Scottish Court of Session Decisions

 

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 8

 

CA119/14

OPINION OF LORD WOOLMAN

In the cause

SOUTH LANARKSHIRE COUNCIL

Pursuer;

against

COFACE SA

Defender:

Pursuer:  Clark QC, Edwards;  Ledingham Chalmers LLP

Defender:  Lord Davidson of Glen Clova QC;  MacRoberts LLP

 

27 January 2015

The Issues
[1]        The pursuer seeks payment of the sum of £4,499,410.32 under a performance guarantee Bond.  The defender contends that the notice served by the pursuer to trigger the Bond was invalid.  Liability turns on two interlinked issues.  First, what is the proper construction of the Bond?  Second, did the notice comply with the terms of the Bond?

 

The Facts
[2]        Mainshill lies near the village of Douglas in South Lanarkshire.  It formerly comprised woodland and agricultural land.  In July 2008 the Scottish Coal Co Ltd (“Scottish Coal”) applied for planning permission to develop an opencast coal mine at the site.  On 30 June 2009, South Lanarkshire Council (“the Council”) granted conditional planning permission.  The detailed conditions included obligations on Scottish Coal:  (a) to enter into a minute of agreement regulating the development of the site in terms of section 75 of the Town and Country Planning (Scotland) Act 1997;  and (b) to submit for approval a detailed restoration scheme for the site. 

[3]        The parties executed a section 75 agreement in June 2009.  In terms of clause 8.4 (firstly), Scottish Coal undertook to restore the site at the conclusion of the mining operations in accordance with the approved plan.  Clause 14.1 required Scottish Coal to provide a performance guarantee Bond from an independent financial institution in respect of the restoration obligations.  The scope of the Bond was set out in clause 14 and a draft of the document was annexed to the section 75 agreement. 

[4]        Coface SA (“Coface”), a major financial institution based in France, agreed to stand as the guarantor.  Together with Scottish Coal and the Council, it executed a performance guarantee Bond, which is dated 22 and 28 January and 13 February 2010 (“the Bond”).  The Bond was to endure until 1 August 2014.  Coface’s liability was subject to monetary limits, which depended upon the date on which the claim was made.  Liability was based upon the amount of restoration work that the Council estimated would be required.  The maximum aggregate liability of Coface under the Bond was just under £4.5 million. 

[5]        On 29 April 2013 I ordered that Scottish Coal should be wound up on the ground of insolvency.  The interim liquidators directed that operations should cease at the Mainshill site, subject to two exceptions.  They instructed that certain safety operations should be carried out and that coal already extracted should be sold.  In late April 2013, the liquidators informed all the local authorities responsible for sites at which Scottish Coal was carrying out open cast works that there were insufficient funds to undertake any restoration works.

[6]        The Council wrote to Coface on 1 May 2013 by first class recorded delivery and first class post, enclosing certified copies of the winding-up order and the Bond.  It stated that (i) the liquidators had ceased all works at the Mainshill site, (ii) Scottish Coal was therefore in breach of its planning obligations, (iii) the Council was likely to call up the Bond, (iv) there was time pressure on it to do so, as the Bond’s current value of £4,499,410.32 would decrease to £2,701,472 on 1 July 2013, and (v) the restoration costs would exceed those sums.  The Council asked for a named contact at Coface with whom it could correspond.  It also offered to agree a short continuation of the time limit if Coface gave a formal undertaking to that effect.

[7]        Coface did not respond to the letter and the Council wrote again by the same means on 29 May 2013.  The letter was very short:

“I refer to my letter of 1^st May 2013 enclosing certified copy Bond.  As I have not heard from you, I attach Notice in terms of Clause 3 of that Bond.

 

Notice in respect of Clause 14 of the Agreement as defined in the Bond was served on the Company and their Provisional Liquidators on 17^th May 2103 (sic).”

