness" or "officious bystander" test (Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206) could be considered as a separate test from that of business efficacy. In that case he held that the Shirlaw test was satisfied whilst the business efficacy test was not.

[10] Mr Howie noted that the terms of the bond prohibited the bank from assigning its rights thereunder without the consent of the pursuer. The right of the pursuer to withhold consent was not qualified by any test of reasonableness. This removed one of the essential planks of the pursuer's implied term trilogy, namely the term which Mr Walker submitted should be implied into the banking contract that the bank would assign to the defender its right to repayment from the pursuer of the excess paid under the bond. There was no room for such an implication into the banking contract if, under the terms of the bond, the pursuer could refuse consent to the assignation - by refusing its consent, the pursuer could, in effect, hold onto the money, since the bank would not be interested in pursuing in its own name a claim for repayment if it had already been paid by the defender. Further, he pointed out that the terms of the bond were substantially those set out in the building contract. There was therefore no occasion for any separate negotiation between the bank and the defender over the terms of the banking contract, or between the pursuer and the bank over the terms of the bond. It was fanciful, therefore, to ask what the parties to those particular contracts would or would not have been willing to agree. It was fanciful also to think in terms of any discussion, however notional, between the parties to those contracts into which the officious bystander could have had the opportunity to interpose his uncalled-for suggestion: c.f. Shirlaw v Southern Foundries.

[11] Mr Walker had accepted that a term had to be implied somewhere in the set of contractual relationships which he had outlined. It was clear, therefore, that the test of necessity was satisfied at least at that broad level. The remaining question was which implication made the most sense or was least repugnant to the way in which the parties to the contracts would have intended them to work. Mr Howie submitted that the obvious place for the term was in the building contract. The claim for re-payment of the excess involved a detailed consideration of the merits of the dispute under the building contract. The bank had no interest in this. It was unrealistic to think that the bank would wish to undertake an obligation to sue to recover any excess paid under the bond. The bank knew nothing about the merits of any dispute under the building contract. It did not wish to be involved in that. Its obligation to pay under the bond was an absolute obligation to pay upon a demand by the pursuer in the required form, regardless of the accuracy of the statements in the demand. It was not interested in the underlying merits. If it were the case that it was the bank that could sue on the bond for the excess, the bank would be undertaking the burden of seeking to prove in litigation with the pursuer that the defender was not in breach of contract or, if it was, that the damage suffered by the pursuer was less than the amount called under the bond. That was not a task that a reasonable banker would want to undertake, not only because of the difficulty of running such a case, but also because of the expense. Much better for the bank to be able to rely upon its counter-indemnity from the defender at the time the bond is called. It could adjust its rates to take account of its assessment of the defender's creditworthiness. On the hypothesis that the bank had the right of action for recovery of the excess, Mr Walker had submitted that these difficulties could be overcome by an assignation of the right of action by the bank to the defenders. This did not work because of the restriction on assignation (see above). But the assignation route did not work anyway, because if the bank had been paid by the defender pursuant to its counter-indemnity it would not have suffered any loss and would have no claim to assign. And, he asked rhetorically, on what basis in law did the bank have a claim in any event? It had done what it contracted to do. It had paid in response to a valid demand. The merits or otherwise of that demand were res inter alios acta so far as the bank was concerned. There was no failure or default of any kind by the pursuer so as to put the pursuer in breach vis-à-vis the bank. Assuming, as would usually be the case, that the bank had been paid under the counter-indemnity, what interest did it have to recover from the pursuer? All this pointed against there being an implied term in the bond contract. Put simply, if the officious bystander had asked what would happen if it later turned out that the pursuer had claimed more under the bond than he was ultimately found entitled to by way of damages under the building contract, it was far from obvious that the parties (i.e. the pursuer, the defender and the bank) would have answered: "of course, the pursuer will repay the bank". Having regard to the bank's right to be indemnified by the defender for the full amount of its payment under the bond, it was far more likely that they would all have agreed that it should be sorted out between the parties to the underlying dispute, i.e. between the pursuer and the defender.

[12] Mr Howie submitted that the insolvency problem was more apprehended than real. The bank holds a counter-indemnity from the defender. When the pursuer makes a demand upon the bond, the bank will claim from the defender under its counter-indemnity. If, at that stage, the defender is insolvent, that is the risk that the bank takes in agreeing to put up the bond. It will have made an analysis of the position of the defender before agreeing so to do. Any later insolvency by the defender, after it has paid on the counter-indemnity, will not affect the bank.

