Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 28

 

CA23/16

OPINION OF LADY WOLFFE

In the cause

THE FIFE COUNCIL

Pursuer

against

ROYAL & SUN ALLIANCE INSURANCE PLC

Defender

Pursuer: Armstrong QC, Sutherland;  Morton Fraser LLP

Defender:  Hanretty QC, Paterson;  Clyde & Co

 

17 February 2017

Introduction
[1]        This action concerns a claim made by the pursuer under a restoration bond entered into among the pursuer, the defender and the Scottish Coal Company Limited (“Scottish Coal”), dated 21, 24 and 27 September 2012 (BN11280) (“the Bond”).  The Bond had been procured to guarantee the performance of the obligations owed to the pursuer in terms of a Minute of Agreement under section 75 of the Town and Country Planning (Scotland) Act 1997 (“the 1997 Act”) dated 11 February 2010 and subsequent dates entered into among the pursuer (as the planning authority), UK Coal Mining Limited (“UK Coal”)(as the developer) and Peter Auchterlonie and Bruce Auchterlonie (as the landowners) (“the Agreement”) and the fulfilment of the conditions attached to a planning consent granted by the pursuer on 15 March 2010 under reference number 08/00607/WEIA for the development of an opencast coal site at North Blair Farm, Oakley, Saline, Fife (respectively, “the Planning Permission” and “the Site”).  UK Coal transferred its interest as developer to Scottish Coal.

[2]        By way of background, the pursuer avers that on 5 September 2012, Scottish Coal notified the pursuer of its intention to mothball the Site and run it on a care and maintenance basis and that coaling ceased at the Site in early November 2012.  Scottish Coal went into liquidation in April 2013.  In November 2015 the pursuer notified the liquidators of Scottish Coal that the company was in breach of its restoration obligations in terms of the Planning Permission and that if it failed to remedy the breach it would be in default in terms of the Agreement.  The liquidators advised the pursuer that, having regard to the funds available to Scottish Coal, it had no prospect of discharging its restoration obligations.  While not all of the foregoing averments are admitted, it is not disputed that Scottish Coal are in default in the relevant sense of their obligations under the Agreement and have not fulfilled all of the conditions in the Planning Permission.

[3]        The pursuer accordingly gave written notice by letter from their agents, Morton Fraser LLP, dated 2 December 2015 to the defender that there had been a default in terms of the Agreement and called upon the defender in terms of clause 3.1 of the Bond to make payment of £3,124,840.55 to the pursuer for the proper and reasonable cost of restoring and reinstating the Site including aftercare obligations (“the Notice”). 

[4]        The defender disputes that the Notice has triggered its obligation under the Bond.  In this commercial action the pursuer seeks (1) declarator that the Notice triggered the defender’s obligation to make payment in terms of the Bond, and (2) payment of £3,124,840.55.  The defender resists the pursuer’s claim.

[5]       In particular, the defender contends:

(1)        that on a proper construction of clause 2.2 of the Bond, the pursuer first requires to carry out the remedial works before any claim under the Bond can be made;  and

(2)        that, in any event, the Notice is invalid on the basis that it has not satisfied the third of the three criteria stipulated in clause 3.1 of the Bond, in that the pursuer had not included “reasonable evidence of the pursuer’s intention and ability to proceed forthwith with the restoration and reinstatement” of the Site in terms of the Agreement. 

The matter called before me on debate on the Commercial Roll for determination of these issues.

 

Background

The Planning Permission

[6]        In its capacity as planning authority the pursuer granted the Planning Permission inter alia for the reclamation of derelict colliery bings and the extraction of coal and fireclay by surface mining methods at the Site.  The Planning Permission was granted subject to a large number of conditions.  The majority of these governed the coaling operations proposed at the Site.  However, the coaling operations were time-limited.  Condition 7 stipulated inter alia that:

“7.       Coal extraction on the site shall cease and the site shall be wholly restored to agricultural and countryside uses within 5 years of the commencement of coaling operations.  Restoration of the site will be completed within 12 months of the practical cessation of extraction of coal on site…”.

 

A number of the conditions of the Planning Permissions concerned the restoration of the Site and the aftercare works.  The principal obligation about restoration is set out in the following terms, in condition 52:

“52.     The site shall be fully restored in accordance with the terms of the Planning and Environmental Statement, the approved Management Plan, and, in particular, the Restoration Plan Drawing No. 144/D3 unless otherwise agreed in writing by this Planning Authority.  This details levels, tree planting, soil coverage, habitat creation, public access, final boundaries, phasing, relationship to adjoining land, long term management and detailed schedules to be implemented.”

 

[7]        In addition, there was a requirement (in condition 53) that aftercare was carried out in accordance with an approved management plan and a further requirement (in condition 55) as to the duration of the aftercare operations.  The period of aftercare provided for was at least five years.

 

The Agreement

[8]        The pursuer and developer entered into the Agreement, of the kind provided for under section 75 of the 1997 Act.

[9]        The Agreement put in place obligations concerning the protection of the environment and the restoration of the Site after coal extraction activities had ceased.  The planning authority sought to secure the performance of these obligations of the developer by requiring the provision of a performance bond.  In terms of clause 6 of the Agreement, the developer and its successors and assignees were obliged to deliver a Full Restoration Bond to the pursuer.  Clause 6.4 of the Agreement provided as follows: 

“6.4     The Full Restoration Bond shall be of sufficient amount to cover the entire restoration of the Land where coal extraction will have taken place following the cessation of coal extraction operations including  (without prejudice to that generality) (a) the restoration of the Land to woodland, countryside and agricultural uses in accordance with the restoration scheme to be prepared by the Developer in terms of the Consent and (b) the aftercare following restoration of the Land or any part thereof in accordance with the aftercare scheme to be prepared by the Developer in terms of the Consent all only in the event of Default by the Developer.” 

 

I shall refer to the restoration and the aftercare work collectively as “the remedial works”.

[10]      What constituted a “default” was set out in clause 1.1.4 of the Agreement, which provided as follows:

“1.1.4 ‘Default’ shall occur where the Developer shall have failed to comply with any of the conditions imposed by the Consent relating to the restoration or aftercare of the Land and the Developer has failed to remedy such non-compliance within a reasonable period of time following receipt of written notice from the Compliance Assessor or the Council calling on the Developer to remedy such non-compliance.”

 

[11]      Further provision was made in the event of Default for certain powers to be exercisable by the pursuer.  In particular, clause 6.8 of the Agreement provided as follows: 

“In the event of the Developer being in Default in respect of its obligations regarding restoration and/or aftercare referred to in Clause 6.4 above, the Council shall be entitled to carry out or procure the carrying out of any works reasonably necessary to remedy that Default and to recover any costs thereof incurred from the Guarantor under the Full Restoration Bond …… up to the maximum sum then provided thereunder.”

 

By clause 8.1 of the Agreement the pursuer were also enabled to enter onto the Site inter alia for the purpose of undertaking the remedial works.

[12]      The Agreement also had a schedule containing a draft form of the terms of the restoration bond to be entered into (“the draft bond”).  In terms of the proposed scope of the cautioner’s obligation, as set out inter alia in clause 2.2 of the draft bond, it was to “pay [to the pursuer] the proper and reasonable cost, subject to clause 4 of this Bond, of any operation to be carried out by [the pursuer] to restore and reinstate the said site including aftercare obligates pursuant to the conditions” (emphasis added).  In terms of the condition of bond notice, clause 3.1 of the draft bond, provided that, insofar as there was a requirement to provide a full breakdown of any proper and reasonable cost, it was in respect of “of any operation to be carried out” (emphasis added). As will be seen the corresponding clauses in the Bond omitted the words “to be” where they appeared in the draft Bond.

[13]      As there was reference in the pleadings and in submissions to the current owners of the Site, it should be noted that it is averred that in or around July 2014, Mines Restoration Limited (“MRL”), a wholly owned subsidiary of the Scottish charity Scottish Mines Restoration Trust Limited (“SMRTL”), acquired the Site from the liquidators of Scottish Coal.  That averment is admitted, as is the averment that one of the purposes of MRL is the restoration of former coal mining sites in Scotland. 

