SOUTH LANARKSHIRE COUNCIL AGAINST AVIVA INSURANCE Ltd [2016] ScotCS CSOH_83 (16 June 2016)

OUTER HOUSE, COURT OF SESSION

[2016] CSOH 83

 

CA226/15

OPINION OF LORD DOHERTY

In the cause

SOUTH LANARKSHIRE COUNCIL

Pursuer;

against

AVIVA INSURANCE LIMITED

Defender:

Pursuer:  Duncan QC, Edwards;  Ledingham Chalmers LLP

Defenders:  Thomson;  Brodies LLP

16 June 2016

Introduction
[1]        In this commercial action the pursuer seeks payment by the defender of the £3,117,724 which it avers is due under a “Performance Guarantee Bond” (“the Bond”) granted by the defender to the pursuer.  The principal issues in dispute are (i) whether the Bond is a performance bond or an ordinary guarantee; (ii) if the Bond is a performance bond, whether the pursuer has complied with its requirements so as to oblige the defender to make payment thereunder.  The matter came before me for a debate on the commercial roll. 

 

The planning permission
[2]        In April 2001 the pursuer granted the Scottish Coal Company Limited (“SCCL”) planning permission to extract coal using open-cast methods at Broken Cross Muir, near Douglas Water, Lanarkshire.  Thereafter SCCL applied for and received further grants of planning permission to extend the surface coal mine at the site.  On 3 September 2012 the pursuer granted SCCL planning permission (reference CL/11/0405) (“the planning permission”) consenting to further development at the site.  The planning permission has not been produced but it was not disputed that it had been granted subject to the forty-three conditions (“the Conditions”) which had been appended to the report prepared for the planning committee’s meeting of 24 January 2012 (6/2 of process).  For present purposes only the following Conditions need be mentioned:

“2        That the development hereby approved shall be implemented strictly in accordance with drawings;

 

…

 

 

No change to the design will take place without the prior written approval of the Council as Planning Authority.

 

3          That all coal and other mineral extraction operations on the site shall cease not later than the 31st December 2018 and the entire site shall be restored in accordance with the approved restoration scheme … not later than 31st December 2020.

 

4          That the development shall be carried out strictly in accordance with the plans hereby approved …

 

…

 

7          That within one year of commencement of development hereby approved, a final detailed restoration scheme (based on Drawing 26472-G041a.dwg – Figure 2.9 – Restoration Plan) shall be submitted for the approval of the Council as Planning Authority.  No deviation from the restoration plan approved through this condition shall take place unless agreed in writing by the Council as Planning Authority.

 

8          That within one year of commencement of development, an aftercare scheme which details the steps to be carried out and their timing within the 5 year aftercare period shall be submitted to and approved in writing by the Council as Planning Authority …

 

…

 

20        At least one month prior to the commencement of the development, a guarantee to cover all site restoration and aftercare liabilities imposed on the expiry of this consent will be submitted for the written approval of the Council as Planning Authority.  Such guarantee must;

 

…

 

ii          be granted by a bank or other institution which is of sound financial standing and capable of fulfilling the obligations under the guarantee;

iii         be for a specified amount which covers the value of all site restoration and aftercare liabilities as agreed between the developer and the planning authority at the commencement of development

iv         either contain indexation provisions so that the specified amount of the guarantee shall be increased on each anniversary of the date of this consent by the same percentage increase in the General Index of Retail Prices … or be reviewable to ensure that the specified amount of the guarantee always  covers the value of the site restoration and aftercare liabilities

v          come into effect on or before the date of commencement of development, and expire no earlier than 12 months after the end of the aftercare period.

…

 

21        That the outer face of the sub-soil storage tip located along the northern boundary of the site shall be seeded during the first planting season available, and the area shall be maintained as a grassed area in accordance with the appropriate agricultural management techniques thereafter until the removal of the subsoil tip, unless otherwise agreed in writing by the Council as Planning Authority.

 

…”

 

The Bond
[3]        On 29 June and 4 July 2012 the pursuer, the defender and SCCL entered into the undernoted deed:

“PERFORMANCE GUARANTEE BOND

 

In respect of BROKEN CROSS NORTH EAST SURFACE MINE

 

…

 

1.         Background

 

…

 

1.2       The Company [SCCL] has requested the Cautioner [the defender] and the Cautioner has agreed to guarantee the performance of obligations of the Company which are to be created in the Conditions to be attached to the planning permission [CL/11/0405] …

 

…

 

2.         Scope of Bond

 

2.1       The Cautioner subject to the terms hereof hereby guarantees to the Council the due and proper performance of the obligations in the Conditions.

 

2.2       In the event of any breach of the Conditions, the cautioner shall, if called upon by the Council, pay to the Council the proper and reasonable cost of restoration works required to be carried out in terms of the Conditions.

 

3.         Condition of Bond Notice

 

3.1       Prior to the obligation on the Cautioner to pay any sums due hereunder becoming enforceable by the Council, notice in writing of any breach of the Conditions by the Company and a full breakdown of any proper and reasonable the (sic) cost of restoration work to be carried out must be provided to the Cautioner … together with reasonable evidence of the intention of the Council to proceed with any such operation.

 

3.2       If the costs incurred by the Council after carrying out the restoration exceed the cost paid by the Cautioner, the Council may give notice in writing of the total of the costs incurred by the Council and a full breakdown thereof together with reasonable evidence of such costs, and the Cautioner shall pay to the Council the difference between the costs actually incurred by the Council, and the sum previously paid by the Cautioner.  Provided that the liability of the Cautioner to the Council shall be limited in accordance with the Schedule annexed to this Bond.

 

3.3       The Cautioner shall be obliged to make payment within thirty working days of receipt of sufficient evidence that such sums are due for payment either under clause 3.1 or 3.2. 

