Scottish Court of Session Decisions

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2016] CSIH 15

CA119/14

 

Lord Menzies

Lady Smith

Lord Drummond Young

OPINION OF THE COURT

delivered by LORD DRUMMOND YOUNG

in the cause

by

SOUTH LANARKSHIRE COUNCIL

Pursuer and Respondent;

against

COFACE SA

Defender and Reclaimer:

Act:  Duncan QC, Edwards;  Ledingham Chalmers LLP

Alt:  Lord Davidson QC;  MacRoberts LLP

4 March 2016

[1]        Early in 2010 the reclaimer granted a performance guarantee bond in favour of the respondent in security of the obligations of the operator of an opencast mine to restore the land following the cessation of mining operations.  Following the insolvency of the operator, the respondent raised proceedings for the payment of the sum of £4,499,410.32 which was said to be due by the reclaimer under the bond.  The reclaimer asserts that the notice served by the respondent to call up the reclaimer’s liability under the bond was invalid.

[2]        In July 2008 Scottish Coal Co Ltd applied to the respondent for planning permission to develop and operate an opencast coal mine at a site at Mainshill, near Douglas, South Lanarkshire.  On 30 June 2009 conditional planning permission was granted.  Two of the conditions are material for present purposes.  First, Scottish Coal was obliged to enter into a minute of agreement regulating the development of the site in accordance with section 75 of the Town and Country Planning (Scotland) Act 1997, and secondly, Scottish Coal was obliged to submit a detailed restoration scheme for the site to the respondent for its approval.  The section 75 agreement was concluded in June 2009.  Clause 8.4 required that Scottish Coal should carry out and complete detailed restoration work and what were described as aftercare works in the manner provided in the planning consent following the cessation of mining operations.  Clause 14.1 required Scottish Coal to obtain a restoration bond, in the form of a validly executed performance bond, in favour of the respondent to secure their obligations to carry out the specified restoration work.  A draft performance bond was annexed to the section 75 agreement.

[3]        The reclaimer, which is a major financial institution based in France, agreed to act as guarantor in respect of the performance bond.  The reclaimer, Scottish Coal and the respondent executed a performance guarantee bond dated 22 and 28 January and 13 February 2010.  The bond guaranteed performance by Scottish Coal of the restoration obligations contained in the section 75 agreement, and contained detailed provisions for the calling up of the bond; these are set out below.  The bond came into operation on 1 February 2010.  The maximum aggregate liability of the reclaimer was fixed at £4,499,411.  That sum was, however, subject to a system of variable limits specified in the schedule to the bond, which took the form of bands set generally at seven monthly intervals over the period of 54 months from the date of commencement of the works.  The maximum limit for each of the bands was to be index linked according to a formula provided in the bond.  The relevant band was to be determined by the time when a claim under the bond was made.

[4]        Scottish Coal encountered financial difficulties, and on 29 April 2013 the court pronounced an order for its winding up on the ground of insolvency.  The interim liquidators instructed that mining operations should cease at Mainshill, and that all operations should cease apart from certain tasks required for safety and the sale of coal already extracted.  They further informed all of the local authorities in whose areas Scottish Coal was carrying out opencast works that the company’s funds were insufficient to pay for any restoration works.  On 1 May 2013 the respondent wrote to the reclaimer by first class recorded delivery post and first class post to intimate that it was likely that the bond would be called up.  Certified copies of the bond and the Court of Session interlocutor winding up the company were enclosed with the letter, and it was stated that the liquidators had now ceased all works on site.  The letter continued by stating that Scottish Coal were in breach of their planning obligation and planning consent conditions, with the result that calling up of the bond was likely.  The current bond value was estimated at £4,499,410.32, but that was due to decrease to £2,701,472 on 1 July 2013.  Consequently the respondent was under time pressure to serve a formal breach notice, but it was suggested that, by agreement, an undertaking could be given by the reclaimer to continue the time limit which would delay the serving of a formal notice.

[5]        The reclaimer did not reply to the foregoing letter, and on 29 May 2013 the respondent wrote to the reclaimer in the following terms:

“I refer to my letter of 1 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 [2013]”.

 

The notice enclosed with the letter was in the following terms:

“On behalf of and as authorized 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 among the said South Lanarkshire Council and the Scottish Coal Company Limited… and Douglas and Angus Estates…. The cost of the Restoration Works as defined in the said Bond is… £9,199,892.00 Sterling”.