 

The Bond:  The Terms of the Guarantee
CLAUSES 1.1 AND 1.2

[14]      Clause 1.3 of the Bond provides that: 

“[Scottish Coal] has requested the [defender] and the [defender] has agreed to guarantee the performance of the obligations of [Scottish Coal] to the [pursuer] in terms of the Conditions (as hereinafter defined).” 

 

[15]      The scope of the Bond is set out in clause 2 and provides:

“2 SCOPE OF BOND

 

2.1 The [defender], subject to the terms hereof, hereby guarantees to the [pursuer] the due and proper compliance with the Agreement and the conditions attached to the consent referred to in the Agreement to the extent that non-compliance with the Agreement or said conditions would constitute a Default (as defined in the Agreement).”

 

It is clear from clause 2.1 that the “Conditions” guaranteed are the conditions attached to the Planning Permission to the extent that non-compliance is rendered a default within the meaning of the Agreement.

 

[16]      Clause 2.2 of the Bond provided as follows:

“2.2 In the event of Default (as defined in the Agreement) the [defender] shall, if called upon by the [pursuer], pay to the [pursuer] the proper and reasonable cost, subject to Clause 4 of this Bond, of any operation carried out in terms of the Agreement by the [pursuer] to restore and reinstate the said site including aftercare obligations pursuant to the conditions.” 

 

The Bond:  Notice Requirements under Clause 3

[17]      Clause 3.1 provides the conditions to be satisfied before the obligation of the defender under the Bond became enforceable.  Parties are agreed that clause 3.1 imposes three requirements. For ease of reference I shall insert roman numbering into clause 3.1.  It provides as follows: 

“3.1     Prior to the obligation upon the [defender] to pay any sums due hereunder becoming enforceable by the [pursuer], (i) notice in writing of any Default and (ii) a full breakdown of any proper and reasonable cost of any operation carried out as referred to in Clause 2 aforementioned must be provided to the [defender] in writing at its above mentioned representative office in the United Kingdom, (iii) together with reasonable evidence of the intention and ability of the [pursuer] to proceed forthwith with any such operation.”

 

The Bond:  The Maximum Aggregate Liability

[18]      Clause 4.1 prescribes the defender’s maximum aggregate total liability to the pursuer at any time as set out in the schedule to the Bond (“the schedule”).  The Schedule is follows: 

 

Clause 4.2 provides for a temporary cessation of works during which Scottish Coal was only obliged to maintain the Site in the condition in which it existed as at 31 December 2012.  That period of cessation ended on 30 March 2014.  It is convenient here to note, too, that the BOND expired by no later than 30 March 2017 (“the Expiry Date”):  Clause 5.2 of the Bond.

 

The Notice

[19]      The Notice included a number of attachments including a cost breakdown, an explanation thereof and contour plan of the restoration operations to be carried out to restore the site (including aftercare obligations).  The Notice also referred to and appended copies of the correspondence between the pursuer and the liquidator of Scottish Coal to evidence the developer’s default, and which is admitted.  The Notice also included a full cost breakdown of the remedial works prepared by Ironside Farrar Ltd (“the scheme”).  This was further particularised into 35 separate items to achieve the remedial works.  The defender accepts that the information provided satisfied the first and second requirements of clause 3.1.  At the top of page 2 of the Notice, it was stated that the pursuer “will comply with its obligations under the Bond.”.  The issue which divides the parties is whether that sentence was sufficient to comply with the third condition of clause 3.1.

 

Post-Notice correspondence from the Pursuer

[20]      For completeness, I note the terms of some further correspondence from the pursuer to the defender, namely, that by letter dated 17 December 2015, Iain Matheson, Head of Legal Services for the pursuer, confirmed to the defender that the pursuer intends and is able to proceed forthwith with the restoration operation (including aftercare obligations) referred to in the Notice.  

 

The Pleadings

[21]      Not all the documentation referred to at debate was agreed.  Similarly, the duration of any proposed remedial works was also disputed.  As there was reference in the debate to how these matters were framed in the pleadings, and submissions to exclude certain averments, it is necessary to set out the relative passages in the pleadings.

 

The Pursuer’s Pleadings

[22]      The pursuer’s averments in Article 10 in relation to the proper construction of the Bond and the duration of the remedial works, are as follows:

[10] …Explained and averred that on a proper construction of the Bond, the pursuer does not need to carry out the restoration and reinstatement of the Land before it can trigger the Bond.  The works required for the restoration and reinstatement of the Land will take approximately seven years to complete, with approximately two years for the restoration and reinstatement, and five year aftercare.  This was known to the pursuer and the defender at the time they entered into the Bond.  Reference is made to Schedule 1 of the Bond, clauses 6.4, 6.5, 6.7 and 7.4 of the Agreement, conditions 7, 52, 53 and 55 of the Consent, figure 4.5 in Chapter 4 of the Environmental Statement, and the Compliance Officer’s assessment of the level of the Bond dated 24 February 2012.  As hereinbefore condescended upon, the defender’s maximum liability under the Bond reduces over time.  On the defender’s construction of the Bond, viz. that it cannot be triggered before the works have been carried out, the pursuer would never be able to realise the value of the Bond.  That cannot have been the intention of the parties at the time they entered in the Bond.  It would not accord with business common sense.” 

 

[23]      In addition to the matters set out above, the pursuer’s pleadings also referred to certain matters said to be within the reasonable knowledge of the defender at the time it received the Notice.  In particular, in relation to the issue of restoration, at the end of Article 10 it is averred:  

“[10]    The Notice confirmed that the pursuer ‘will comply with its obligations under the Bond.’  The pursuer’s only obligation under the Bond is to ensure that the restoration and reinstatement of the Land is carried out in terms of the Agreement.  The defender was fully aware of the pursuer’s intention and ability to carry out the restoration and reinstatement of the Land at the time it received the Notice. Reference is made to the previous correspondence between the parties to which the defender refers in its averments in Answer 11; the minutes of a meeting of the pursuer’s Executive Committee dated 22 October 2013 recording the decision of the pursuer to authorise its Executive Directors to take such action as was required to secure the restoration of the Land;  the letter from MRL dated 1 October 2014 confirming it will cooperate with the pursuer in the restoration of the site;  and the pursuer having carried out the restoration of two other opencast coal sites at Muir Dean by Crossgates and St Ninians by Kelty.” 

 

The Defences

[24]      In its defences the defender sets out two bases on which it resists the pursuer’s claim.  The first is to contend that its liability was contingent inter alia on the pursuer’s first undertaking the restoration works.  In Answer 10, it is averred: 

“Explained and averred that the letter of 2 December 2015 does not trigger any obligation on the part of the defender to make payment in terms of the Bond.  On a proper construction of the Bond, the defender’s liability to make payment to the pursuer is contingent upon both Default (as defined in the Agreement) and the pursuer having carried out restoration and reinstatement of the Land as required by the Consent.  Reference is made to clauses 2.2 and 3.1 of the Bond.  That construction is consistent with the terms of clause 6.8 of the Agreement as hereinbefore condescended upon.  It is apparent from the terms of the letter of 2 December 2015 that the pursuer has not carried out any such operation.  Accordingly, the defender has no liability to make payment to the pursuer in terms of the Bond.” 

 

[25]      The defender also sets out an alternative position, to the effect that the terms of the Notice and material provided therewith were not sufficient to trigger its liability under the Bond.  In particular, it is stated:  

“Esto the liability of the defender is not contingent upon the pursuer carrying out restoration and reinstatement of the Land (which is denied), the pursuer required to produce with any notice served by it in terms of the Bond, reasonable evidence of its intention and ability to proceed forthwith with the restoration and reinstatement of the Land as required by the Consent.  No such evidence was produced with the letter of 2 December 2015.  Accordingly, on the alternative construction, the defender similarly has no liability to make payment to the pursuer in terms of the Bond.  Further explained and averred that the letter of 17 December 2015 does not provide reasonable evidence of the pursuer’s intention and ability to proceed forthwith with the restoration and reinstatement of the Land as required by the Consent.  Instead, the pursuer states that its intention and ability to proceed with the restoration operation (including aftercare obligations) ‘is conditional upon confirmation in writing from [the defender] that [the defender] will guarantee to indemnify the [pursuer] for all the costs incurred in the operation, up to the sum of £3,124,840.55 as stated in the Notice, in full, and within a reasonable period of each stage of the operation.’  The pursuer is called upon to disclose the documentation vouching its averments that the works would take ‘approximately two years for the restoration and reinstatement, and five year aftercare’ and that this ‘was known to the pursuer and the defender at the time they entered into the Bond’.  The pursuer’s failure to answer the foregoing call will be founded upon.” 