 

4.         Date of commencement and Limits of Bond

 

4.1       This Bond shall commence on the 29th day of June 2012.

 

4.2       The maximum aggregate total liability of the Cautioner in relation to all claims made by the Council under this Bond shall not in any circumstances except where expressly agreed in writing by the Cautioner and the Company exceed the sum of … £3,150,000 …

 

4.3       The maximum aggregate liability at any particular time of the Cautioner to the Council shall under deduction of any sum previously claimed by the Council under and in terms of Clause 2.2 above be limited to such sum as is determined in accordance with the Schedule annexed to this Bond.

 

…

 

5.         Discharge or release

 

5.1       The Cautioner shall not be discharged or released by any variation in or waiver of any of the provisions of the Conditions or the extent or nature of the Works or any forbearance or allowance of time by the Council or by the insolvency of any of the parties or any breach by the Company of its obligations hereunder.

 

5.2       The obligations of the Cautioner under this Bond shall cease and the Cautioner shall be released and discharged absolutely except in relation to claims already received by the Cautioner and not paid once the obligations incumbent on the Company referred to in the Conditions have been fulfilled or if the Company shall procure a replacement Bond for this Bond on terms mutatis mutandis with this Bond or on the expiry of 42 months from 1st July 2012 whichever shall first arise …

 

6.         Continuing Obligations of the Company

 

6.1       In recognition of the Company’s request that the Cautioner undertakes the obligations under this Bond, the Company undertakes with the Cautioner to perform and discharge promptly and fully the Company’s obligations imposed by the Conditions.

 

…”

 

The Schedule annexed to the Bond provided that the maximum aggregate Bond liability of the defender in respect of all claims made by the pursuer during the period 29 June 2012 – 30 June 2013 was £2,850,000; for 1 July 2013 – 30 June 2014 it rose to £3,000,000; for 1 July 2014 – 31 December 2015 it rose to £3,150,000; and from 1 January 2016 it was £0.  The Bond was subscribed on behalf of the pursuer by its Legal Manager, Margaret Mary Cairns, who was designated “Proper Officer”.

 

Subsequent events
[4]        On 29 April 2013 the Court of Session pronounced an interlocutor ordering that SCCL be wound up pursuant to the Insolvency Act 1986 and appointing interim liquidators.  The defender does not dispute that on their appointment the liquidators caused SCCL to cease its activities at each of its open cast sites.  On 13 May 2013 the pursuer wrote to the defender informing it that SCCL had entered liquidation and that the liquidators had ceased all works on the site.  It advised that SCCL was in breach of its planning obligations and of the planning permission Conditions, and that it was likely that the Bond would be called up.

[5]        The pursuer avers that in late April 2013 the liquidators made clear to it and to other local authorities that by reason of the level of insolvency of SCCL they did not intend to carry out any restoration or aftercare works on SCCL’s sites because the cost of those works would far exceed the value of any unsecured funds; that SCCL had failed to do or pay for any of the restoration works at the site;  and that SCCL was in breach of the Conditions in the planning permission concerning restoration obligations and in breach of several of the Conditions governing development, including Conditions 2, 4 and 21.  The defender’s response to those averments is that those matters are not known and not admitted. 

 

The notice
[6]        By letter dated 8 October 2015 the pursuer’s Legal Manager, Margaret Mary Cairns, gave the defender the following notice on the pursuer’s behalf:

“…  I hereby give notice in terms of clause 3.1 of the … Bond … that the Scottish Coal Company Limited … are, in the respects described in Annex 2 attached hereto, in breach of the obligations contained in conditions attached to the grant of planning permission … granted by the Council on 3 September 2012 (reference CL/11/0405) for works at a surface mine at Broken Cross Muir, Douglas Water (‘the site’).

 

So that the site may be restored to a state which accords with the proper implementation of the Conditions, the Council intends to carry out the restoration works required in terms of the Conditions (“the restoration works”) and has procured the undertaking of the restoration works, all as sufficiently evidenced by the contract among the Council, Hargreaves Surface Mining Limited and OCCW (Broken Cross) Limited dated 6 and 8 October 2015 … and comprising Annex 3 attached hereto.  The proper and reasonable costs of the restoration are set out in Annex 4 attached hereto. 

 

Annex 2, Annex 3 and Annex 4 are to be read as if their terms are set out within this notice.

 

In terms of the Bond, as at the date of this notice in writing the maximum aggregate liability under the Bond is £3,150,000 pounds sterling.

 

Now therefore, on behalf of and as authorised by the Council, I notify you that the proper and reasonable cost of the restoration works is £3,117,724.  Accordingly, by way of demand, I call upon you, in terms of the Bond, to pay to the Council the sum of £3,117,724 …

 

Annex 2

…

 

Notice of Breach of Conditions

 

…

 

Performance Guarantee Bond numbered 24960680 CBO

 

TAKE NOTICE that in terms of clause 3.1 of the above numbered Bond the Scottish Coal Company Limited …are in breach of Conditions 2, 4 and 21 of the Conditions attached to the Conditional Planning Permission granted by South Lanarkshire Council on 3 September 2012 reference CL/11/0405 as follows:-

 

In respect of Condition 2, the development approved by the Conditional Planning Permission has not been implemented in accordance with the drawings narrated in Condition 2;

 

In respect of Condition 4, the development has not been carried out in accordance with the plans approved by the Conditional Planning Permission and

 

In respect of Condition 21, the outer face of the sub-soil storage tip located along the northern boundary of the site was not seeded during the first planting season available and the area has not been maintained in accordance with the appropriate agricultural management techniques.”

