Council’s claim for £4.5m to pay for Scottish Coal site restoration works was valid, judge rules

Lord Woolman (pictured) heard that the pursuer South Lanarkshire Council was seeking payment of the sum of £4,499,410.32 under a performance guarantee bond, but the defender Coface SA – a French-based financial institution standing as guarantor – contended that the notice served by the pursuer to trigger the bond was “invalid”.

Liability turned on two interlinked issues, firstly, the proper construction of the bond, and secondly, whether the notice served on the company following the liquidation of Scottish Coal complied with the terms of the bond.

Clause 2.2 of the bond stated that liability would arise when the council called upon Coface to make payment.

Clause 3.1 provided that the council must serve on Coface at a specified address a “notice in writing”, which must identify both the nature of the breach, and the cost of the works to be carried out.

Clause 3.1 stated that 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.

According to counsel for the pursuer, clause 3.2 simply provided an evidential requirement. The council’s notice had to be signed by one of its authorised officials in order to constitute “sufficient evidence” of the sum due.

But counsel for the defender adopted a different construction of the bond, founding on the fact that clause 3.1 referred to a “notice in writing”, while clause 3.2 referred to a “written demand for payment”.

He submitted that each term must be given a separate meaning. It followed 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.

However, the judge rejected that approach as “unsound”.

Delivering his opinion, Lord Woolman said: “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.

“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’.

“A two-stage procedure would give rise to uncertainty. Neither party could be sure when the bond was realisable.

“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.”

On the question of whether the notice was valid, Coface submitted that the notice enclosed with the council’s letter of 29 May 2012 did not qualify as a notice because if failed to provide the figure representing the “cost to the council” in terms of clause 2.2, and it did does not qualify as a demand because that term is not used. Instead the council simply provided the total cost of the restoration works.

However, the judge regarded that approach as “too narrow”.

Lord Woolman said: “Courts should avoid technical constructions that involve an undue emphasis on the niceties of language. 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. 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.”