There has been a raft of cases in recent years on whether a demand made under an on demand bond is compliant. A non-compliant demand may give a surety a defence to an on demand bond claim.

Following on from our e-alert from June last year on the South Lanarkshire v Coface case, there has been another case recently reported concerning a Scottish Coal bond. *

Both cases suggest that the Scottish courts operate a more lenient approach concerning the interpretation of performance bonds than the English courts.

Background

A bond was issued by RSA in favour of Fife Council, to guarantee the obligations of Scottish Coal. The Council served a demand under the bond on 2 December 2015 notifying a default under the contract, and demanding payment of £3.1m for remediation works.

The Bond referred to RSA being required to pay the Council:

  1. the cost of any operation carried out to restore and reinstate the site, in the event of default; and
  2. that prior to the obligation to pay out, notice in writing of the default and a full breakdown of any proper and reasonable cost must be provided together with reasonable evidence of the intention and ability of the Council to proceed forthwith with any operation.

RSA rejected the demand on the following grounds:

  1. That the Council had to actually carry out the remedial works before making a claim on the bond (and they had not done this); and
  2. That the Council had not provided reasonable evidence of its intention and ability to proceed with the work as required. It had only stated that it would ‘comply with its obligations under the Bond’.

Judgment

The Scottish Court of Session had to decide whether or not completion of the remedial work was a precondition to a demand under the bond. The Court focussed on the commercial purpose for which the bond had been provided. It was procured in order to guarantee the restoration and aftercare of the site in the event of a default by Scottish Coal.

One key factor in this case was that the court judgment was given on 17 February 2017 and the bond was due to expire on 30 March 2017. The demand was made on 2 December 2015. The Court decided that it was ‘virtually impossible’ for the beneficiary to have carried out all remedial works before the bond expiry. In the circumstances, an interpretation of the bond which required all work to be completed before making a call was uncommercial. In addition, the clause which referred to works ‘carried out’ had to be read in conjunction with the second key clause set out above in point 2. This required only a breakdown of cost together with evidence of an intention and ability to proceed with the works.

It was, therefore, decided that the Council was not required to carry out the remedial works before liability was triggered under the bond. In addition, the Court decided that the fact that RSA was fully aware of the beneficiary’s intention to carry out the works, and as the demand referred to complying with its obligation under the bond, this was sufficient to demonstrate reasonable evidence of the Council’s intention and ability.

 Implications

This case demonstrates the need to construe commercial wordings in accordance with commercial common sense and the purpose for which the document was entered into. Following on from the decision in South Lanarkshire v Coface, it demonstrates the more lenient approach of the courts in Scotland, and that sureties should be careful and take proper legal advice when considering whether or not to pay out a demand under a bond.

This blog post was written by Gemma Wilson. For more information, please contact:

Gemma Wilson, associate, Construction

T: 0161 836 7884

E: Gemma.Wilson@gateleyplc.com 

 * Fife Council v. Royal & Sun Alliance Insurance Plc


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.