 

Annex 3 contained completed missives between the pursuer and solicitors acting for Hargreaves Surface Mining Limited (“Hargreaves”) and OCCW (Broken Cross) Limited (“OCCW”) in terms of which Hargreaves and OCCW agreed to enter into a Restoration Services Agreement with the pursuer relating to the site.  The obligation of Hargreaves and OCCW to enter into the Restoration Services Agreement was subject to the suspensive condition that the pursuer procured settlement of the Bond by 6 April 2016 (six months after the date of conclusion of the missives).  Annex 4 was in the following terms:

“BROKEN CROSS NORTH SURFACE MINE SITE – RESTORATION COSTS

SCHEDULE OF WORK AND BILL OF QUANTITES

 

item

description

quantity

unit

rate(£)

amount(£)

 

1

Excavate overburden and deposit as fill - 4 trucks

818,000

m3

1.40

1,145,200

2

Excavate overburden and deposit as fill - 6 trucks

474,000

m3

1.74

824,760

3

Doze overburden to final level

727,711

m3

0.66

480,289

4

Excavate topsoil and subsoil from stockpile spread and level

155,000

m3

1.90

294,500

5

Cultivate topsoil and sew grass seed

50.90

Ha

1,750

89,075

6

Hydroseed final overburden surface

6.30

Ha

2,000

12,600

7

Prepare and erect fences/field boundaries

4,600.00

m

6.50

29,900

8

Hedging

450.00

m

12.00

5,400

9

Drainage - field drains and drainage sump

1

sum

40,000

40,000

10

Overheads/Management

1

sum

130,000

130,000

11

Stone picking

1

sum

5,000

5,000

12

Farm track/Road construction

1

sum

36,000

36,000

13

Tree Planting

5.00

Ha

5,000

25,000

 

 

TOTAL COSTS FOR RESTORATION SCHEME

 

 

3,117,724

 

The pleadings

[7]        The pursuer avers that in terms of the Bond the sum of £3,117,724 became payable within 30 working days of the notice.  It avers that it was not incumbent upon it to prove that SCCL is in breach of the Conditions 2, 4 and 21; and that the terms of the notice complied with the requirements set out in the Bond.  In particular it avers, in Article 6 of Condescendence:

“… the question of whether SCCL is or is not in breach is, for the purposes of the current action, neither here nor there.  Liability under the bond does not require proof of breach but merely delivery of the requisite documents in terms of cl.  3.1 & 3.3.”

 

The defender denies that liability under the Bond has arisen.  It maintains that on a proper construction of the Bond the liability undertaken by the defender was a merely a secondary liability as guarantor; and that, in any event, the terms of the notice do not comply with the requirements set out in the Bond.

 

Submissions for the pursuer
[8]        Mr Duncan moved for the defences to be repelled and for decree de plano to be pronounced. 

[9]        There was extensive jurisprudence on the subject of performance bonds.  In IE Contractors Ltd v Lloyds Bank plc [1990] 2 Lloyd’s Rep 496, at p.  499 - 500 Staughton LJ observed:

“The first principle which the cases establish is that a performance bond, like a letter of credit, will generally be found to be conditioned upon the presentation of one or more documents, rather than upon the actual existence of the facts which those documents assert… [T]here is a bias or presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than on facts.  But I would not hold the presumption to be irrebuttable if the meaning is plain.”

 

[10]      More recently, in East Ayrshire Council v Zürich Insurance PLC [2014] CSOH 102, Lord Malcolm drew the following points from the case law in England and Wales:

“18.     …

 

1.         The normal principles of construction of contract apply to performance bonds.  Thus to identify whether a demand has created a liability to pay depends upon the parties' intentions in that regard as expressed in the terms of the agreement.

 

2.         Unless there is special provision to the contrary, a performance bond is an autonomous contract which creates an absolute and unqualified obligation on the issuing bank (or insurance company) to pay if and when presented with a demand which complies with the requirements for such as agreed in the bond.  This is an independent obligation quite separate from the underlying guaranteed transaction.  Again subject to any contrary provision in the bond, the bank is expected to do no more than compare the demand with the agreed requirements.  Nothing depends upon the true position concerning any dispute between the beneficiary in the bond and the account party (here the company), nor on the bank's knowledge of it.  And the bank need not and is not expected to make any inquiry on the matter.

 

3.         In short, a performance bond is intended to be an immediately enforceable obligation of the grantor to pay against stipulated documents.  (The fraud exception is based on the general refusal of the court to facilitate a fraudulent gain.) The other side of the coin is that, leaving aside trivial typographical errors which are obvious on the face of the document, the bank is not obliged to pay if a demand does not meet the agreed terms.  This remains true even if it can be proved that any differences are of no materiality.  It is often said that banks' expertise is in documents, not as to the merits or circumstances of the underlying transaction or of the parties to it.  Should the bank pay out in respect of a non-compliant demand, for example because in the particular circumstances it seems fair and reasonable to do so, it may face difficulties in enforcing the counter indemnity obligation of the party in default, who is likely to argue that the bank exceeded its mandate.

 

4.         Whether exact or strict compliance with any agreed style or form is required again depends upon the terms of the bond.  There are cases where it has been held sufficient for the demand to deal with the substance of what is required, rather than slavishly duplicate precise wording…”

 

[11]      In South Lanarkshire Council v Coface SA [2016] CSIH 15, [2016] BLR 237, in the Opinion of the Court delivered by Lord Drummond Young, an Extra Division set out the general principles of the law relating to performance bonds at paras 9-16.  Mr Duncan made particular reference to the following parts of that discussion:

“General principles

 