 

[6]        The letter of 29 May 2013 was followed by correspondence between the respondent and the reclaimer’s solicitors, but with no definite outcome.  On 25 July 2014 the respondent wrote to the reclaimer, referring to the notice of 29 May 2013 and to the reclaimer’s failure to pay the sum then demanded or any other sum to the respondent, and demanding payment of the sum of £4,499,411 by 4 August 2014.  A further letter sent on the same day demanded payment of a lesser sum, but that is not founded on by the respondent.

[7]        In the bond, Scottish Coal was referred to as “the Company”, the reclaimer was referred to as “the Cautioner”, and the respondent was referred to as “the Council”.  Clause 1 referred to the section 75 agreement in respect of the grant of planning permission for the development of the opencast coal site at Mainshill and the fact that Scottish Coal had requested the reclaimer and the reclaimer had agreed to guarantee the performance of the restoration, but not the after-care, obligations of Scottish Coal to the respondent in terms of clause 8.4 (firstly) of the agreement.  Clause 2 then provided:

“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 above-mentioned 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 authorized official of the Council being sufficient evidence of any sum due hereunder”.

 

Clause 5 recorded that the maximum aggregate total liability of the Cautioner in relation to all claims made by the Council under the bond was not, in the absence of agreement to the contrary, to exceed £4,499,411.  Provision was made for index linking of sums due.  In addition, in a table contained in the schedule to the bond the maximum liability under the bond was to vary according to the period subsequent to the date of commencement of the works.  After the 34^th month the maximum liability declined from £4,499,410.32 (which was the maximum possible liability under the bond) to £4,373,161.54 (which after index linking would reach the sum of £4,499,410.32), and after the 41^st month the maximum liability declined to £2,286,447.23 which after index linking would give the sum of £2,701,472 referred to in the respondent’s letter of 1 May 2013.

 

Construction of the bond
[8]        The issue between the parties is whether the bond was effectively called up by the notice sent by the respondent on 29 May 2013:  whether that document was an effective notice in the light of the terms of the bond.  The Lord Ordinary held that it was, and we agree.  The argument for the reclaimer is in essence that the document sent by the respondent was not a valid notice according to the terms of clause 3 of the bond.  The Lord Ordinary’s construction, it was said, failed to have regard to the diversity of expressions used in clauses 2 and 3; the use of different expressions was an indication that different concepts were involved.  The result was that calling up the bond involved a two‑stage process.  First, notice in writing of the breach of the section 75 agreement must be served in terms of clause 3.1, and secondly, that notice must be followed by a separate demand for payment as required by clause 3.2.  Only in that way, it was said, could the reclaimer know how much it had to pay.  On that basis the reclaimer submitted that the notice of 29 May 2013 was ineffective to call up the bond, with the result that there was no liability on the reclaimer to make payment.

 

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

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

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

[12]      A further important principle is what is known as the doctrine of strict compliance:  the documents presented must be precisely those which the bond calls for:  I.E. Contractors Ltd, supra, at 500.  It has been said that there is no room for documents which are almost the same, which will do just as well.  The reason for this principle lies in the fact that implementation of the contract is normally conditional on the presentation of documents and nothing more; there is no means of checking whether performance is due by reference to underlying facts, and thus the documents must be exactly what is required by the contract.  Moreover, a performance bond can be enforced by the beneficiary very easily, by the mere sending of documents, and there is therefore a danger that the right to call up the bond can be abused.  Accordingly some degree of strictness is required.  When the granter of the performance bond makes payment, it generally has a right to be reimbursed by the party whose obligations are guaranteed, either contractually or on a restitutionary basis.  If the granter does not ensure that the documents comply fully with the terms of the bond, that right to reimbursement will generally be denied. It is nevertheless important to note that “the degree of compliance required by a performance bond may be strict, or not so strict. It is a question of construction of the bond”:  I.E. Contractors Ltd v Lloyds Bank PLC, supra, at 501.  In the decided cases performance bonds have been compared with letters of credit, which likewise are payable on the presentation of documents and require strict compliance with the documentary requirements of the contract:  ibid, at 500;  Siporex Trade SA v Banque Indosuez, supra, at 155.  While similarities unquestionably exist, we do not think it necessary to consider the law on letters of credit;  although letters of credit were extensively used before performance bonds became commonplace, performance bonds are now widely used and have been the subject of a significant number of court decisions in their own right.