[13] In the course of submissions on this point I was referred to the following authorities: Cargill International SA v Bangladesh Sugar & Food Industries Corp. [1996] 4 All. E.R. 563 (Morison J) and [1998] 1 WLR 461 (Court of Appeal); Comdel Commodities Limited v Siporex Trade SA [1997] 1 Lloyds' Rep 424; Seepong Engineering Construction Co Limited v Formula 1 Administration Limited (Langley J, unreported, 25 February 1999); Australasian Conference Association v Mainline Constructions PTY Limited (in liquidation) [1978] 141 C.L.R. 335; and Wood Hall Limited v The Pipeline Authority and Another [1979] 141 C.L.R. 443. Insofar as they touched upon the point at issue before me, they supported the position of the defender. However, Mr Walker submitted that, with the exception of the decision in Australasian Conference Association v Mainline Constructions, which he argued was distinguishable, the point did not arise for decision in those cases and therefore any comments on the issue were obiter. In addition, I was referred to passages from a number of well-known textbooks, namely: Hudson's Building & Engineering Contracts (11^th ed.) at para.17.078, both in the main volume and in the Supplement thereto under reference to the same paragraph; Keating, Construction Contracts (8^th ed.) at para.10-36; Andrews and Millett, The Law of Guarantees (4^th ed.), at paras.16-033 and 16-034; and Benjamin's Sale of Goods (7^th ed.), at paras.23-288 and 23-289.

Discussion

[14] In some cases it is necessary to decide whether, after demand is made upon a bond and payment is made by the bank, the party receiving payment is entitled to retain the full amount of that payment regardless of the loss he has actually suffered, or whether he is obliged to account for the difference between the amount of the payment to him under the bond and the amount of his loss. That was the main issue in Cargill v Bangladesh Sugar & Food Industries Corp. where it was argued, unsuccessfully, that there was no duty to account at all. There are cases, of which Seepong Engineering Construction v Formula 1 Administration Limited is one, in which it has been held that there was to be no accounting after the bond was called. But absent clear words to the contrary, I would expect that in the normal case the calling of a bond will be followed in due course by an accounting under which the party receiving payment thereunder will retain only the amount of his proved losses. I do not need to decide this point since, as I have indicated, both counsel agree that under the contractual arrangements in place in the present case the pursuer is not entitled to retain any more than he is ultimately found to be entitled to in the dispute under the building contract. He must account for the excess.

[15] It is agreed between the parties that the obligation on the pursuer to account for any excess must rest upon an implied term in one of the contracts to which it is a party. The "business efficacy" test for implication of terms has at its heart the proposition that the term sought to be implied must be necessary in order for the contract to work as it must have been intended to work. The qualification is important, since all contracts will work in some way or other. Both parties are here agreed that it is necessary to imply a term somewhere in the tripartite relationship between the pursuer, the defender and the bank. Otherwise the building contract will not work as the parties to it must have intended it to do, since there would be no mechanism for the repayment by the pursuer of any excess paid to it under the bond. Once this is accepted, the test of necessity is met. It cannot be right then to ask whether, in relation to each of the three contracts, it is necessary to imply a term to achieve repayment. That would be a reductio ad absurdum. By that test, it would not be necessary to imply a term into the bond contract because the desired result could be achieved by an implication in the building contract. And it would not be necessary to imply a term into the building contract because the result could be achieved by an implication in the bond contract. Adopting this approach, it would be impossible to imply into either contract a term which both parties accept had to be applied into one of them. Accordingly, I take the necessity test as being satisfied by the fact that it is necessary to imply a term into one of the contracts between the parties. The question then becomes one of evaluating which implication best gives the business efficacy to the transaction as a whole which the parties to it must have intended.

[16] If a term is to be implied into the bond contract with the bank that the pursuer will account to the bank for that excess, that term must be matched by a corresponding term in the banking contract between the bank and the defender in terms of which, if it has already received payment from the defender under the counter-indemnity, the bank will reimburse the defender in a like amount. If, on the other hand, a term is to be implied into the building contract that the pursuer will account to the defender for that excess, then there is no need to imply a corresponding term into the banking contract between the defender and the bank, since the defender's obligation to pay the bank arises out of the counter-indemnity which will already be in place.