9          The general principles of law applicable to performance bonds are reasonably well established; they are laid down in a number of cases, notably Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 QB 159, Siporex Trade SA v Banque Indosuez [1986] 2 Lloyd's L R 146, IE Contractors Ltd v Lloyds Bank PLC [1990] 2 Lloyd's L R 496, Oval (717) Ltd v Aegon Insurance Company (UK) Ltd (1997) 85 PLR 97, and the recent very helpful discussion by Lord Malcolm in East Ayrshire Council v Zürich Insurance PLC [2014] CSOH 102.  The construction of such bonds is governed by the normal principles that apply to the construction of contracts; those principles are well known, and are laid down in cases such as Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, at paragraphs 14 and 21-30, Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43, and Arnold v Britton [2015] AC 1689.  The provisions of the parties' contract must be construed in context and in accordance with the purposes that the contract is intended to achieve.  The context includes the circumstances at the time of contracting so far as they were known to the parties or ought to have been known to reasonable persons in the position of the parties at that time; the approach to construction is objective.  The words used in the contract must be given effect according to their natural meaning or any relevant technical meaning, but wording that is capable of more than one meaning should be construed in accordance with commercial common sense.  In such a case a contractual provision should if possible be construed in such a way as to further the parties' common intentions; it should further be construed in such a way as to avoid arbitrary or disproportionate results, and in such a way as to secure commercial predictability.  In the case of performance bonds, the commercial purpose of such bonds and the contractual and business structure in which they operate are in our opinion of great importance. 

 

10        A performance bond is a form of guarantee.  It is normally granted by a bank or other financial institution, and its purpose is to provide a prompt and readily realizable security for obligations undertaken in an underlying transaction.  The underlying transaction can take many forms; frequently it is a construction contract, where bonds are granted in favour of the employer to secure due performance of the contractor's obligations.  In the present case the underlying transaction is the section 75 agreement concluded between Scottish Coal and the respondent, and more specifically the obligations undertaken by Scottish Coal to restore the land following the cessation of mining operations.  The performance bond, like a standard guarantee, is a contract independent of the underlying transaction.  The usual obligation of the granter of a performance bond is to make payment to the beneficiary on the presentation by the latter of specified documentation.  Provided that the documentation conforms to the requirements of the bond, payment must be made immediately; an important feature of such bonds is that there should be no delay in payment, and thus no prejudice to the beneficiary's cash flow.  Consequently the obligation to pay has been described as absolute and unqualified: East Ayrshire Council v Zürich Insurance PLC, supra, per Lord Malcolm at paragraph [18].

 

11        The context is accordingly that the underlying transaction involves performance of works, delivery of goods or the like whereas the bond is granted by a financial institution to provide security by making payment on the occurrence of a specified event.  The financial institution is unlikely to have any detailed knowledge of the underlying transaction or any expertise in that field.  Against this background, it is not usual for a bond to require the granter to investigate the factual position in the underlying transaction, and the obligation to make payment under the performance bond is not normally related to the actual performance of the underlying transaction; payment is normally ‘conditioned upon the presentation of one or more documents, rather than upon the actual existence of facts which those documents assert’: IE Contractors Ltd v Lloyds Bank PLC, supra , at 499 per Staughton LJ; East Ayrshire Council, supra, at paragraph [18].  Thus the truth or falsity of the assertions in the documents presented is immaterial, subject only to an exception for established or obvious fraud; the bank is not concerned in any way with the rights and wrongs of the underlying transaction:  ibid ; Siporex Trade SA v Banque Indosuez, supra , at 158. 

 

12        A further important principle is what is known as the doctrine of strict compliance: the documents presented must be precisely those which the bond calls for: IE Contractors Ltd, supra, at 500.  It has been said that there is no room for documents which are almost the same, which will do just as well.  The reason for this principle lies in the fact that implementation of the contract is normally conditional on the presentation of documents and nothing more; there is no means of checking whether performance is due by reference to underlying facts, and thus the documents must be exactly what is required by the contract.  Moreover, a performance bond can be enforced by the beneficiary very easily, by the mere sending of documents, and there is therefore a danger that the right to call up the bond can be abused.  Accordingly some degree of strictness is required.  When the granter of the performance bond makes payment, it generally has a right to be reimbursed by the party whose obligations are guaranteed, either contractually or on a restitutionary basis.  If the granter does not ensure that the documents comply fully with the terms of the bond, that right to reimbursement will generally be denied.  It is nevertheless important to note that “the degree of compliance required by a performance bond may be strict, or not so strict.  It is a question of construction of the bond”: IE Contractors Ltd v Lloyds Bank PLC, supra, at 501.  …

 

13        The foregoing rules are obviously subject to the precise terms of the bond in question.  Thus a bond may provide that a beneficiary who seeks to enforce the bond should be able to provide evidence that the underlying factual position is as he asserts … For example, if a bond is granted in favour of the employer in a building contract, the bond may provide that in order to enforce it the employer must demonstrate to the bank that a breach of contract has occurred with resulting loss.  That involves an element of inquiry into the underlying factual position …

 

15        At the other extreme, a bond may be payable by the granter on the service of a mere demand for payment, with nothing else being required of the beneficiary.  This possibility was referred to in IE Contractors Ltd, supra, at 499, where Staughton LJ stated that the court had been told that some performance bonds are payable merely upon a demand being made, without requiring the presentation of any other document or the assertion of any fact.  The lack of formality in such a procedure obviously has the disadvantage that the beneficiary is not forced to direct its mind to the requirements for payment with any great rigour.  Perhaps for that reason, in the great majority of cases the bond is payable on the presentation by or on behalf of the beneficiary of a demand for payment together with either the assertion of a particular factual situation or a specified document or documents ....”