 

[26]      In Answer 11, after admitting that the defender disputes that the Notice triggered its obligation to make payment to the pursuer, the defender avers the following in respect of the pursuer’s prior attempts to trigger clause 3.1 of the Bond:

“Quoad ultra denied. Explained and averred that the letter dated 2 December 2015 is the fifth purported written notice issued by or on behalf of the pursuer calling for payment by the defender in terms of the Bond.  Previous purported notices were issued on 3 May 2013, 29 May 2013, 12 July 2013 and 15 December 2014.  On each occasion, the defender’s solicitors responded to the pursuer or the pursuer’s solicitors.  The defender’s solicitors have explained, in their correspondence, why the purported notices did not trigger an obligation on the defender to make payment in terms of the Bond.  The defender’s solicitors have called upon the pursuer’s solicitors to provide details of:  (i) the transfer of the Land to MRL;  (ii) the pursuer’s position as to the respective liabilities of Scottish Coal and MRL in terms of the Agreement;  and (iii) the evidence of the pursuer’s intention and ability to proceed forthwith with the restoration and reinstatement of the Land as required by the Consent.  They do so again.  The pursuer’s failure to answer those calls will be founded upon.”

 

The pursuer admits the averments anent the four previous notices it had issued.  No admission was made in respect of the correspondence from the defender’s solicitors, which were simply referred to for their terms.

 

Scope of the Parties’ Dispute

[27]      At the outset of the debate Mr Armstrong QC for the pursuer confirmed that the pursuer relied only on the Notice as the trigger of the defender’s liability under the Bond.  While there was reference in the pursuer’s pleadings to the subsequent letter from one of the pursuer’s officials, Mr Matheson, dated 17 December 2015, set out in paragraph [X] above, he eschewed reliance on that letter for the purposes of giving valid notice to the defender.  Furthermore, in respect of the number of requirements set out in clause 3.1, which is set out in paragraph [16] above, parties were agreed before me that these were three in number.  These were: 

(i)        that there had to be notice in writing of a default,

(ii)       that there had to be a full breakdown of any proper and reasonable cost of any operation, and

(iii)      that the pursuer had to provide “reasonable evidence” of the pursuer’s intention and ability in respect of the restoration works. 

[28]      It was common ground that requirements (i) and (ii) had been satisfied, as there had been a relevant default by Scottish Coal and the Notice had provided a full breakdown of costs.  For the purposes of satisfying requirement (iii), the pursuer relies on the sentence at the top of page 2 of the Notice in which it is stated that it “will comply with its obligations under the Bond”.

[29]      There was some reference in submissions to the  factual matrix. In particular, in relation to the argument that restoration works first required to be carried out, Mr Armstrong suggested that this was not a commercial reading given that the restoration works as envisaged in the Agreement would comprise a two-stage process extending to seven years.  Mr Hanretty objected to this.  The defender’s position in this is set out in paragraph 4 of its note of arguments.  In relation to the suggested length of any restoration works: 

“… the pursuer’s adjustments dated 4 May 2016 assert that, at the time it entered into the Bond, the defender was aware that the works would take approximately seven years to complete.  The defender denies that averment and has called upon the pursuer to assert the basis for it.  The pursuer has not done so.  Accordingly, insofar as facts that the pursuer offers to prove by way of those adjustments are material to the Court’s determination of the defender’s primary position, a proof before answer will be required.  For present purposes, therefore, the defender calls upon the pursuer to revisit those adjustments and make its position known to the defender.  Once that has been done it will be possible to determine definitively whether the defender’s primary argument can be resolved at debate.”

 

The Case Law on Interpretation of Contracts
[30]      The 11 authorities parties included in their joint bundle of authorities are the leading authorities concerning the general principles to be applied in the interpretation of contracts, or which deal specifically with the interpretation of performance bonds.  The general principles of interpretation of commercial contracts, as set out, for example, in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, or in Arnold v Britton [2015] AC 1619, were not in dispute.  These principles have been accepted and applied by the Inner House in many cases, including most recently in Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43, @SIPP Pension Trustees v Insight Travel Services Ltd 2016 SLT 131, and South Lanarkshire Council v Coface SA [2016] CSIH 15.  From this cornucopia of cases, it suffices to note just two:  South Lanarkshire Council v Coface SA (“Coface”), and I.E. Contractors Ltd v Lloyds Bank PLC, [1990] 2 Lloyd's Rep 496] (“I.E. Contractors”).  

[31]      In Coface the Inner House recently confirmed the general principles of law applicable to performance bonds, including how they are to be construed. The court set out the general principles (in paragraph 9) and which include the following: 

(1)   The construction of performance bonds is governed by the normal principles that apply to the construction of contracts (see 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 1619).

(2)   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.

(3)   The words used in the contract must be given effect according to their natural meaning or any relevant technical meaning.

(4)   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.

(5)   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.

(6)   In the case of performance bonds, the commercial purpose of such bonds and the contractual and business structure in which they operate are of great importance. 

[32]      A feature common to many cases dealing with letters of credit is the doctrine of compliance, meaning that the documents presented must be precisely those which the letter of credit calls for. The rationale for this was explained in I E Contractors at page 500 per Staughton LJ:  this facilitates the purpose of such commercial documents, which is to enable the beneficiary to obtain prompt and certain payment.  In I.E. Contractors, which concerned a performance bond and not a letter of credit, Staughton LJ considered the extension of the doctrine of strict compliance to performance bonds.  He did not do so uncritically, as he acknowledged (at page 501) that the “degree of compliance required of a performance bond may be strict, or not so strict.  It is a question of construction of the bond.”

[33]      Coface also concerned a claim under a performance bond.  It is pertinent to note the court’s observations as to the purpose of a performance bond.  In particular, in delivering the opinion of the court Lord Drummond Young stated: 

“[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 performance bond, like a standard guarantee, is a contract independent of the underlying transaction …. 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.” 

 

[34]      In relation to the requirement for compliance with the terms of the particular bond, Lord Drummond Young observed (at paragraph 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: I.E. Contractors Ltd [v Lloyds Bank PLC, [1990] 2 Lloyd's Rep 496], at 500 … 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”: I.E. Contractors Ltd v Lloyds Bank PLC, supra, at 501.” 

 

Defenders’ Submissions

Summary of Defender’s Two Principal Arguments

[35]      In summary, the defender’s two arguments are as follows:

(i) on a proper construction of the Bond the pursuer requires to carry out the remedial works before any obligation on the part of the defender under the Bond is triggered;  and

(ii) esto that is incorrect, the Notice is deficient in that it disclosed no evidence of the intention and ability of the pursuer to proceed forthwith with the remedial works.

In relation to his primary interpretation, Mr Hanretty argued that “carried out” meant that the works must have actually been carried out first before the pursuer could claim under the Bond.  In relation to his esto, argument Mr Hanretty’s position was that there was no evidence which could satisfy the third requirement of clause 3.1.  This was, he said, because the Bond was a performance Bond; it was a condition of its enforceability that the pursuer served the Notice “together with” reasonable evidence; but no such evidence had been produced.

 

Submission Regarding the Context

[36]      Mr Hanretty welcomed Mr Armstrong’s concession that the pursuer did not now found upon the letter from Mr Matheson post‑dating the Notice.  However, he resisted any reference to the context.  He submitted that the court should confine itself to the pleadings and any documents incorporated into them.  However, there was no need to refer to the Agreement other than to note the terms of the draft bond contained in the Schedule:  see paragraph [11], above.  Mr Hanretty began by noting that in clause 2.2 of the draft bond the words “to be” had been included before the words “carried out”.  Those words had been omitted from clause 2.2 of the Bond.  In relation to the pleadings, he criticised as irrelevant the passages I have set out at paragraph [2], above.  In relation to the averment in the third‑last sentence of Article 10, that the pursuer’s only obligation under the Bond “is to ensure that the restoration and reinstatement of the Land is carried out in terms of the Agreement”, he submitted that there was no obligation incumbent upon the pursuer in terms of the Bond.  This averment was irrelevant. In relation to the last two sentences of Article 10, he also argued that the averments anent the defender’s knowledge as the recipient of the Bond, were irrelevant.  If the parties had contracted for a specific condition, that required to be fulfilled according to the terms the parties agreed and the defender’s knowledge was irrelevant.

