Guarantors lose challenge to mine restoration bond notice terms

A notice claiming payment of several million pounds under a performance bond relating to the restoration of an opencast mine in South Lanarkshire has been upheld, despite a challenge to its validity by the guarantors.

Lord Menzies, Lady Smith and Lord Drummond Young in the Court of Session refused a reclaiming motion by French financial institution Coface SA, seeking dismissal of an action by South Lanarkshire Council for payment of the sum said to be due under the bond following the insolvency of Scottish Coal. Planning permission to develop the site, at Mainshill, near Douglas, had been granted in 2009 subject to an agreement that Scottish Coal would carry out detailed restoration work after it ceased mining operations. The company was wound up on the ground of insolvency in April 2013. It had no funds for restoration works.

The bond provided (clause 3.1) that prior to the obligation becoming enforceable, notice in writing “of any breach of the agreement by the company and the cost of restoration works to be carried out” must be provided to the cautioner at its address for service”; and in clause 3.2 that the cautioner “shall not be obliged to investigate the authenticity or validity of a claim”; written demand from an authorised official of the council would be sufficient notice.

After an initial intimation of a likely claim had been ignored by Coface, the pursuers sent a formal notice stating that Scottish Coal was in breach of its agreement and that the cost of restoration works was £9.2m. Coface's maximum liability was then £4.5m.

Coface challenged the Lord Ordinary's decision that the document sent was an effective notice in terms of the bond, arguing that different expressions used in clauses 2 (scope of the bond) and 3 indicated that different concepts were involved, and a two stage process was required: first, notice of breach of the agreement, and then a separate demand for payment. Only that way could it know how much it had to pay.

Delivering the opinion of the court, Lord Drummond Young said the general principles were well established: the contract had to be construed in context and in accordance with the purposes it was intended to achieve. Words had to be given their ordinary and natural meaning, and construed in accordance with commercial common sense if there was more than one possible meaning. “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.”

Further, “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.” Because of this, the documents had to be precisely what the bond called for, though the strictness required for compliance was a question of construction of the bond.

Under the present bond the notice had to satisfy two requirements: to give notice of breach of agreement, and to indicate the cost of restoration works. These corresponded to the terms of clause 2 giving rise to liability. Clause 3.1 had to be construed in that context, and the notice clearly satisfied what it required.

On the argument that a two stage procedure was required, Lord Drummond Young commented: “We can see no commercial purpose in such a procedure; once the cost of the restoration works has been provided, as required by clause 3.1, the calculation of the amount actually due is a relatively straightforward exercise... These are calculations that the cautioner can perform just as easily as the council. Thus a second document is otiose. Furthermore,… any such procedure would give rise to uncertainty as to when the bond was realisable: could the two documents be served simultaneously, and if not how long would have to elapse before the demand for payment could be served? Commercial common sense, applied to the practical operation of the bond procedures, suggests that such uncertainty is unnecessary and undesirable.”

The expressions “claim” and “written demand for payment” in clause 3.2 were synonymous. It was not necessary to specify the precise breach that had occurred; that might be impossible in a case such as the present.

The case was remitted to the Lord Ordinary, who had allowed proof on whether the signatory of the notice was the council's authorised signatory.

Click here to view the opinion.