 

[12]      It was clear that on a proper construction of the Bond it was a performance bond.  In terms of clause 2.2 the defender assumed an independent obligation to make payment to the pursuer of the cost of restoration works required under the Conditions on the pursuer giving notice that SCCL had breached any of the Conditions.  That was clear from the structure and language of the Bond.  It was a “Performance Guarantee Bond”.  Clause 3 envisaged that payment would be made swiftly after a claim was made.  The commercial purpose of the Bond was to put the pursuer in the position where it could step in and carry out restoration work by giving notice of a breach by SCCL.  That commercial purpose would be defeated if the pursuer required to investigate and prove the occurrence of a breach.  Standing the Bond’s terms, the fact that it had been granted by a financial institution, and its commercial purpose, there was a presumption that the Bond was a performance bond and that the pursuer did not require to prove breach of Conditions by SCCL in order to obtain payment under the Bond.  The counter-indications relied upon by the defender were not nearly strong enough to displace that conclusion.  It was not unusual for language such as “guarantee” and “cautioner” to be used in a performance bond.  Nor was it unusual for clauses such as clause 5.1 to be included, though strictly speaking they were unnecessary.  There had been similar language and a similar clause in the bonds in East Ayrshire Council v Zürich Insurance PLC, supra, South Lanarkshire Council v Coface SA, supra, and Gold Coast Ltd v Caja de Ahorros [2002] 1 Lloyd’s Rep 617.  Parties in the position of the contracting parties would have been aware of the case law relating to the construction of performance bonds.  Reference was made to the guidance on construction of contracts provided by Lord Neuberger PSC in Arnold v Britton [2015] AC 1619, at paras 15 and 23.  The circumstances here were very different from those in Marubeni Hong Kong and South China Ltd v Mongolian Government [2005] 1 WLR 2497 and in Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2011] All ER (Comm) 307.  In those cases the instrument concerned had not been granted by a financial institution.  On a proper construction of the Bond, provided the notice requirements in clause 3 were complied with the obligation to make payment was enforceable.  The Inner House had considered a bond in essentially the same terms in South Lanarkshire Council v Coface SA, supra.  The decision in that case had determined the proper construction of a bond which was, to all intents and purposes, in the same terms as the Bond.  That decision bound the Court to construe the Bond in the same way as the bond in that case had been construed.  While there were some differences between the terms of the two bonds, none of them was material. 

[13]      Clause 2 referred to “any breach of the Conditions”.  If the pursuer asserted that there had been any breach of the Conditions it was entitled to seek payment of the whole cost of restoration works.  In fact, in the present case all of the breaches asserted had involved failures to comply with restoration obligations and the restoration costs claimed were attributable to those breaches.

[14]      The defender’s averments that   it was an implied term of the Bond that claims would be intimated to the pursuer within a reasonable period of time of any breach arising were irrelevant.  There was no proper basis for such a term being implied.  It was not necessary to do so in order to give the Bond business efficacy.  Nor was it a term which persons in the position of the contracting parties would have treated as going without saying.  There was little scope for the implication of terms in a performance bond - certainty was very important.  In any event the suggested term would conflict with express terms of the Bond, in particular, with clauses 4, 5 and the Schedule.  In terms of clause 5, forbearance by the pursuer did not discharge or release the defender.  In terms of the Schedule the periods to which each claims cap applied were lengthy - just over a year for £2,850,000, two years for £3,000,000, and 18 months for £3,150,000.

[15]      The requirements set out in the Bond had been complied with.  Clause 3 had to be construed in a commercially sensible way bearing in mind the commercial purpose of the Bond.  Just as the underlying facts relating to the asserted breach were not to be investigated, neither was the assertion of fact as to what were proper and reasonable restoration costs (unless fraud was alleged, which it was not).  On any reasonable view Annex 4 had provided a “full breakdown” of the cost of restoration work.  The declaration of intention in the notice, and the missives, were reasonable evidence of the intention of the pursuer to proceed with restoration work.  They showed that as at the date of the notice the pursuer had the necessary intention.  The documents which the pursuer had produced complied with the requirements of the Bond. 

 

Submissions for the defender
[16]      Mr Thomson did not dispute the correctness of the principles summarised in East Ayrshire Council v Zürich Insurance PLC and South Lanarkshire Council v Coface SA.  However, he submitted that on a proper construction of the Bond it was not a performance bond payable on the pursuer asserting a breach and presenting documents.  Rather, it was an ordinary guarantee.  The obligation which the defender had assumed was merely accessory to, and co-extensive with, SCCL’s obligation to comply with the Conditions making provision for restoration works.  That was evident on an ordinary reading of the Bond.  The language used (“Guarantee”, “Cautioner”, “guarantee”, “guarantees”) was redolent of an accessory obligation.  The Bond had been obtained by SCCL in order to satisfy the obligation which it had in terms of Condition 20 of the planning permission.  The obligation had been to obtain “a guarantee”.  The natural reading of clause 2.2 was that the pursuer had to demonstrate (rather than just assert) that there had been a breach.  The references to “the proper and reasonable” cost of restoration works (clauses 2.2, 3.1), “reasonable evidence” (clauses 3.1, 3.2), and “sufficient evidence” (clause 3.3) were indicative of objective requirements.  Those requirements, and the fact that clause 4 contemplated the possibility of more than one claim being made, were difficult to reconcile with the proposition that the defender’s liability under the Bond was autonomous of SCCL’s liability under the Conditions; or that all that the pursuer required to do was to give notice (i) asserting that there had been a breach; (ii) asserting what a full breakdown of the proper and reasonable cost of the relevant restoration work to be carried out was; (iii) asserting that it intended to proceed with that work and providing reasonable evidence of that intention.  Mr Thomson submitted that it was not evident from the Bond that the commercial purpose was to put the pursuer in funds quickly to carry out restoration work in the event of SCCL breaching any of the Conditions.  He argued that the Bond was not a banking transaction, and that the presumption in IE Contractors Ltd v Lloyds Bank plc was not applicable.  Rather, the contrary presumption which had been applied in Marubeni Hong Kong and South China Ltd v Mongolian Government and in Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd ought to be applied.  Clause 5.1 was a strong indication that the Bond was an ordinary guarantee and not a performance bond conditioned on the presentation of documents.  If the obligation assumed had been autonomous rather than accessory clause 5.1 would have been unnecessary.  Reference was made to Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1996] 1 AC 199, per Lord Jauncey at p.  205E, and to Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd, supra, per Sir Andrew Blackburne at para 27.  Neither in South Lanarkshire Council v Coface SA nor in East Ayrshire Council v Zürich Insurance PLC had the defender sought to argue that the bond was not a performance bond but a guarantee.  The nature of the bond had not been in dispute.  Rather, the issue in each case had been whether the pursuer had complied with the terms of the bond.  Accordingly, the decision in South Lanarkshire Council v Coface SA did not bind the court in the present case to hold that the Bond is a performance bond.  In any case, there were material differences between the Bond here and the Coface bond.  In particular, clause 3.2 of the latter had provided:

“3.2     The Cautioner shall not be obliged to investigate the authenticity or validity of a claim; a written demand for payment from an authorised official of the Council being sufficient evidence of any sum due thereunder.”