[13]      The foregoing rules are obviously subject to the precise terms of the bond in question.  Thus a bond may provide that a beneficiary who seeks to enforce the bond should be able to provide evidence that the underlying factual position is as he asserts.  For example, if a bond is granted in favour of the employer in a building contract, the bond may provide that in order to enforce it the employer must demonstrate to the bank that a breach of contract has occurred with resulting loss.  That involves an element of inquiry into the underlying factual position.  An example of such a bond is found in Oval (717) Ltd v Aegon Insurance Company (UK) Ltd, supra, where a performance bond included an express provision that it should be a condition precedent to the beneficiary’s right to recover that the granter should be notified by the beneficiary in writing of any “non-performance or non-observance on the part of the contractors of any of the stipulations or provisions contained [in the main contract]… within one month after such non-performance or non-observance shall come to the knowledge of” the beneficiary.  It was held that the bond was payable to the beneficiary upon proof of default by the main contractor whose performance was guaranteed; the Scottish case of Clydebank & District Water Trustees v Fidelity & Deposit Company of Maryland, 1915 SC 362; 1916 SC (HL) 69, was followed.

[14]      The commentary on Oval (717) in the Building Law Reports (85 BLR 100-101) notes that conditions requiring notification of non-performance by the party whose performance is guaranteed are not common but are found on occasion.  The writer observes that such guarantees may be commercially worthless to the beneficiary, at least if they require notification of every default that occurs under the contract whose performance is guaranteed, since minor defaults are commonplace.  Furthermore, we note that a requirement that specification should be provided of any default in the performance of the underlying contract seems fundamentally at odds with the documentary nature of performance bonds, and the general principle that banks and other financial institutions are concerned with documents rather than the underlying facts.  The possibility of a bond of this nature was referred to in I.E. Contractors Ltd v Lloyds Bank PLC, supra, at 499, where it was observed that such a bond might be “inconvenient" for the bank.

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

[16]      An example of such a bond is that considered in Siporex Trade SA v Banque Indosuez, supra, where the undertaking in the bond was to make payment of a sum up to the contractual maximum on the beneficiary’s first written demand in the event that no banker’s irrevocable documentary letter of credit had been issued in favour of the beneficiary by a specified date.  The bond further provided that any claim must be supported by the beneficiary’s declaration to that effect.  Letters of demand were issued by the beneficiary, which stated that no irrevocable letter of credit had been issued and that payment was therefore demanded of the specified sum.  It was held that such a demand was sufficient; the obligation under the bond was absolute, and no regard was to be had to the rights and wrongs of the underlying transaction:  Hirst J at 158-160.  Yet another example is found in East Ayrshire Council v Zürich Insurance PLC, supra, where the bond provided for payment of the sum demanded within 10 days of service upon the cautioner of a certificate of default, and further that service of a properly drafted certificate of default would be “conclusive evidence” of a liability to pay within 10 days.  Lord Malcolm held that all that the bond required was a properly drafted certificate of default:  see paragraph [20].  In this case the wording of the bond contemplated that a certificate of default would be issued which indicated the amount that the cautioner was due to pay;  the certificate of default amounted to an assertion of fact.  As we have observed, requirements of this nature are the norm.

 

Construction of the bond granted by the reclaimer
[17]      The performance bond granted by the reclaimer specifies the primary obligation in clause 2.1: the reclaimer (the Cautioner) guarantees to the respondent (the Council) “the due and proper performance” by Scottish Coal of the restoration obligations under the section 75 agreement.  Clause 2.2 provides for payment: in the event of a breach of those restoration obligations the Cautioner shall, “if called upon” by the Council, pay to the Council the cost to it of the works required to be carried out in implement of the restoration obligations.  In our opinion the payment obligation in the latter clause is straightforward.  It arises if two conditions are satisfied:  first, there must be a breach of the restoration obligations by Scottish Coal, and secondly, the Council must call upon the Cautioner to make payment of the cost of the works required to implement the restoration obligations.  That construction follows in our opinion from the application of the normal principles that apply to the construction of contracts; it secures the fundamental purpose of a performance bond, namely to provide a prompt and readily realizable security for obligations in the underlying transaction, and it does so in the particular context of a performance bond, namely to make provision for a breach of the obligations in the underlying contract.