[17] The need, on the pursuer's case, for a corresponding term in the banking contract does not seem to me to carry much weight, since in the circumstances where it is needed (i.e. where the duty to account is to the bank) it will be implied without difficulty. There is a greater problem, however, with the pursuer's proffered analysis. That is to do with how, if the right lies with the bank, the defender can force the bank to sue effectively for the excess. The problem is both legal and practical. I have already adverted to the practical difficulties of the bank having to undertake the suit at great expense to itself in respect of a dispute about which it knows nothing and in the outcome of which, because it has the benefit of a counter-indemnity from the defender, it has no interest. The legal difficulties are no less pressing. Is the bank to be left on its own to sue, or is it to be under the instructions of the defender as a kind of dominus litis? What terms are to be implied as regards expenses? Is the bank to be held liable to the defender for its conduct of the litigation? Are there to be implied into the banking contract reciprocal obligations on the defender to co-operate in the litigation, to provide documents and witnesses, to act diligently, etc.? How are claims to privilege or confidentiality to be dealt with? It is not, of course, impossible to draft an agreement to deal with all these points, but in the absence of a detailed agreement the scope for disputes and uncertainty is obvious. Put shortly, it is not the sort of case where, had the officious bystander raised the question of what was to happen, one could envisage the bank and the defenders retorting in unison: "of course, the defenders are entitled to require the bank to sue ...". The solution might lie in an assignation; but the term of the bond limiting the bank's entitlement to assign its rights under the bond - which term was in the draft bond attached to the building contract and therefore must have been in the contemplation of both the pursuer and the defender at the time of entering into the building contract - precludes the implication of a term in the banking contract that the bank will, if requested so to do and if it has been paid by the defender under the counter-indemnity, assign to the defender its claim against the pursuer for recovery of the excess.

[18] The natural implication, so it seems to me, is an implication of the type for which the defender contends, i.e. an implication of a term into the building contract that, "in the event that ... the pursuer should make a call on the bond it would account to the defender for the proceeds of the bond, retaining only the amount equivalent to any loss suffered by the pursuer as a result of the defender's breach of contract, if any". I have taken the wording from the defender's pleading, but nothing turns on particular words used. The sense is clear, and a proposed implication does not fail the test of certainty simply because its purport can be expressed in a number of different ways. A term implied into the building contract has none of the disadvantages of involving the bank in the merits of the case. It has the distinct advantage of allowing the issue of what loss, if any, the pursuer has suffered as a result of the defender's alleged breach of the building contract to be determined in litigation or arbitration between the parties to that contract. And it further has the advantage that the dispute is resolved between the parties who have in fact suffered the consequences of, on the one hand, the breach of contract and, on the other, the excessive call upon the bond. It is unrealistic to think that the bank will not have agreed with the defender a counter-indemnity in terms of which, upon a call being made upon the bond, the defender will in turn indemnify the bank in the like amount. If the call on the bond is in an amount which turns out to have been excessive, the party who is out of pocket is the defender, not the bank; and it seems to me quite natural, and something to which all parties would have said "of course", that it should be the defender to whom the pursuer has to account for that excess.

[19] The only potential problem in this is that which Mr Walker identified in his submissions. If the defender becomes insolvent after the bond is established by the bank, but before the bank can claim against it on the counter-indemnity, then the bank stands to lose. If the liquidator recovers from the pursuer on an accounting between the parties to the building contract, the amount recovered will go into the pot for the benefit of all creditors of the defender and the bank will, unless it has taken some security, rank as an unsecured creditor along with other unsecured creditors. If the bank has not taken security, it is true that it will stand to lose in such circumstances. But it does not seem to me that this stands in the way of the solution put forward by the defender. It is simply a risk that the bank takes, a commercial risk which it will decide whether or not to take depending upon its own assessment of the defender's creditworthiness. It can always refuse to issue the bond, or require some security before agreeing to issue it.

[20] I accept that in none of the English cases did the point with which I am concerned arise directly for decision. However, those cases point very strongly in favour of the accounting taking place between the pursuer and the defender and not between the pursuer and the bank. Thus, in Cargill International v Bangladesh Sugar Food Industries Corp. at first instance, Morison J makes it clear that he is envisaging an accounting between the parties to the underlying contract. Having cited a number of cases and textbooks, he concludes at page 571h as follows:

"As a matter of general principle, therefor, in the light of the commercial purpose of such bonds, the authorities to which I have referred and the textbook comments, I take the view that if there has been a call on a bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party may hold the amount recovered in trust for the bank (where, for example, the bank had not been paid by him) but that does not affect his right to bring the claim in his own name. In the normal course of events, the bank will have required its customer to provide it with appropriate security for the giving of the bond, which would be called upon as soon as the bank was required to pay. ... In principle, I take the view that the account party is always entitled to receive the overpayment, since his entitlement is founded upon the contract between himself and the beneficiary."