 

[8]        The notice enclosed with the letter was in the following terms:

“Performance Guarantee Bond (Restoration) numbered 271839

On behalf of and as authorised by South Lanarkshire Council … I hereby give Notice in terms of Clause 3 of Performance Guarantee Bond (Restoration) numbered 271839, granted by you as Cautioner in favour of the said South Lanarkshire Council and dated 22 and 28 January and 13 February both months 2010, that the Scottish Coal Company Limited … now in Provisional Liquidation, are in breach of clause 8.4 (firstly) of Minute of Agreement …  The cost of the Restoration Works as defined in the said Bond is … £9,199,892.00”

 

[9]        Over a year later, on 25 July 2014, the Council sent two further letters to Coface.  Both purported to be demands for payment, but for different sums.  One sought payment of £4,499,411, the other of £1,271,230.65.  The summons only refers to the letter seeking payment of the higher sum.  Mr Clark explained that the other letter was sent “out of an abundance of caution”.  He added that if the court finds against the Council on its current pleadings, it may seek to introduce averments about the £1.27 million letter.

 

The Terms of the Bond
[10]      Clause 1 of the Bond sets out the background to the guarantee.  In particular it refers to Scottish Coal’s obligation to restore the site in terms of clause 8.4 (firstly) of the section 75 Agreement.  Clauses 2 and 3 are the key provisions:

“2         SCOPE OF BOND

 

2.1        The Cautioner subject to the terms hereof hereby guarantees to the Council the due and proper performance by the Company of the restoration (but not aftercare) obligations contained in Clause 8.4 (firstly) of the Agreement (hereinafter referred to as the Restoration Obligations).

 

2.2        In the event of a breach of the Restoration Obligations as referred to in Clause 2.1 above, the Cautioner shall, if called upon by the Council, pay to the Council the cost to the Council of the works required to be carried out in implement of the Restoration Obligations (which works are hereinafter referred to as the Restoration Works).

 

3          CONDITION OF BOND NOTICE

 

3.1        Prior to the obligation upon the Cautioner to pay any sums due hereunder becoming enforceable by the Council, 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 abovementioned address for service.

 

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 hereunder.”

 

[11]      Clause 5 stated that the Coface’s “maximum aggregate total liability” for all claims was £4,499,411.  Its maximum liability was to be determined in accordance with the schedule annexed to the Bond, which contained the following table (subject to index linking for inflation):

A. Period subsequent to Date of Commencement of Works	B. Maximum Bond Liability (£)	C. Maximum aggregate volume of overburden material (m3)
0-6 months	515,359.94	0
7-13 months	2,864,103.18	3,249,300
14-20 months	3,277,657.56	3,779,100
21-27 months	3,584,248.87	4,025,500
28-34 months	4,499,410.32	5,330,800
35-41 months	4,373,161.54	5,228,000
42-48 months	2,286,447.23	2,216,100
49-54 months	1,271,230.65	662,100

 

What is the proper Construction of the Bond?
[12]      In a parallel case also arising out of the liquidation of Scottish Coal, Lord Malcolm analysed the English case law on performance guarantee bonds:  East Ayrshire Council v Zürich Insurance Public Ltd Co [2014] CSOH 102 at para. 18.  I respectfully agree with him (a) that the normal principles of contractual construction apply;  (b) that the guarantor is expected simply to check whether the demand complies with the agreed requirements; and (c) that the degree of compliance depends upon the terms of the individual bond:  see in particular IE Contractors Ltd v Lloyds Bank plc [1990] Lloyd’s LR 496, 501 per Staughton LJ. 

[13]      I now turn to the language of the Bond.  Clause 2.2 states that liability arises when the Council calls upon Coface to make payment.  It is silent, however, on the question of how such a call should be made.  Clause 3.1 provides the necessary specification.  The Council must serve a “notice in writing” on Coface at a specified address.  The notice must identify two matters: (i) the nature of the breach, and (ii) the cost of the works to be carried out. 

[14]      According to Mr Clark, clause 3.2 simply provides an evidential requirement.  The Council’s notice must be signed by one of its authorised officials in order to constitute “sufficient evidence” of the sum due. 

