The Scottish case of Fife Council v RSA Insurance recently reached its conclusion. The key issue for the Court was whether or not the Council had provided a valid notice in relation to an on demand bond.
RSA had issued a bond in favour of the Council as security for the restoration obligations of a mine operator, who was to restore the land once mining activities had ended. After the mine operator became insolvent, it was unable to restore the land and the Council wished to claim under the bond. After a lack of response from RSA to its letters, the Council issued notice of a formal demand under the bond.
Was the notice valid?
The contract set out three requirements for a valid notice:
- Notice in writing of default;
- Full breakdown of proper and reasonable costs of any operation carried out; and
- “Reasonable evidence” of the “intention and ability” of the Council to proceed immediately with any restorative operation.
RSA accepted that the first two requirements had been complied with; however RSA argued that the Council had not shown reasonable evidence, intention and ability that it would proceed immediately with any restorative operation.
RSA argued that as the Council’s formal demand only stated the Council would “comply with its obligations under the Bond”; this did not satisfy “intention and ability”. However the Court rejected RSA’s argument, stating that the sentence should be read in line with the demand as well as the other supporting documents. It was held that any reasonable reader of the demand would know that the “critical sentence” was aimed to satisfy the third requirement and the notice was valid.
What does this mean?
Whilst this case sets a Scottish precedent, it shows leniency for on demand bonds and a move away from strict compliance with the demand terms. In this case, the Court accepted a statement from the Council as “reasonable evidence” of its “intention and ability”.
It remains to be seen if this leniency will spread south of the border, however the case serves as a reminder to be vigilant when drafting bonds! If you want to be provided with documentary evidence to accompany any claim under an on demand bond, for example, evidence of third party or completion contractor quotes for carrying out the work, you must specify precisely what is to be provided with the form of demand.
This blog post was written by Karen Spencer and Stephen Marsh.
For further information, please contact:
Karen Spencer, partner, Construction
T: 0161 836 7888