[18]      Clause 3 of the bond makes detailed provision for the service of notice under the bond.  Clause 3.1 states that, prior to the Cautioner’s obligation to make payment becoming enforceable by the Council, “notice in writing” must be provided to the Cautioner at a specified address.  The notice must satisfy two requirements: first, it must be notice of a breach of the section 75 agreement by Scottish Coal, and secondly, it must indicate the cost of the restoration works to be carried out.  Those two requirements correspond to the two conditions in clause 2.2, notification of a breach of the restoration obligations and a call to pay the cost of the works required to implement those obligations (although the cost of the works and the liability to pay may not be the same:  see below).  In our opinion clause 3.1 must be construed in that context.  Clause 3.2 provides that the Cautioner is not to be obliged to investigate the authenticity or validity of a claim.  That accords with the underlying principle that governs performance bonds, that in the normal case the granter of the bond is concerned with documents rather than the rights and wrongs of the underlying transaction.  Clause 3.2 further provides that a written demand for payment from an authorized official of the Council will be sufficient evidence of any sum due thereunder.  That is in essence a procedural provision, designed to make clear how the demand for payment can be authenticated by the Council.

[19]      In our opinion the notice sent by the respondent to the reclaimer on 29 May 2013 clearly satisfies the requirements of clause 3.1.  A covering letter states that the notice was sent in terms of clause 3 of the bond.  The notice itself is on the writing paper of the respondent, and bears to be signed by the respondent’s Manager and Proper Officer.  The operative clause reads:

“I hereby give Notice in terms of Clause 3 of Performance Guarantee Bond (Restoration)… dated 22 and 28 January and 13 February both months 2010, that the Scottish Coal Company Limited… are in breach of Clause 8.4 (firstly) of [the section 75 agreement]”.

 

Clause 8.4 (firstly) is the clause that provides for Scottish Coal’s carrying out the Detailed Restoration Work as specified in the section 75 agreement.  The notice then states that the cost of the restoration works as defined in the Bond is £9,199,892.  The words quoted from the notice indicate that Scottish Coal are in breach of their restoration obligations under the section 75 agreement.  That is a breach that gives rise to a liability under clause 2 of the bond, and it is notice of that breach that must be given under clause 3.1.  We consider that the notice of the breach is quite sufficiently clear.  The second requirement of clause 3.1 is an indication of the cost of the restoration work is to be carried out.  This too is provided in the notice.  Thus the notice complies strictly with the terms of clauses 2 and 3 of the bond.

[20]      The true state of affairs in the underlying transaction, the section 75 agreement, is irrelevant to liability under the notice; the general principle to that effect is reinforced by the provisions of clause 3.2 of the present bond.  The bond requires the respondent as beneficiary to state the cost of the restoration works, which has been done in the notice of 29 May 2013.  That is not the same thing as the reclaimer’s liability under the bond.  That liability is subject to an upper limit, which fluctuates over time according to the schedule and the indexation provisions in clause 8 of the bond, and the sum in the notice, of nearly £9.2 million, is well over the maximum limit.  Nevertheless it is obvious that the liability of the reclaimer will be the full sum that is due under the bond at the date of the notice, calculated according to the table contained in the schedule to the bond and the relative indexation provisions found in clause 8.

 

Construction advanced by the reclaimer
[21]      The reclaimer argued that the wording of the bond required more than the notice served by the respondent on 29 May 2013.  In particular, when clauses 2 and 3 were taken together, four distinct terms were used in relation to the calling up of the bond.  Clause 2.2 referred to the Cautioner’s being “called upon” to pay, clause 3.1 required “notice in writing” of a breach of the section 75 agreement, and clause 3.2 used the expressions “claim” and “written demand for payment”.  It was submitted that on a literal interpretation these must have separate meanings.  Such an interpretation was supported by the fact that the four expressions were not functionally interchangeable within clauses 2 and 3.  On this basis it was submitted that before the call to pay under clause 2.2 could become enforceable notice in writing must be provided in accordance with clause 3.1.  That notice had to state the cost of restoration works, but that was not necessarily the same thing as liability under the bond, where liability was limited by the schedule; indeed, in the present case the cost of the remedial works and the liability under the bond were not the same.  Consequently another document was required, which was a written demand for payment as contemplated in clause 3.2.  On the normal meaning of language, it was submitted, two documents were required, the notice of the breach of the section 75 agreement, which was to state the cost of the remedial works, and the written demand for payment, which would specify the Cautioner’s liability under the bond.

