Council awarded £3m payout from insurers over collapse of Scottish Coal Company

South Lanarkshire Council raised a commercial action seeking payment of £3,117,724 from Aviva Insurance, which the local authority claimed was due under a “performance guarantee bond” granted by the defender insurance company to the local authority pursuer.

A judge in the Court of Session ruled that that the bond was a “performance bond”, rejecting the defender’s argument that it was “an ordinary guarantee”, and held that the pursuer had complied with its requirements so as to oblige the defender to make payment.

Lord Doherty heard that in April 2001 the pursuer granted the Scottish Coal Company Limited (SCCL) planning permission to extract coal using open-cast methods at Broken Cross Muir near Douglas Water in Lanarkshire, and subsequently granted further applications to extend the surface coal mine at the site.

In September 2012 the pursuer granted SCCL planning permission consenting to further development at the site, subject to certain conditions, prior to which the pursuer, defender and SCCL had entered into a deed headed “performance guarantee bond”, whereby the cautioner agreed to guarantee the performance of obligations of the company which were to be created in the conditions to be attached to that planning permission.

The bond stated that “in the event of any breach of the conditions, the cautioner shall, if called upon by the council, pay to the council the proper and reasonable cost of restoration works required to be carried out in terms of the conditions”.

However, in April 2013 the Court of Session pronounced an interlocutor ordering that SCCL be wound and appointing interim liquidators, causing SCCL to cease its activities at each of its open cast sites.

Two weeks later the pursuer wrote to the defender informing it that SCCL had entered liquidation, that the liquidators had ceased all works on the site, that SCCL was in breach of its planning obligations and of the planning permission conditions, and that it was likely that the bond would be called up.

By letter dated 8 October 2015 the council’s legal manager wrote to the defender to give notice that in terms of the bond the SCCL was in breach of the obligations contained in conditions attached to the grant of planning permission, that the council intended to carry out the restoration works required in terms of the conditions, that the proper and reasonable cost of the restoration works was £3,117,724, and to demand payment.

But the defender denied that liability under the bond has arisen, maintaining that on a proper construction of the bond the liability undertaken by the defender was a merely a secondary liability as guarantor, and that, in any event, the terms of the notice do not comply with the requirements set out in the bond.

Pronouncing decree de plano, the judge agreed with counsel for the pursuer that on a proper construction of the contract, the bond was a “performance bond”, and that it did not require the council to establish that a breach of conditions had occurred.

In a written opinion, Lord Doherty said: “In my opinion it bears the hallmarks of a performance bond payable on a breach of the underlying obligation being asserted, and on the presentation of documents. Nomenclature is not decisive, but it is significant that the bond is headed ‘PERFORMANCE GUARANTEE BOND’.

“Reasonable persons placed in the position of the contracting parties at the time of the granting of the bond would have been fully aware of the law relating to performance bonds, including the principles of construction applied to them.

“Clause 3.1 envisaged the pursuer being put in funds to carry out restoration work in advance of the work being done. Clause 3.3 provided for those funds being paid to the pursuer swiftly – within 30 working days of the documents referred to in clause 3.1 having been provided to the defender.

“The commercial purpose of the bond was to put the pursuer in funds quickly to carry out restoration work which SCCL had failed to do in breach of one or more of the conditions.

“That purpose would not be served if the pursuer required to investigate and prove breaches of conditions, or prove that anticipated costs for remedial works were proper and reasonable, before any liability under the bond arose or became enforceable.”

He added: “On a proper construction of the bond it is not an ordinary guarantee. It is a performance bond. The defender assumed an autonomous obligation to make payment to the pursuer in the circumstances referred to in the bond.

“The notice which the pursuer served complied with the bond’s requirements. The defender became liable to make the payment claimed in the notice within thirty working days of its receipt.”