 

It was significant that the Bond contained no such provision.

[17]      Even if the Bond was a performance bond of the type the pursuer suggested rather than a guarantee, it was an implied term of the contract that claims would be intimated to the pursuer within a reasonable period of time of any breach arising.  Reference was made to Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, per Lord Hoffman at paras 16 - 23; Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] 3 WLR 1843, per Lord Neuberger PSC at paras 14 - 25; Aberdeen City Council v Stewart Milne Group Ltd 2012 SC (UKSC) 240, per Lord Hope at para 24, Lord Clarke at paras 31 - 33.  The term should be implied because otherwise the pursuer could increase its recovery by delaying the making of a claim. 

[18]      In any case the pursuer had not complied with the requirements of the Bond.  First, Annex 4 was not “a full breakdown of any proper and reasonable … cost of restoration”.  Second, the restoration costs claimed were not all caused by the breaches upon which the pursuer founded.  It was disputed that there had been any breach of clauses 2 or 4; and the restoration works to which the costs claimed related were far more extensive than works required to remedy any breach of Condition 21.  Third, the pursuer had not provided “reasonable evidence” of its intention to proceed with the restoration works.  The missives were subject to the suspensive condition which had to be purified by 8 April 2006.  If the Restoration Services Agreement referred to in the missives was ever entered into it would be OCCW (rather than the pursuer) who engaged Hargreaves to carry out works, albeit that the pursuer would fund the works from the proceeds of the Bond.  Fourth, in giving notice of claim at the time it did the pursuer had been in breach of the implied term that notice be given within a reasonable time of SCCL’s breach of Conditions.  The breaches of Conditions which the pursuer relied upon had arisen in April 2013 when the liquidators intimated that they would not carry out restoration works.  Had the pursuer made a claim on the Bond by 30 June 2013 its claim would have been capped at £2,850,000.  For the pursuer’s claim to have been intimated within a reasonable time it ought to have been made by 30 June 2013.  The proposed term did not conflict with any express term of the Bond.  The reference to forebearance in clause 5.1 referred to forebearance by the pursuer in seeking to enforce the Conditions against SCCL.  It did not refer to delay by the pursuer in making a claim under the Bond. 

[19]      The pursuer’s averments that liability under the Bond did not require proof of breach were irrelevant and ought not to be admitted to probation.  Quoad ultra a proof before answer ought to be allowed. 

 

Decision
Performance bond or guarantee?

[20]      Whether the Bond is a performance bond conditioned on the giving of notice and the presentation of documents, or an ordinary contract of guarantee, is a matter of construction of the contract.  The normal principles relating to the construction of contracts apply.  Particular guidance as to some of the factors which may require to be borne in mind when it is contended that a contract is a performance bond were discussed in East Ayrshire Council v Zürich Insurance PLC East Ayrshire, supra, at para 18 and in the Opinion of the Court in South Lanarkshire Council v Coface SA, supra, at paras 9-16.

[21]      In both of those cases there was no dispute as to the nature of the contract.  In each case it was common ground between the parties that the contract was a performance bond. The dispute was whether the notice which had been served complied with what the bond required of a notice.  It follows that Mr Duncan went too far when he suggested that, standing the decision in South Lanarkshire Council v Coface SA, the court was bound to hold that the Bond was a performance bond with the same character as the bond in that case.  The ratio decidendi of South Lanarkshire Council v Coface SA does not compel any such conclusion.  The decision was that the notice complied with the requirements which the bond stipulated. 

[22]      Since it was conceded in South Lanarkshire Council v Coface SA that the contract was a performance bond there is little to be gained from comparing and contrasting the bond there with the Bond here.  There are undoubtedly many similarities.  I note at this stage that clause 6.1 of the Coface bond was in almost identical terms to clause 5.1 of the Bond.  Perhaps the most significant difference between the two contracts is that the Coface bond contained a “sufficient evidence” clause (clause 3.2). 

[23]      Looking at the terms of the Bond and its context, I agree with Mr Duncan that it is a performance bond.  In my opinion it bears the hallmarks of a performance bond payable on a breach of the underlying obligation being asserted, and on the presentation of documents.  Nomenclature is not decisive, but it is significant that the Bond is headed “PERFORMANCE GUARANTEE BOND”.  Reasonable persons placed in the position of the contracting parties at the time of the granting of the Bond would have been fully aware of the law relating to performance bonds, including the principles of construction applied to them.  Clause 3.1 envisaged the pursuer being put in funds to carry out restoration work in advance of the work being done.  Clause 3.3 provided for those funds being paid to the pursuer swiftly - within 30 working days of the documents referred to in clause 3.1 having been provided to the defender.  The commercial purpose of the Bond was to put the pursuer in funds quickly to carry out restoration work which SCCL had failed to do in breach of one or more of the Conditions.  That purpose would not be served if the pursuer required to investigate and prove breaches of Conditions, or prove that anticipated costs for remedial works were proper and reasonable, before any liability under the Bond arose or became enforceable.