It is clear from the passage as a whole that "the party who provided the bond" is not the bank but the party to the underlying contract. The idea that that party might hold the amount recovered in trust for the bank might appear to provide a solution to the insolvency problem which Mr Walker raised. However, neither counsel before me wished to support the notion that that Scots law would recognise a trust in such circumstances, and on this matter I was referred to an illuminating article by Professor Gretton, Constructive Trusts and Insolvency, in the European Review of Private Law, 3:463-476, 2000. But that apparent difference between English and Scots law does not affect the underlying analysis. If the insolvency problem is not solved in this way, so be it.

[21] Before Cargill reached the Court of Appeal, Morison J's comments were approved by the Court of Appeal in Comdel Commodities Limited v Siporex. The appeal concerned the discharge on grounds of delay of a mareva injunction. In the background was a claim by Comdel in an arbitration against Siporex for recovery of the excess amount demanded by and paid to Siporex under a performance bond. In giving the judgment of the court, Potter LJ made the following remarks directed to Comdel's claim (at page 431):

"The law in this respect has recently been the subject of an illuminating decision of Mr Justice Morison in Cargill International SA v Bangladesh Sugar & Food Industries Corp. ... in which the authorities are reviewed ... Those authorities are to the effect that it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, there will at some stage in the future be an 'accounting' between the parties to the contract of sale in the sense that their rights and obligations will finally be determined at some future date. The bond is a guarantee of due performance; it is not to be treated as representing a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract giving rise to the right to call for payment under the bond. If the amount of the bond is not enough to satisfy the seller's claim for damages, the buyer is liable to the seller for damages in excess of the amount of the bond. On the other hand, if the amount of the bond is more than enough to justify the seller's claim for damages, the buyer can recover from the seller the amount of the bond which accedes the seller's damages."

Although Comdel's right to claim was not in issue, I do not consider that it is right to regard this passage as obiter; its right to claim to recover from Siporex any excess paid to Siporex under the bond was an essential step in the argument since, had it been the bank rather than Comdel which had the right, the injunction would presumably have been discharged on that ground without any need to consider delay.

[22] The appeal in Cargill International SA v Bangladesh Sugar & Food Industries Corp. focused principally on the argument that the arrangements in that case did not allow for any accounting subsequently between the parties at all, an argument which failed. The leading judgment was given by Potter LJ. At page 468G he said this:

"If questions of reasonableness are taken into account and if the usual characteristics and broad commercial purpose of performance bonds are borne in mind, it seems to me that the following matters are pertinent to the task of construction in the case. First, as Mr Hossain accepted, such a bond is a guarantee of performance. That is not to say it is a guarantee in the sense that it has all the normal incidents of a contract of surety; it is of course a contract of primary liability so far as the bank that gives it is concerned. However, it has the feature that its purpose is to provide security to the buyer for the fulfilment by the seller of his contractual obligations. ... Second, its purpose is also that the buyer may have money in hand to meet any claim he has for damage as a result of the seller's breach. Third, it confers a considerable commercial advantage upon a buyer. Not only does the buyer have an unquestionably solvent source from which to claim compensation for a breach by the seller, at least to the extent of the bond, but payment can be obtained from the seller's bank on demand without proof of damage and without prejudice to any subsequent claim against the seller for a higher sum by way of damages. In these circumstances the obligation to account later to the seller, in respect of what turns out to be an overpayment, is a necessary corrective if a balance of commercial fairness is to be maintained between the parties."

I note the statement that the obligation to account is to account to the other contracting party under the underlying contract. Later, at page 470F, he emphasised that the bond acted as an obvious incentive for performance, in that it achieved the effect of early payment against loss without the need to resort to litigation and

"if it is sufficient (or more than sufficient) to compensate the buyer, it places the onus of challenge and recovery upon the seller."

Again, I note that it is the seller who is said to recover, not the bank. In the same case Staughton LJ agreed that the appeal should be dismissed. He said this (at page 471F):

"The general situation as to performance bonds is that they provide that the bank or other party giving the bond has to pay forthwith, usually on demand. But subsequently there has to be an accounting between the parties to the commercial contract."

He went on to say this:

"... it seems to me right to bear in mind that the parties very probably will have known that that is a general feature of performance bonds. Is there then wording in this contract which shows a different intention? In my judgment there is not. ... In other words, the bond is to be forfeited when it is called upon in the circumstances described, the bank must pay, and the money must go to the Bangladesh Food and Sugar Corporation (sic), but that does not affect the position which generally applies, as between the Bangladesh Sugar and Food Corporation and Cargill, that there must be an accounting."