[15]      Lord Davidson adopts a different construction of the Bond.  He founds on the fact that clause 3.1 refers to a “notice in writing”, while clause 3.2 refers to a “written demand for payment”.  He submits that each term must be given a separate meaning.  A notice involves an alert.  A demand connotes an instruction to hand over money.  It follows that the Bond prescribed a two-stage procedure.  The Council had to serve a notice specifying the breach and the cost of the works to the Council, followed by a demand for payment. 

[16]      Lord Davidson argued that his approach reflected business common sense.  He suggested that various contingencies could have affected Coface’s liability.  Parliament might have passed legislation relieving Scottish Coal of its restoration obligations.  The Council might have reached a compromise agreement with the liquidators.  A “white knight” might have come on the scene to rescue the company.  A two-stage procedure allowed Coface to check the position before it had to make payment.

[17]      I reject that approach as unsound.  The two parts of clause 3 are closely interwoven.  When clause 3.2 refers to a “claim”, that can only mean a “notice in writing” served by the Council in terms of clause 3.1.  On a natural reading, the purpose of clause 3.2 is clear.  It provides further specification about the nature of a claim made by the Council.  If one of its authorised officials signs the notice, no questions will arise about authenticity or validity.  Put short, I conclude that the terms “call”, “notice in writing”, “claim” and “written demand for payment” are synonyms. 

[18]      That construction squares with the approach of a reasonable commercial person.  He or she would be aware that such instruments are designed to provide “a security which is … readily, promptly and assuredly realisable when the prescribed event occurs”:  Siporex v Banque Indosuez [1986] Lloyd’s LR 146, 158 per Hirst J.  A two-stage procedure would give rise to uncertainty.  Neither party could be sure when the Bond was realisable.  Two questions highlight the problem.  How long after serving a notice would the Council have to wait before serving a demand?  Could it serve both documents simultaneously?  The answers to these questions could have major financial consequences, given the disparity of the figures in the schedule.  A reasonable commercial person might also query (a) why Coface should have an opportunity to make enquiries, given that clause 3.2 envisages that it will not to do so, and (b) why the heading of clause 3 is in the singular, not the plural. 

[19]      Having regard to these considerations, I hold that on a proper construction of the Bond, the Council had to serve one, rather than two, documents on Coface to trigger liability.

 

Was the Notice valid?
[20]      Coface submits that the notice enclosed with the Council’s letter of 29 May 2012 is deficient in two respects.  It does not qualify as a notice, because if fails to provide the figure representing the “cost to the Council” in terms of clause 2.2.  It does not qualify as a demand, because that term is not used.  Instead the Council simply provides the total cost of the restoration works.

[21]      I regard that approach as too narrow.  Courts should avoid technical constructions that involve an undue emphasis on the niceties of language: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1977] AC 749, 771 per Lord Steyn.  The Council had informed Coface on 1 May that it would seek payment of the sum guaranteed in terms of the schedule to the Bond.  Viewed objectively in the context in which it was sent, the import of the notice dated 29 May 2013 was obvious: Patel v MRD Property Developments Ltd [2012] EWCA 727 at para. 21.  The reasonable recipient could have been in no doubt that the Council sought the maximum sum available under the schedule, which was less than half the total cost of the restoration works.

 

Two Miscellaneous Points
Was the notice signed by an authorised official of the Council?
[22]      Janet Lawson subscribed the notice dated 29 May 2013, designing herself as the “Manager and Proper Officer” of the Council.  In an affidavit dated 22 July 2014, she states that she is a legal services manager within the Council’s Department of Administration and Legal Services.  She also states that she is “an authorised signatory on behalf of the Council in terms of a Scheme of Delegation promulgated by the Council.” A copy of the scheme is annexed to her affidavit.  Coface does not, however, accept that she was so authorised and proof may be required on this point.

 

The letter of 25 July 2014
[23]      If it had been necessary to do so, I would have rejected the Council’s fall-back argument based on its letter of 25 July 2014 for the higher sum.  If the notice of 29 May 2013 is invalid, then the Council cannot use that date retrospectively to fix liability.  In terms of the schedule to the Bond, Coface’s liability on 25 July 2014 was £1.27 million.

 

Conclusion
[24]      Counsel agreed that I should fix a by order hearing to discuss further procedure in the light of this opinion.