[24]      On a proper construction of the Bond clauses 2.2 and 3.1 do not require the pursuer to demonstrate or establish that a breach of Conditions has occurred.  The presumption that bonds such as this will generally be found to be conditioned upon the presentation of one or more documents, rather than upon the actual existence of the facts which those documents assert, is applicable (IE Contractors Ltd v Lloyds Bank plc, supra, per Staughton LJ at pp.  499 - 500; East Ayrshire Council v Zürich Insurance PLC, supra, per Lord Malcolm at para 18; South Lanarkshire Council v Coface SA, supra, per the Opinion of the Court at paras 9-16). 

[25]      I am not persuaded by Mr Thomson’s submission that in the circumstances of this case that presumption does not apply.  I also reject his submission that there is a strong presumption that the Bond is not a performance bond of the type the pursuer suggests.  The circumstances here are very different from those in Marubeni Hong Kong and South China Ltd v Mongolian Government, supra, and Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd, supra. In neither of those cases was the relevant instrument granted by a bank or other financial institution.  In Marubeni the grant was by the parent company of the account holders, (the obligant in the underlying transaction).  In Vossloh the granters were the controlling shareholders of the account holder.  Where, as here, the granter is a bank or other financial institution whose business includes the granting of financial instruments for a fee, the context is entirely different (see eg Meritz Fire & Marine Insurance Co Ltd v Jan de Nul NV [2011] 1 All ER 1049, per Beatson J at paras 65-66; Caterpillar Motoren GmbH & Co KG v Mutual Benefits Assurance Co [2015] 2 Lloyd’s Rep.  261, per Teare J at para 20; Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd [2015] EWHC 999 (Comm), per Carr J at para 83). 

[26]      If, as I consider, the presumption referred to in IE Contractors Ltd v Lloyds Bank plc is properly in play, none of the remaining matters relied upon by Mr Thomson leads me to conclude that it falls to be rebutted.  The language he relies upon as indicating pure caution (“Guarantee”, “Cautioner”, “guarantee”, “guarantees”) is often used in instruments where the obligations concerned are primary rather than accessory. The same observation applies in relation to the terms of Condition 20.  Having regard to that, and to the fact that there are several respects in which the Bond differs from the instrument contemplated in Condition 20, little help is to be had from that source.  The inclusion of clause 5.1 was unnecessary if the obligation assumed was as principal, but I am not inclined to attach much significance to that here.  I recognise that some weight was attached to the presence of a similar clause in Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co. Ltd, but the circumstances there were very different.  The bond had been granted jointly by a subcontractor and a surety company.  In terms of the bond the granters assumed a joint and several obligation to the main contractors.  Lord Jauncey observed (at p.205D) that bonds in similar form had existed for more than 150 years and had been treated by the parties thereto and by the courts as guarantees.  It was clear on the authorities that such bonds were guarantees and not on demand performance bonds (p.207D-H).  As has been observed before (Gold Coast Ltd v Caja de Ahorros, supra, per Tuckey LJ at para 25; Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd, supra, per Carr J at para 81), clauses such as clause 5.1 are often inserted in on demand performance bonds, usually to head off any possibility of argument about the consequences of the events described.  On the other hand, while the inclusion of a “sufficient evidence” clause would have been likely to have further reinforced the conclusion that the Bond should be construed as being a performance bond, I am not persuaded that its absence is a weighty factor here. 

[27]      In my opinion it was only by disputing the commercial purpose of the Bond, and by denying the applicability of the presumption that the Bond was conditioned upon the presentation of documents rather than upon the actual existence of the facts which those documents assert, that the defender was able to contend that the pursuer is obliged to prove both that a breach has occurred and that the restoration costs it claims are proper and reasonable.  Neither of those matters are matters which persons in the position of the contracting parties would have considered that a bank or other financial institution providing a bond would have been well equipped to investigate and determine.  In my opinion, on a proper construction of the Bond the pursuer requires to prove neither of those things. 

 

Implied term?
[28]      I am not persuaded that the term suggested by Mr Thomson ought to be implied into the Bond.  First, while I am not satisfied that the proposed term would be contrary to the express terms of clause 5.1, it would in my opinion sit very uneasily with the provisions of the Schedule.  The Schedule stipulates periods ranging from a year to two years for each of the Column B thresholds.  Each of those thresholds is for aggregate liabilities at any particular time (clause 4.3).  Second, implication of the term is not necessary to give the contract business efficacy.  The contract is capable of working perfectly well without it.  Third, the term suggested would not have been so obvious that it went without saying.  I am not convinced that notional reasonable people in the position of the contracting parties would have agreed to it.  Accordingly, employing the ordinary principles applicable to the implication of terms in written commercial contracts (as elucidated in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd, supra) I conclude that the term proposed does not fall to be implied. 

[29]      The arguments against implication appear to me to be even more compelling when regard is had to the nature of the contract here.  The need for clarity and certainty in performance bonds is particularly important.  For that reason it will be rare that a term is implied into such a contract (see Cauxell Ltd v Lloyds Bank plc, The Times, December 26, 1995, per Cresswell J (also noted in Andrews and Millett, Law of Guarantees (7th ed.), at para 16-018); Uzinterimpex JSC v Standard Bank Plc [2007] EWHC 1151(Comm), per David Steel J at para. 157).  Implication of the term proposed here would be likely to result in there being a need for some investigation into the facts of the underlying transaction when a demand was made.  Thus, for example, in relation to the pursuer’s claim the defender maintains that all of the breaches of Conditions relied upon in the pursuer’s notice of claim had occurred by April 2013.  The pursuer sees things rather differently.  In relation to Conditions 2 and 4 it avers (Article 6 of Condescendence):

“… that each of those conditions did give rise to obligations concerned with undertaking restoration works by certain points.  SCCL was required to implement the approved development ‘strictly in accordance with the drawings’ identified in condition 2.  Those drawings show the extent of restoration works to be carried out by certain phases of the development.  For the period covered by the bond, SCCL has not progressed the works including the restoration works in accordance with these drawings.  It has not carried out the development in accordance with the approved plans.” (emphasis added).