[37]      Mr Hanretty also referred to clause 6.8 of the Agreement.  While he stepped back from his initial suggestion that this required the pursuer to step in to do the restoration works, that clause contained a power enabling them to do so.  In any event, the pursuer was entitled by virtue of this clause to carry out any works reasonably necessary to remedy a default on the part of Scottish Coal.  Indeed, he argued that the pursuer could do so as many times as was necessary, and could demand payment in terms of the Bond.  This, he said, was obvious from the terms of clause 4.1 of the Bond which makes clear that the maximum aggregate liability at any time shall be the sum shown in column B of the table in the Schedule, less the aggregate amount of any sums previously paid by the defender under the Bond.  In his submission, the parties had determined the limits of the Bond, which they did by reference to clauses 4 and 5 and Schedule of the Bond.   

 

Submissions on the Case Law on the General Principles of Interpretation

[38]          Mr Hanretty submitted that the strong trend of the cases in the last 15 years had been that the courts will not undo a bad bargain.  The court cannot depart from the natural meaning of the words:  see @SIPP at paragraph 17.  Effect ought to be given to the language in the Bond, as chosen by the parties, and the natural meaning of clause 2.2.  The Court should be very slow to reject the natural meaning simply because it appears to have been a very imprudent term for one of the parties to have agreed:  Arnold v Britton, per Lord Neuberger at paragraph 20.  In any event, he argued that his primary interpretation was consistent with the pursuer’s rights in terms of clause 6.8 of the Agreement.  He argued that commercial sense could not be invoked retrospectively.  The court could not reject an imprudent meaning if that is what parties had agreed.  The court should just read the words.  It was not appropriate to “shoehorn” the knowledge of the parties into the words used with the result that they meant something other than what the words naturally mean.  In @SIPP the court was dealing with infelicities, that was not the position here.

 

Case Law on Performance Bonds

[39]      Mr Hanretty then turned to consider a number of the cases specifically concerned with the interpretation of performance bonds.  Starting with the case of East Ayrshire Council v Zurich Insurance PLC [2014] CSOH 102 he noted the terms of the bond there under consideration (at paragraph 5) and the style certificate of default (in paragraph 7).  He noted the fourth of the propositions (in paragraph 18) Lord Malcom had derived from the cases, which concerned strict compliance.  He also noted Lord Malcom’s observation (at paragraph 21) that the conclusive nature of the certificate of default was an important factor. He laid particular stress on Lord Malcom’s observation (at paragraph 22) that if parties agree three matters to be certified, then each is necessary for a valid demand.  This, he said, accorded with the character of a performance bond: it should be immediately prestable on a default.  Parties cannot look behind a performance bond.  Under reference to paragraphs 22 and 23, Mr Hanretty emphasised Lord Malcolm’s observation that the state of knowledge of a party was irrelevant.

[40]      Mr Hanretty next turned to Hoe International Limited v Martha Andersen & Anr [2016] CSOH 33.  This was not, he said, really a question of interpretation so much as a case about the form of notice stipulated in a share purchase agreement.  I was invited to heed the warning in paragraph 35 and to proceed with precision, which was called for in a performance bond.  Here, he argued, so there had been no evidence, there was no issue as to whether the evidence was “reasonable”.  He could not understand why the pursuer did not provide evidence.  He would not look at the pursuer’s post‑Notice letter (see paragraph [26], above) and which the pursuer now disavowed, although he suggested that it showed that the pursuer was aware the Notice was defective.  If the Notice did not meet the contractual stipulation, the pursuer’s claim failed.

[41]      He next referred to Lord Drummond Young’s observations in Coface (at paragraph 10) about the character of a performance bond, and in which East Ayrshire Council had been cited with approval.  Finally, in this context, Mr Hanretty referred to South Lanarkshire Council v Aviva, a decision of Lord Doherty, in particular noting the terms of the bond (in paragraph 3), the court’s reference to Coface (in paragraph 11) and the observation (at paragraph 25) that there was a presumption that a performance bond was generally conditioned upon the presentation of one or more documents rather than on the actual existence of the facts which those documents assert.

 

Submission in Favour of First Argument

[42]      Mr Hanretty developed his argument in support of his principal argument as follows.  He began by noting the discrepancy between the draft bond appended to the Agreement and the terms of clause 2.2 and 3.1 of the Bond.  While the wording of the draft bond did not point to an obligation first to carry out the remedial works, the language of clause 3.1 of the Bond did.  Clause 2.2 clearly provided that the defender’s liability to make payment to the pursuer was contingent upon both a default (as defined in the Agreement) and the pursuer having carried out restoration and reinstatement of the Site as required by the Planning Permission.  For this purpose, the defender founded on the words highlighted in bold from clauses 2.2 and 3.1: 

“2.2 In the event of Default (as defined in the Agreement) the [defender] shall, if called upon by the [pursuer], pay to the [pursuer] the proper and reasonable cost, subject to Clause 4 of this Bond, of any operation carried out in terms of the Agreement by the [pursuer] to restore and reinstate the said site including aftercare obligations pursuant to the conditions.

 

3.1  Prior to the obligation upon the [defender] to pay any sums due hereunder becoming enforceable by the [pursuer], notice in writing of any Default and a full breakdown of any proper and reasonable cost of any operation carried out as referred to in Clause 2 aforementioned must be provided to the [defender] in writing at its above mentioned representative office in the United Kingdom, together with reasonable evidence of the intention and ability of the Council to proceed forthwith with any such operation.”

 

[43]      Mr Hanretty  accepted, however, that there was a tension between the words in bold (in clauses 2.2 and 3.1) that the pursuer relied upon for the purpose of its primary argument and the words underlined in clause 3.1, which suggested any remedial works were prospective (rather than had to have been carried out).  Mr Hanretty suggested that the way to resolve this tension was to delete the words at the end of clause 3.1.  In any event, his position was that the court had to accept the words used, regardless of the tension he identified: the Bond says what it says.

[44]      If the defender’s principal argument is not accepted by the Court, then as I understood him he accepted that clause 3.1 must be interpreted by inserting, before the word “carried”, the words “to be”.  Mr Hanretty turned to his esto argument.

 

Submission in Support of the Defender’s Alternative Argument

[45]      Mr Hanretty began this chapter of his submissions by providing definitions of “together with” and “evidence” from the Oxford English Dictionary.  In terms of that definition “together” denoted two things or persons and “together with” meant “along with, in combination with...at the same time as, simultaneously with”.  Clause 3.1 of the Bond had used the phrase “together with” when introducing the third requirement, namely of “reasonable evidence of the intention and ability” of the pursuer to proceed forthwith with any such operation.  In other words, Mr Hanretty argued, something other than, and additional, to the Notice was required.  In South Lanarkshire Council, for example, there had been the missives.

[46]      If the Bond had required that it be accompanied “together with” a certificate, so this argument ran, that certificate had to be provided at the same time.  In support of this interpretation of “together with” he referred to the summary of a Canadian case contained Words and Phases Legally Defined (fourth edition at page 1153) where the court had construed literally a criminal statute that the accused in receipt of a notice of the Crown’s intention to produce a certificate of analysis at trial, the copy certificate had to accompany that notice.  The statutory requirement of “together with” meant at the same time.  Here, nothing else had been produced apart from the Notice.

[47]      Mr Hanretty drew back from the, perhaps extreme, proposition that, had otherwise reasonable evidence been included in gremio of the Bond, the Notice would nonetheless have fallen foul of the “together with” requirement simply because it had not been physically separate from the Notice itself.  He maintained that nothing had been produced.  There had been no “evidence”.  The OED definition of evidence meant, in relation to things, “[t]o serve as evidence for; to attest, prove” and in relation to persons it meant “[t]o support by one’s testimony, attest (a fact or statement)”.  It was not competent to supply this evidence at some subsequent date (as, for a time, appeared to be the purpose of Mr Mathieson’s letter) or apart from the Notice. 