Again, there is a clear distinction drawn between the bank's obligation to pay in full and the accounting that will subsequently take place between the two parties to the underlying contract.

[23] At first instance in that case Morison J cited from Hudson, Keating and Benjamin. I have referred earlier to the current editions of those books. They continue to support the proposition that the accounting is as between the parties to the underlying contract. I would only comment on two points. The first point is in respect of a suggestion in Benjamin, at para.23-288, that the rationale may be that "the making of an excessive demand is, basically a breach of the beneficiary's underlying contract", so that the other party to the underlying contract can, in effect, recover the excess as damages for breach of that contract. I would not wish to be taken as concurring in this analysis. The authors of Millett and Andrews, at para.16-034, suggest that it may not be a breach of contract for the beneficiary to make a demand on the performance bond when there has not in fact been a breach by the other party to the underlying contract. I agree with that, provided at least that the demand is an honest one. They suggest that the duty to account arises otherwise, though they question the different ways in which it may arise. The parties here are agreed that the route to recovery is by an implied term. The second point relates to a suggestion in Hudson that the payment under the bond is made by the bank "as agent for the contractor", so that (for that reason) it is the contractor not the bank who may sue to recover the excess. Mr Howie seized on this and reminded me that in this case the operative part of the bond began with the words: "On behalf of the Contractor". There is no necessary inconsistency between the bank, on the one hand, paying as agent and, on the other, providing its personal guarantee that payment will be made. However, I do not consider that that is how such arrangements are normally understood. The bank, at the request of one of the parties to the contract, gives its own undertaking to pay. I consider that the words "on behalf of ...", read in the context of the bond as a whole, here mean no more than "at the request of ..." or "on the instructions of ...".

[24] In Cargill, Morison J relied upon two Australian decisions. The more in point of the two is Australasian Conference Association v Mainline Constructions PTY Limited (in liquidation). The somewhat complicated proceedings are succinctly summarised in Cargill at the bottom of p.569. It is clear from both the majority and dissenting judgments that the question that was determinative of the dispute was whether the employer was bound to account to the bank or to the builder. The High Court held that the employer was bound to account to the builder, i.e. to the other party to the underlying building contract. Mr Walker sought to distinguish that case on the basis of a specific term in that building contract, but he failed to persuade me that that was a valid ground for distinction. That case further supports the view to which I have come.

[25] For these reasons I answer the question posed at para.[6] above in the following way: where a demand has been made on a performance bond in an amount which is ultimately found to exceed the sum due to the party making the demand, that party is obliged to account for that excess to his opposite contracting party? To give effect to this I shall repel the pursuer's first plea in law in its Answers to the Counterclaim in so far as directed towards the averments in Statement 7.1 of the Counterclaim anent the right to recover under the bond for monies which ex hypothesi are not sums to which the pursuer was entitled in name of damages.

A pleading point

[26] A discrete point was taken by Mr Walker as to the competency of the defender's conclusion for count and reckoning as sought to be introduced into its Counterclaim by a Minute of Amendment. One aspect of that was dealt with in light of discussion during the hearing by amendment which was offered at the time and submitted to the court afterwards. That amendment results in the claim for count and reckoning running alongside rather than in place of the claim for payment. I need say no more about that. But Mr Walker's fundamental point was that a conclusion for count and reckoning was incompetent when the party claiming payment can specify the amount of his claim to the penny. He referred me to Maxwell, The Practice of the Court of Session at p.357, to Macfadyen, Court of Session Practice at para.[2052], and to Marchmont Ltd v Clayton 1989 SLT 725, 728. I do not accept that. All that those passages say is that in such circumstances an ordinary action is more appropriate. In the present case there is an averment that the pursuers intromitted with the money when they received it from the bank and either held on to it or applied it as they did. The details do not matter. There might, I suppose, be scope for enquiry into how the money was handled by the pursuers, what interest was earned, so as to justify the full process of count and reckoning, but I do not rest my decision solely on that. On the broader ground, I see no reason why a conclusion for count and reckoning should not be used in a claim for re-payment of excess amounts received under a performance bond in circumstances such as the present, particularly since the precise sum (if any) will not be ascertained until the disputes under the building contract are resolved in the same litigation.

[27] That was the only opposition to the Minute of Amendment being received and, indeed, to the Counterclaim being amended in terms thereof. I shall therefore allow the amendment.