 

In my opinion the introduction of the need for investigation of the underlying facts would be antithetical to the commercial purpose of the Bond. 

 

Did the notice comply with the requirements of the Bond?
[30]      In South Lanarkshire Council v Coface SA, supra, the Court observed in relation to the bond there:

“22.     …  Provisions such as clauses 2 and 3 must be construed in a practical manner, in accordance with commercial common sense, and in such a way as to further the parties’ common intention and the essential purpose of a performance bond.  An unduly technical construction should be avoided.  When the clauses are looked at from this standpoint, it is our opinion obvious that the purpose of the notice specified in clause 3.1 is to indicate to the Cautioner that there has been a breach …, that being the event that triggers liability under the bond, and to state the cost of remedying the breach.  That is the call for payment referred to in clause 2.2, and it accords with the fundamental objective of a performance bond …”

 

Those observations are equally relevant to clauses 2 and 3 of the Bond.  Properly construed, clause 3.1 required the pursuer (i) to assert that a breach of the Conditions had occurred; (ii) to assert what the proper and reasonable cost of restoration work to be carried out to remedy the breach was, and to give a full breakdown of that cost; (iii) to state that it intended to carry out that work, and to provide reasonable evidence of that intention.  I shall deal with each of these matters in turn.

Requirement (i)
[31]      The notice duly asserted that breaches of Conditions 2, 4 and 21 had occurred. 

Requirement (ii)
[32]      At the outset I should indicate that I do not accept Mr Duncan’s submission that there need be no correspondence between a breach of a Condition and the restoration costs claimed.  In my opinion, breach of a Condition which is unrelated to restoration obligations would not entitle the pursuer to call for payment of the cost of restoration works.  More significantly for present purposes, a breach of a Condition in relation to one aspect of the restoration works would not entitle the pursuer to claim payment for the whole restoration works required to be carried out under all of the Conditions.  Thus, for example, if the only breach claimed here had been the breach of Condition 21 that would have entitled the pursuer to claim the restoration costs related to that breach, but not the entire restoration costs arising from all of the restoration obligations contained in the Conditions.  Reasonable persons in the position of the contracting parties at the time of contracting would have understood ”the proper and reasonable costs of restoration works required to be carried out in terms of the Conditions” to mean restoration costs attributable to the breach or breaches relied upon.  The alternative construction - that that expression means the whole costs of restoration works irrespective of whether or not the breach concerned restoration obligations, and regardless of the extent to which the breach gives rise to a failure to carry out the restoration works - is contrary to commercial common sense (and, arguably, absurd).  However, in light of the terms of the notice this issue does not appear to me to be critical in the present case.

[33]      The notice asserted that the proper and reasonable costs of restoration works were £3,117,724.  Sensibly read, it attributed those costs to the breaches of Conditions asserted in the notice.  While the defender denies that there have been breaches of Conditions 2 and 4, or that those breaches resulted in the need for the restoration works claimed, those differences between the parties are disputes about the underlying facts.  The defender’s contention that breaches of other Conditions not specified in the notice may have caused or contributed to the need for the works is open to the same objection.  None of these matters provide a good basis for refusing payment. 

[34]      Whether the pursuer has provided a “full breakdown” of the relevant cost is a matter which falls to be determined objectively.  Once again, those words ought to be construed in a practical manner, in accordance with commercial common sense, and in such a way as to further the parties’ common intention and the essential purpose of a performance bond.  Approaching matters in that way, and bearing in mind that a breakdown in advance of work being carried out is likely to be less comprehensive than a breakdown after the event, I am satisfied that the information in Annex 4 of the notice complied with the requirement in clause 3.1 for the provision of a “full breakdown” of the relevant cost. 

Requirement (iii)
[33]      The notice clearly stated that the pursuer intended to carry out the restoration works and that it had made arrangements for the work to be done by OCCW and Hargreaves.  It produced the missives to vouch those arrangements.  Whether “reasonable evidence of the intention of the pursuer to proceed” has been provided falls to be determined objectively, and as at the date of the notice.  Here too, the language used should be construed in a practical manner, in accordance with commercial common sense, and in such a way as to further the parties’ common intention and the essential purpose of a performance bond.  Approaching matters in that way I am clear that the declared intention and the missives produced comprised “reasonable evidence” of the intention of the pursuer to proceed with the works.  On any fair reading of them it was plain that the pursuer had put in place arrangements to have the necessary work carried out by others at its expense using the Bond proceeds.  In my opinion that was sufficient to comply with requirement (iii).  I decline to construe the requirement as necessitating evidence that the pursuer personally would carry out the works.  That would be an unduly technical and unjustifiably restrictive construction having regard to the purpose of the Bond.  The presence of the suspensive condition does not detract from the missives’ significance as evidence of the pursuer’s intention at the date of the notice.  Had the payment under the Bond been made as it ought to have been the suspensive condition would have been satisfied. 

 

Conclusion
[34]      On a proper construction of the Bond it is not an ordinary guarantee.  It is a performance bond.  The defender assumed an autonomous obligation to make payment to the pursuer in the circumstances referred to in the Bond.  The notice which the pursuer served complied with the Bond’s requirements The defender became liable to make the payment claimed in the notice within thirty working days of its receipt. 

 

Disposal
[35]      I propose to sustain the pursuer’s pleas-in-law, repel the defender’s pleas-in-law, and pronounce decree de plano.  However, before doing so I shall put the case out by order to enable parties to address me on the appropriate terms of an interlocutor.  I have in mind in particular that I was not addressed as to the date from which interest should run, or as to the appropriate rate (or rates) of interest.  Any motion for expenses might also conveniently be disposed of at that hearing.