[48]      By their reference to “evidence” in the Bond the parties had agreed that something more was required than the ipse dixit of the creditor in the obligation.  This was not a case akin to the creditor making a simple demand.  Something more than that was required.  The phrase “together with reasonable evidence of the intention and ability” of the pursuer to undertake the remedial work required evidence to attest or prove the two state of affairs asserted:  the intention and ability of the pursuer to proceed.  He dismissed as “nonsense” the argument set out in paragraph 40 of the pursuer’s Note of Argument (No 11 of process) that the pursuer’s only obligation under the Bond was to carry out the remedial work in terms of the Agreement and that the defender was aware of the pursuer’s intention in that regard.  The pursuer was under no obligation under the Bond.  The pursuer’s assertion in any event disclosed nothing of its ability to do the remedial work.  The court should take an objective approach to interpretation.  This was not a Mannai‑type case.  The reasonable bystander would not accept that the Notice complied with clause 3.1.

[49]      He argued that the requirements in clause 3.1 were prescriptive and were the constitutive elements of a valid demand.  Strict compliance is required and the documents presented must be precisely those which the Bond calls for:  IE Contractors Ltd (per Staughton LJ at 499) and Coface (per the Opinion of the Extra Division at paragraph [12]).  The parties have agreed that “the key which is capable of turning the lock” (per Lord Reed in Ben Cleuch Estates Ltd v Scottish Enterprise [2006] CSOH 35, at paragraph 138) is the provision of documentation satisfying the requirements of the Bond.  He sought dismissal of the pursuer’s action.

 

Pursuer’s Submissions

[50]      Mr Armstrong began by adopting his Note of Argument.  The issues in this case concerned the proper interpretation of the Bond and whether the Notice had triggered the defender’s obligations under the Bond.  There was no difference between the parties on the case law.  The pursuer seeks a declarator of what it had done.  It would now be too late to claim under the Bond.

 

The First Issue: the Interpretation of Clause 2.2

[51]      Turning to clause 2.2, Mr Armstrong offered three possible interpretations.  The first interpretation was that the Bond provided for the defender to guarantee the developer’s obligation contained in the conditions attached to the Planning Permission to restore the Site so that, on default and due notice, the defender was required immediately to pay under the Bond.  This interpretation, he said, accorded with clauses 1.3 and 2.1 of the Bond.  Clause 1.3 referred to the developer’s obligations to carry out and pay for restoration and aftercare of the Site.  The overriding purpose of the Bond was for the defender to guarantee that compliance.  It should not involve the pursuer being obliged to do and pay for the remedial works first, before it could be recovered from the defender.

[52]      The second interpretation was that offered by the defender.  This required that the pursuer had to carry out the remedial works before it could claim.  There were several problems with this interpretation.  This was not consistent with clauses 1.2, 2.1 or the latter part of clause 3.1.  On the defender’s interpretation, it was necessary to delete the latter part of 3.1.  Further, if the work required to be done first, as the defender contended, then there would be no need for the pursuer to show its intention and ability to proceed with them.  This part of clause 3.1 would become otiose.  The defender’s interpretation was also inconsistent with the commercial purpose of a performance bond.  More fundamentally, on the facts of this case, the restoration works which were the subject of the underlying agreement would take several years and this would be followed by a five‑year period for aftercare.  In this connection, Mr Armstrong referred to conditions 7 and 52 of the Planning Permissions (set out at paragraph [6], above).  Condition 7 required that the Site be wholly restored within five years of the commencement of coaling operation with the further proviso that restoration had to be completed within 12 months of the practical cessation of coal.  Condition 52 contained a reference to the Environmental Statement, and an extract of this showing the amount of earthworks and time frame was produced (at No 6/9 of process).

[53]      Mr Hanretty objected at this point to any reference to these materials, given what he said was a failure to answer the call added to Answer 10 of the defences for the pursuer “to disclose the documentation vouching its averment that the works would take ’approximately two years for the restoration and reinstatement, and five year aftercare’” and its averment that this was known to the defender.  While the documentation had been produced, there had, he said, been no proper response to this call.

[54]      In reply to this Mr Armstrong noted that the Agreement and the Planning Permission were both referred to in clause 1.1 of the Bond.  The Agreement had stipulated in terms (at clauses 1.1.6 and 4.4) for a “Full Restoration Bond”, which “shall be of sufficient amount to cover the entire restoration of [the Site]” and which included (a) restoration of the Site to woodland etc and (b) aftercare following restoration.  Mr Armstrong also referred to clause 1.1.4 of the Agreement, which defined “Default”, including the provision that a reasonable time had to be allowed for rectification of any potential default.  Clause 6.5 of the Agreement, making provision for calculation of the amount, was reflected in clause 4.2 of the Bond and the Schedule appended to it, showing how liability decreased in stages.  The defender’s approach did not readily accommodate these provisions.

[55]      A third possible interpretation is that the pursuer would do the work, albeit this did not sit well with clauses 2.1 and 2.2, but the pursuer would be entitled to serve a notice at an earlier point.  The effect of the service of the notice would be to crystalise the time period in terms of clauses 4.1 to 4.3, 5.2 and the Schedule appended to the Bond.  This approach would give content to the last part of clause 3.1.  The service of the notice would be stage one.  Stage two would be after the pursuer had completed the work and when payment under the Bond would be made.  This, at least, would give some content to the latter part of clause 3.1.  A variation of this would be a call by the pursuer to crystalise the amount, this would be followed by service of the Notice, the completion of the works and then payment under the Bond.

[56]      Mr Armstrong contended that what the pursuer did was consistent with the first and third interpretations he offered.

[57]      Mr Armstrong then turned to the case of Hoe.  This concerned the proper interpretation of the notice provisions provided for in a share purchase agreement (“SPA”) of any claims to which the seller might be subject, and whether the notice served was adequate in terms of “giving reasonable details of all material aspects of a claim” (see paragraph 9 of the decision) and whether its mode of service complied with the requirements in clause 19 of the SPA.  Lord Woolman answered the first question in the affirmative, and the second in the negative. In relation to the adequacy of the notice, Mr Armstrong referred to Lord Woolman’s conclusion on this issue (at paragraph 27) where he stated that “the reasonable recipient would have known that a claim was being made…. And what the claim was about”.  This was an example of the application of the context, known to both parties, being applied.  There was context here, which he had already referred to.

[58]      Mr Armstrong then turned to address the question of whether the sentence at the top of page 2 of the Notice (set out in paragraph [18], above) relied on satisfied the requirement for reasonable evidence.  The context for this was the defender’s knowledge of the Bond, of the pursuer’s interest as the planning authority to have the Site restored and the relative provisions under the Agreement.  The defender could not but be aware of the prior correspondence.  In its letter dated 3 May 2013 (No 7/8 of process), which referred to the Bond and the Site in the subject headings, the pursuer suggested a meeting with the pursuer’s relevant officers

“to finalise any position statements that require to be finalised – and- to discuss the future arrangements that will now need to be put into place to access the bond monies and effect restoration of the site”. 

 

The pursuer’s letter dated a few weeks later, 29 May 2013 (No 7/9 of process), was a prior attempt to give notice under the Bond.  It expressed the wish that the pursuer’s claim “could be processed quickly”.  The pursuer’s attempted to give a further notice, by letter dated 12 July 2013 (No 7/10 of process).  This notice also referred inter alia to the fact of lack of maintenance on the Site since 31 December 2012, the security of the Site being compromised and water filing in one of the voids.  It referred to a passage about pumping operations in an earlier notice and, again, asked that the “claim be processed urgently”.  Mr Armstrong also referred to the two letters attached to that notice and to the safety concerns expressed.  Finally, he referred to the letter date 15 December 2014, now sent by the pursuer’s agents, Morton Fraser (No 7/11 of process), and the reference at page 2 to the pursuer’s explanation that given the cooperation of the present owners and the terms of the Agreement it “is able to proceed forthwith with the alternative Scheme and is demanding payment in terms of the Bond for this purpose.”  (Emphasis in the original).  While these earlier notices were not relied on for the purpose of triggering the defender’s liability under the Bond, they were all relevant to the pursuer’s intention and ability to carry out the remedial works.  They formed part of the context in which the Notice fell to be construed.