[22]      The Lord Ordinary rejected such an argument, on the basis that the four expressions used in clauses 2 and 3 were synonyms; in particular the “claim” under clause 3.2 could only mean the “notice in writing” served under clause 3.1, and clause 3.2 merely provided specification about the nature of the claim made by the Council.  In our opinion this approach is correct.  Provisions such as clauses 2 and 3 must be construed in a practical manner, in accordance with commercial common sense, and in such a way as to further the parties’ common intention and the essential purpose of a performance bond.  An unduly technical construction should be avoided.  When the clauses are looked at from this standpoint, it is in our opinion obvious that the purpose of the notice specified in clause 3.1 is to indicate to the Cautioner that there has been a breach of the section 75 agreement, that being the event that triggers liability under the bond, and to state the cost of remedying the breach.  That is the call for payment referred to in clause 2.2, and it accords with the fundamental objective of a performance bond.  The argument for the reclaimer is correct in stating that the cost of remedial works is not the same as the amount that is due under the bond, but it is an easy matter to examine the terms of the schedule to the bond, carry out the index‑linking operation required by clause 5 of the bond, and thus to determine the part of that cost that is actually due. In carrying out this operation it is the cost of the remedial works that is the variable; everything else can be determined using the mechanism specified in the bond.  That is why there is no need to state the amount that is actually due; the cost of the remedial works is the important variable element.

[23]      The argument for the reclaimer contemplated a two‑stage procedure, with the notice of the breach and the cost of restoration works to be followed by a written demand for payment.  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 using the schedule to the performance bond and the index‑linking provisions found in clause 5.4.  These are calculations that the Cautioner can perform just as easily as the Council.  Thus a second document is otiose.  Furthermore, as the Lord Ordinary indicates in his opinion, any such procedure would give rise to uncertainty as to when the bond was realizable:  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.

[24]      The reclaimer placed some emphasis on the provisions of clause 3.2, which is where the expressions “claim” and “written demand for payment” are used.  In our opinion this emphasis is misplaced.  The first part of clause 3.2, as we have indicated, must be construed in accordance with the fundamental purpose of a normal performance bond, that the granter of the bond should not be obliged to investigate the underlying facts, but should be entitled to proceed on the basis of a written demand for payment and any documents or statements of fact that are specified in the relevant clause of the bond.  That is precisely what clause 3.2 achieves.  The second part of clause 3.2 is, as we have indicated, a procedural provision that specifies the form that the notice under clause 3.1 should take:  it must be a demand for payment from an authorized official, and provided that that is done the demand will be sufficient evidence of any sum due.  That is in accordance with the fundamental working of a performance bond: payment is against documents with no regard to the facts of the underlying transaction.

[25]      It was also submitted on behalf of the reclaimer that the notice did not state in plain terms what the breach of contract was other than repeating the formula used in clause 2.1, namely that there had been a breach of the restoration obligations contained in clause 8.4 (firstly) of the section 75 agreement.  What is required, it was suggested, was greater specification of the precise breach that had occurred.  In our opinion this submission must be rejected.  Clause 3.1 merely requires “notice in writing of any breach”.  That breach must obviously be a failure or inability to implement the detailed restoration obligations that are incumbent under the section 75 agreement.  Such a breach might obviously occur at an anticipatory stage, where it became apparent before the termination of mining operations that Scottish Coal was insolvent and would be unable to carry out the restoration works;  that is precisely what has happened in the present case.  In such a case, it is impossible to give specification of the breach beyond stating that the restoration obligations cannot be carried out.  To require more would in our view fly in the face of commercial common sense.  We note, moreover, that the notice of 29 May 2013 refers to Scottish Coal’s being in provisional liquidation, and that a previous letter sent by the Council to the Cautioner on 1 May 2013 had referred to the winding up proceedings and the appointment of liquidators.  In the letter of 1 May it was stated that the liquidators had ceased all works on the site, which would obviously mean that nothing would be done towards implement of the restoration obligations by Scottish Coal.

 

Conclusion
[26]      For the foregoing reasons we are of opinion that the Lord Ordinary was correct to hold that the notice served by the respondent on 29 May 2013 was in accordance with the requirements of the bond.  We accordingly adhere to his decision and refuse the reclaiming motion.  The Lord Ordinary further rejected an alternative argument put forward on behalf of the respondent to the effect that, if the notice of 29 May 2013 was ineffective to call up the bond, the bond had been called up by a subsequent letter dated 25 July 2014.  The respondent cross‑appealed against that decision.  As we have refused the reclaiming motion, we do not find it necessary to consider that argument.  The Lord Ordinary further noted that the reclaimer did not accept that the signatory to the notice of 29 May 2013 was the authorized signatory of the Council.  He therefore allowed a proof before answer, to enable further consideration of this matter.  In these circumstances we will remit the action to the Lord Ordinary to proceed as accords.