[59]      At this point, Mr Hanretty renewed his objection to any reference to the pursuer’s Council Minutes.  He made no concession that, by reason of their publication to the pursuer’s website, any knowledge might be imputed to the defender.  Mr Armstrong’s reply was that there was no prejudice, as these had been produced by the defender and referred to in its Answer 11.  All of these materials pointed to what the reasonable recipient would be aware of.

[60]      Furthermore, the defender’s contention that the pursuer can only satisfy the conditions and validly call on the Bond if it has actually carried out the works entirely ignored and fails to give effect to the last part of clause 3.1.  The effect of the defender’s construction is to render that part of the clause otiose, which cannot have been the intention of the parties.  It is a technical construction that involves an undue emphasis on the niceties of language, which should be avoided:  see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771 per Lord Steyn; and Coface SA at paragraph 22.

[61]      It was, he said, clear from clause 2.1 that the parties intended the Bond to guarantee the performance of the developer’s restoration and aftercare obligations in the conditions attached to the Planning Permission.  It was also clear from clauses 4.1 and the Schedule to the Bond that the defender’s liability in that regard was “at any time” linked to the full cost of carrying out the restoration and aftercare works “at that time”.  Accordingly, reading the Bond as a whole, it is clear that the operations referred to in clause 3.1 should not be restricted to those which the pursuer might already have carried, but should also include those which the pursuer intends to carry out after calling upon the Bond.  That is the obvious meaning of the clause when read as a whole and in its proper context.

[62]      Mr Armstrong concluded his submission in support of his first interpretation by referring to the observation of Staughton LJ in I.E. Contractors (at pages 499 to 500) that there was no reason why a performance bond should not depart from the usual pattern and be conditional upon the existence of facts rather than production of a document asserting those facts.  While there was a presumption in favour of the construction of a performance bond as conditional upon documents rather than facts, that was not irrebuttable.

[63]      If the court accepted the pursuer’s first interpretation, then the Bond provided for a guarantee by the defender of the restoration and aftercare obligations of the developer as recorded in the conditions attached to the Planning Permission.  All that was required in order to oblige the defender to pay was the default of the developer and the service of the Notice.  If that was correct, the court should exclude the defender’s averments in Answer 10 about interpretation and validity.

[64]      Mr Armstrong’s reply to the esto interpretation, was as follows.  He argued that there was an obvious mistake of expression in clauses 2.2 and 3.1.  On the one hand, in terms of clause 2.2 the pursuer must give written notice of “any operation carried out in terms of the Agreement…to restore and reinstate the site” (emphasis added).  This appeared to suggest that the works must already have been carried out by the pursuer.  However, in terms of the final part of clause 3.1, the pursuer must also produce “reasonable evidence of [its] intention and ability…to proceed forthwith with any such operation”.  That formulation indicated that the works will be carried out after service of the notice.  In the light of these tensions, which Mr Hanretty also acknowledged, Mr Armstrong argued that there was a clear and obvious linguistic mistake.  This could be corrected by inserting the words “to be” before “carried out” in clauses 2.2 and 3.1.  It was, he said, open to the court to correct that mistake as part of the unitary process of giving effect to the parties’ intentions: Arnold v Britton (per Lord Hodge JSC at paragraph 78 and Lord Carnwath JSC at paragraph 111).

[65]      In support of his third interpretation, Mr Armstrong submitted that in the context of the Bond, clause 3.1 could be interpreted as a two‑stage process.  The Notice was effective to “call” upon the defender to meet its obligations under the Bond.  All that the pursuer needed to do was to state an intention to carry out the remedial works.  That would suffice to crystalise liability and to fix the amount by reference to the timeframes in the Schedule to the Bond in accordance with clauses 2.2 and 4.1 and the Schedule.  The second stage would be after the pursuer had carried out the work, and then the defender would be obliged to pay.  On this approach, there was still a purpose to the declaratory conclusion, albeit this would be granted at a future date.  Accordingly, even if the Notice were defective in some way, it still served as an effective call upon, and cyrstallisation of, the defender’s liability under the Bond.  This interpretation at least preserved some content to clause 3.1, which the defender’s approach failed to do.

 

Defender’s Reply

[66]      In reply, Mr Hanretty argued that the only case that governed was Coface.  He repeated his argument that on a proper interpretation the pursuer required first to have carried out the work before the defender was obliged to pay under the Bond.  He accepted that even if the words “to be” were inserted before the words “carried out” in clause 3.1, the end of that clause remained problematic for the defender’s approach.  He accepted, as I understood it, that some content had to be given to the last part of clause  3.1 if the defender’s argument prevailed, unless it was impossible to construe clause 3.1 with those words and if the defender’s interpretation prevailed (that the pursuer required first to carry out the works).

[67]      In relation to the question as to whether the Notice complied with the third requirement in clause 3.1, of the provision of “reasonable evidence of the intention and ability” of the pursuer, he renewed his argument about the meaning of “together with.  Further, the sentence relied upon was meaningless.  The pursuer had no obligation.  While it was accepted that the defender knew what the pursuer wanted to do, the parties had contracted for compliance to clause 3.1.  He referred to the third of the principles set out in paragraph 18 of East Ayrshire Council, that the flip side of the immediacy of the enforceability of a performance bond was strict compliance with any notice procedure.  Here, there was nothing to evidence the pursuer’s intention and ability.

 

Discussion
[68]      While both parties referred to the different wording of the Bond in comparison to the wording of the draft bond appended to the Agreement, neither explained the relevance of this information or suggested that this provided any basis for rectification. Short of that step, I find it difficult to see the relevance of the wording in the draft Bond to the question of the construction of the Bond itself. I have placed no reliance on this part of either parties’ submissions.

 

General principles of interpretation of contracts

[69]      There is no dispute as to the general principles of the interpretation of contracts to be applied. The clauses in the Bond should be given their ordinary and natural meaning; they should be construed in the context of the Bond as a whole; and they should be construed consistently with the commercial purpose of the Bond, and as that is informed by the relevant factual matrix or background knowledge which would reasonably be known to the parties at the time of contracting. If there was more than one possible construction, the court should prefer the construction that was consistent with business common sense (including, I would add, the acknowledged commercial purpose of the contract under consideration), so long as the court does not do so retrospectively or with a view to relieving a party of a bad bargain.

 

The characteristics of a performance bond

[70]      Parties also approached matters on the footing that the Bond was a species of documentary credit (sometimes referred to as a letter of credit) to which particular rules applied, by reason of its underlying purpose.  Performance bonds have developed from documentary credits and share some, but not all, of their features. Under a documentary credit, the credit transaction is autonomous and separate from the underlying contract (classically, a sale contract between parties in different countries).  One consequence of this autonomy is that the credit transaction is unaffected by any breach or dispute affecting the underlying contract. Rather, the parties to the credit transaction are concerned solely with documents. In particular, the beneficiary triggers payment upon presentation to the bank liable to pay of documents conforming to the documents stipulated in the credit transaction.  On presentation of the stipulated documents, the bank called upon to pay must decide whether those documents conform in form and type to the stipulated documents. If they conform, the bank’s obligation is to pay. Indeed, there is a codification of the rules governing documentary credits in the Uniform Customs and Practice (“the UCP”) of the International Chamber of Commerce (UCP 500). Essentially, the purpose of a documentary credit is to facilitate ready payment to the beneficiary regardless of any dispute that may arise under the underlying contract. While of course the UCP does not apply to the Bond, it is interesting to note that by article 13(c) thereof, if a documentary credit purports to include a condition without an associated document (a non-documentary condition), that condition is to be ignored.  This is illustrative of the role played by documentation, where that is stipulated.

[71]      The commercial characteristics of a performance bond were also explained by Lord Drummond Young in Coface at paragraph 10 (see paragraph [33], above). It is important, however, not to conflate a performance bond with all of the requirements of a documentary credit. A close reading of I.E. Contractors Ltd discloses that the court was considering whether, and to what extent, it was appropriate that rules applicable to documentary credits should be extended to performance bonds. While the reliance on documentation and the doctrine of strict compliance are essential to documentary credits, as I.E. Contractors Ltd makes clear, that is not necessarily the case in relation to a performance bond if it does not stipulate for this.  In I.E. Contractors Ltd Staughton LJ acknowledged that “there is less a need for the doctrine of strict compliance in the case of a performance bond…”: at page 500, right column.  Whether or not parties have contracted for strict compliance is, as he went on to observe in the next paragraph, always a matter of construing the particular agreement they have made.  The question of whether the parties contracted for strict compliance arises in relation to the second issue, concerning the adequacy of the Notice.

 

The first issue: whether completion of the remedial works was a precondition of any claim

[72]      The first issue here, therefore, is whether, as the defender contends, on a proper interpretation of the Bond, it was a perquisite that the pursuer had to complete the remedial works before the defender came under any enforceable obligation under the Bond. If the defender is correct in its primary interpretation, the action is irrelevant and falls to be dismissed. If not, then the second issue to be considered is whether, on a proper construction, the Notice was adequate and sufficient in its terms.

[73]      In advancing the defender’s interpretation of the Bond, Mr Hanretty wished to keep any reference to the other documentation to a minimum.  Having regard to the references to the Agreement and the Planning Permission on the fact of the Bond, that is in my view an unduly restrictive approach. The Bond is a tri-party agreement among the pursuer, the defender and the developer. In clause 1 it narrates the background and it makes express reference to the Agreement and the Planning Permission: see clause 1.1. By clause 2.2 of the Bond the pursuer and the developer agree that the maximum aggregate liability of the cautioner (ie the defender) will be governed by the terms of the Bond, notwithstanding the terms of the Agreement. A consideration of the Agreement discloses that the developer had undertaken to procure both an “Initial Restoration Bond” (per clauses 1.1.8 and 6.1) and a “Full Restoration Bond” (per clauses 1.1.6 and 6.4).  Clause 1.3 narrates that the defender has agreed to guarantee the “performance obligations” of the developer “in terms of the Conditions (as hereinafter defined)”.  

[74]      The conditions are those in the Planning Permission and breach of which constitutes a default under the Agreement: see clause 2.1, in which the defender “hereby guarantees” to the pursuer the “due and proper compliance” with the Agreement and the conditions attached to the Planning Permission referred to in the Agreement “to the extent that the non-compliance with the Agreement or said conditions would constitute a Default (as defined in the Agreement).”  This necessarily focuses on the conditions in the Planning Permission imposed upon the developer, and non-performance of which would be a “default” within the meaning of the Agreement.

[75]      A consideration of the Agreement discloses that not every breach of a condition in the Planning Permission was a “default” in the relevant sense.  The definition of default in clause 1.1.4 of the Agreement is defined by reference to the developer’s failure (after allowing a reasonable time) to comply with the conditions for restoration and aftercare of the Site.  Clause 6.4 of the Agreement stipulates for a “Full Restoration Bond” of “sufficient amount” to cover the “the entire restoration of the [Site]… including (a) the restoration of the [Site] to woodland…. And (b) the aftercare. (Emphasis added.)  It is significant, in my view, that the amount of the Bond is to cover “the entire” costs of the remedial works. The parties agreed a means to calculate this in the Agreement.  Clause 6.5 of the Agreement provides the mechanism by which the amount of the Bond is calculated by the Compliance Assessor, who is to be “a suitably qualified professional” and whose responsibilities are set out in clause 7.  In terms of clauses 6.8 and 8.1 of the Agreement, the pursuer was entitled to carry out or procure the carrying out of the works to remedy any default and it had power to enter onto the Site for this purpose. Accordingly, reading these provisions together, the amount of the Bond agreed to reflects the carefully worked out pre-estimate by the Compliance Assessor of the entire costs of the remedial works for the Site.

[76]      In short, it is clear from the foregoing that the intention of the parties was that the Bond was to guarantee performance by the developer of its obligation in respect of the whole of the remedial works, and to enable the pursuer to call upon the Bond (more than once, if necessary)  in the event of the developer’s default.

[77]      Turning to the Planning Permission, it is clear from condition 7 of the Planning Permission that the consent is not open-ended in duration. Coal extraction must cease and the Site restored to agricultural and countryside uses within five years of the commencement of coaling operations. Restoration required to be completed within 12 months of the cessation of coaling extraction.  Accordingly, in practical terms, the coaling operations could not extend beyond about 4 years or so after their commencement, if due time was to be allowed for completion of the restoration works within the five years of the commencement of extraction.  Clause 4.2 of the Bond provided for a temporary cessation of the works permitted under the Planning Permission.  “[T]he Works” were defined by reference to the Agreement and Planning Permission “for the Development of an opencast coal site” at the Site: see clause 1.1 of the Bond and, prima facie, are habile to include the extraction works and any remedial works.  From that it may be inferred that the extraction works had commenced on Site and that the timeframe in condition 7 of the planning permission had been brought into play.

[78]      Passing over the contested clauses 2.2 and 3.1 of the Bond for the moment, it is also relevant to note (from clause 4.1 of the Bond) that it expressly envisaged that the pursuer might call upon the Bond more than once. It is for that reason that the maximum is expressed as an aggregate liability. That aggregate was not fixed, but varied and reduced over time, in accordance with the Schedule to the Bond. It should also be noted that the liability under the Bond is time-limited. The defender will be discharged under the Bond by no later than 30 March 2017, being the latest possible Expiry Date.

[79]      Accordingly, the duration of the Bond is not co-extensive with the period during which remedial works might potentially be undertaken or completed. However, its maximum aggregate valuation was a pre-estimate of the entire remedial works. In the light of these provisions of the Bond, read together with the Agreement and the Planning Permission, in practical terms there is virtually no prospect that the remedial works to remedy the developer’s default could ever be completed before the Expiry Date, even if commenced at the earliest possible point in time. So, for example, even if on 31 December 2014 the developer determined to undertake no further coaling works but to cease, the remedial works (ie including aftercare) could not be completed before the Expiry Date. Notwithstanding this, the Bond was to cover “the entire” remedial works.

[80]      Any interpretation of the Bond must give effect to these features of it: including the fact that the Bond’s Expiry Date would be reached before the remedial works could ever be completed, but also that the amount of the Bond was an amount agreed to and intended to cover the entirety of the developer’s obligations to complete the remedial works.  The disputed clauses of course fall to be construed in a manner consistent with the commercial purpose of the Bond, but, it seems to me, that they must also be construed in a manner consistent with the features I have just described and which provide the context for this Bond. This would militate against an interpretation which would make it, in practical terms, virtually impossible for the pursuer ever to call upon the Bond or for the Bond to function as an effective guarantee of the developer’s obligations in respect of remedial works. 

[81]      I return to the defender’s argument that the pursuer first required to complete the remedial works before calling upon the Bond. Consistent with the general principles of interpretation, clause 2.2 of the Bond should be construed according to its terms but also in the context of the other provisions of the Bond, and consistent with the commercial purpose of the Bond. Read in isolation, the defender’s interpretation of clause 2.2 is an available interpretation of this clause. However, it is obviously inconsistent with the latter part of clause 3.1. There is an obvious tension between clauses 2.2 (“carried out”) and 3.1 (“intention and ability…to proceed forthwith with any such operations”). Both parties accepted this.  However, the tension is not restricted to inconsistencies as between clauses 2.2 and 3.1.  There is a like tension within the separate parts of clause 3.1, namely as between the final part of the clause (ie the futurity in the language) and the use of the past tense (of “carried out”) in respect of the second requirement.

[82]      One of the difficulties for the defender is that its literal interpretation of clause 2.1 is inconsistent with the plain and natural reading of clause 3.1.  The final phrasing of clause 3.1, and its reference to the “intention and ability” of the pursuer “to proceed forthwith with any such operation”, is incapable of being read other than that the remedial works are still to be undertaken.  This follows not simply from the verb tense of “to proceed”, but the words “intention” and “ability” point to an expression of a state of mind or state of capacity of some futurity, as does the adverb “forthwith”, betokening something still to be done. 

[83]      However, the tension is not just linguistic (in the sense of inconsistent verb tenses); it is also functional.  If the works first had to be carried out, then one would have expected the second requirement to consist of a simple certification of the sum expended (as this would be known), rather than the stipulation to provide a “full breakdown”.  On the other hand, if the remedial works are still to be carried out, there is an obvious rationale for seeing a “breakdown” of works to be completed, not least as a means to assess whether they are “proper and reasonable”.  The defender’s interpretation sits uncomfortably with the content of the second requirement.  More fundamentally, if the past tense of “carried out” prevails, then there would in practical terms be no competent claim that could be made until after the last of the dates specified in the Schedule (ie the Expiry Date).  The effect of the defender’s interpretation also makes a nonsense of the seemingly precise working out of the figures attributed to different time frames for a possible claim.  The whole of the third requirement would be otiose.  Indeed, it would not be possible to give effect to the defender’s interpretation of clause 2.2 without deleting the whole of this third requirement in clause 3.1.  That, it seems to me, would be to overstep the bounds of correcting any infelicity in expression and is unlikely to reflect what the parties intended.

[84]      The most fundamental difficulty for the defender’s interpretation, if correct, is that it would lead to the result that, in practical terms, the pursuer could never complete the remedial works before the Bond expired.  The pursuer could never make a claim to cover the entire cost of the remedial works, the aggregate value of which is reflected in the Bond. This is profoundly at odds with the commercial purpose of the Bond construed in the context of the Agreement and the Planning Permission and the clear intention that the Bond was to cover the entire costs of the remedial works. To the extent that the defender’s interpretation makes it practically impossible for the pursuer to recover under the Bond, it is an absurd result.  At the very least, is an uncommercial interpretation, as it frustrates the very purpose of the Bond.  I do not accept the defender’s interpretation.

[85]      In my view, the pursuer’s first interpretation (see paragraph [51], above), that it does not require to complete the remedial works, is to be preferred.  Properly construed, and taking into account the context and commercial purpose of the Bond, the pursuer does not require to carry out the remedial works before the defender’s liability under the Bond may be triggered.  The tension that exists in the wording of these clauses is best resolved by interpreting these clauses with the words “to be” inserted before the words “carried out” in clauses 3.1 and 2.2.  Mr Hanretty accepted that this was an available reading.  The pursuer’s interpretation facilitates the commercial purpose of the Bond and in my opinion better accords with business common sense.  For completeness, I should record that I was not attracted to the pursuer’s third interpretation (set out in paragraph [55], above).  This required a two-stage process but, in my view, there was little basis in the Bond to govern the mechanics of this two-stage process.  The effect, too, of the pursuer having to complete the remedial works before any amount could be claimed, is inconsistent with the commercial purpose of the Bond.

 

The adequacy of the Notice

[86]      I turn to consider the arguments about the adequacy of the Notice.

[87]      In relation to the defender’s argument based on the words “together with”, in my view this was overly formalistic.  This phrase did not require that the third requirement of clause 3.1 had to be satisfied by submission of a document or certificate physically separate from the Notice itself.

[88]      The remaining question is whether or not the pursuer’s Notice has satisfied the third requirement at the end of clause 3.1.  The parties have approached the third requirement as a free-standing one.  Clause 3.1 is not obviously framed this way.  Clause 3.1 clearly has two conditions (corresponding to (i) and (ii), set above at para [17]). On one approach, the phrase “together with” simply introduces a particularisation of the second requirement.  Be that as it may, the pursuer relies on the sentence in the Notice (that the pursuer “confirms that it will comply with its obligations under the Bond”: see paragraph [19], above) as satisfying the third requirement.  It seeks to rely on other communings as part of the context in which to construe this sentence of the Notice.  The defender attacked the efficacy of this sentence.  Mr Hanretty invited the court to ignore any context and he invokes the doctrine of strict compliance.  As a fall back, Mr Hanretty argued that in any event the sentence relied on was inadequate.

[89]      It is necessary first to consider the terms of clause 3.1, to ascertain whether the doctrine of strict compliance, in fact, applies.  The doctrine of strict compliance requires compliance of the documents presented with the contractual stipulations as to the type and form of documents stipulated.  In my view, Mr Hanretty’s reliance on this doctrine is misplaced for two reasons.  First, the doctrine requires strict compliance with the documents as presented, namely whether on their face they conform in type and form to those stipulated. The short, and perhaps fatal, problem for the defender is that there is no specific document stipulated for in the third requirement.  Secondly, the language used (“evidence”) invites a consideration of extraneous material which the doctrine of strict compliance is intended to preclude.  Indeed, the reference to “reasonable evidence” indicates a qualitative assessment of whatever is proffered and which would be difficult to define with the requisite certainty for the doctrine to apply.  This kind of qualitative assessment of evidence, as opposed to the ex facie formal compliance of the documentation presented, is it seems to me, inimical to the application of the doctrine of strict compliance.  I do not accept the defender’s argument that, on a proper construction of the Bond, parties agreed that the strict compliance was required in respect of the third requirement, even on the hypothesis that this was a discrete requirement.

[90]      In relation to the meaning of the sentence relied on by the pursuer (that the pursuer “confirms that it will comply with its obligations under the Bond”), Mr Hanretty’s submission is that this is meaningless. He does so, as I understand it, because he argues that there is no “obligation” imposed on the pursuer under the Agreement.  Mr Armstrong invited me to reject the defender’s contention that the pursuer had no obligations under the Agreement. I accept his submission that the pursuer had entered the Agreement as the planning authority for the sole purpose of ensuring that the planning conditions were complied with and that clauses 2.1, 2.2 and 3.1 of the Bond were all directed to ensuring the due restoration of the Site by completion of the remedial works. Mr Armstrong argued that on either the pursuer’s primary interpretation or its third one (set out above, at paragraphs [51] and [55], respectively), the sentence in the Notice letter, that the pursuer will comply with its obligations under the Bond, sufficed for the purpose of the third requirement in clause 3.1.

[91]      In support of the relevance of context, Mr Armstrong referred to the well-known House of Lords case of Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 and the observation of Lord Jauncey of Tullichettle (at pages 767 to 768), that:

“The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And considering this question the notices must be construed taking into account the relevant objective contextual scene.”

 

The pursuer submitted, in my view correctly, that the sentence had to be looked at in the context of the remainder of the Notice. In any event, that sentence had to be looked at in the context of the knowledge of the parties.

[92]      As part of that context, the pursuer contends that the defender was fully aware of the pursuer’s intention to undertake the remedial works. In submissions and in the pleadings, the pursuer invokes (i) the prior correspondence between the parties, including four previous attempts to give notice under the Bond (as set out in Answer 11 and admitted by the pursuer), (ii) the minutes of the pursuer’s Executive Committee dated 22 October 2013 recording the pursuer’s decision to secure restoration of the Site,  (iii) a letter from the current owners dated 1 October 2014 confirming it will cooperate with the pursuer in the restoration of the Site and (iv) the fact that the pursuer has carried out restoration work at two other opencast coal sites. Apart from (ii), which is a matter of averment by the defender and of admission by the pursuer, the defender does not admit these matters.

[93]      I accept Mr Armstrongs’s submission that the case of Mannai applies and that it is appropriate to construe the Notice in the factual context, for the purpose of determining whether objectively, and construing it against the known background, the defender could not but have appreciated that the pursuer was calling on the Bond.  I prefer the pursuer’s submissions as to the necessity of a contextual approach.  I express no view at this stage, and in the absence of evidence as to the context, as to whether or not the sentence relied on was adequate.  However, I am not prepared at this stage to hold that as a matter of relevancy the sentence relied on is necessarily irrelevant or, indeed, that it is appropriate to construe it divorced from the known context (as Mr Hanretty seeks to do).  As the defender disputes much of the background, a proof will be required before it can be determined whether, construed in the appropriate factual matrix, the Notice was adequate to comply with the terms of clause 3.1, as I have construed it.

[94]      I shall therefore put the matter out By Order to discuss further procedure.  I reserve meantime all question of expenses.