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Note: The local planning authority, Fife Council (Beneficiary) demanded about GBP 3.1 million under a “restoration bond” from the Royal & Sun Alliance Insurance Plc (Guarantor). The bond was to cover contractual obligations of a mining company (originally UK Coal Mining Limited, who transferred its interest and status as developer to Scottish Coal Company Limited) relating to environmental cleanup tasks after termination of opencast mining operations. The mining company notified Beneficiary of its intention to terminate mining operations, and subsequently went into liquidation. Beneficiary notified liquidators of mining company that the mining company was in breach of its obligation to restore the former mining site. Due to insufficient funds, no restoration work was carried out, and Beneficiary notified Guarantor that mining company was in breach of its obligations, and demanded payment. Guarantor refused to pay, based on the argument that 1) Beneficiary first had to carry out the remedial work itself, and 2) that the demand notice was invalid or non-compliant because it lacked “reasonable evidence of the intention and ability of [Beneficiary] to proceed forthwith any such operation” as was required by the terms of the bond (requirement (iii) of clause 3.1). Even though the court mentioned the (dated) UCP500, it was agreed that the bond was not subject to any practice rules. Essentially, the main question was whether the notice sent to the Guarantor was (strictly) complying and thus could have triggered the payment obligation under the bond. The court held that the doctrine of strict compliance was not applicable, because the third requirement of clause 3.1 did not specify a document to be presented but instead stated that “reasonable evidence” was required which, so the court, “indicates a qualitative assessment of whatever is proffered and which would be difficult to define with the requisite certainty for the doctrine to apply”. In its first opinion (17 February 2017), the court decided that further procedures and arguments were necessary to decide the case.

During further procedures, the court was referred to extensive correspondence between the Beneficiary and the Guarantor. The question was raised whether the Beneficiary was able and intending to execute the necessary remedial work, especially since there was a possibility that the total costs of the remedial work was to exceed the guaranteed amount under the bond. It was further contented that the bond should be construed as being an independent undertaking akin to a performance bond, and that the doctrine of strict compliance should apply.

The court decided that the bond was “accessory to the obligations incumbent upon the [mining company]”, and “[c]onsistent with the accessory character of a cautionary obligation, there must be default on the part of the [Mining] Company”. The issue of compliance related to “what the Bond required in order to trigger the [Guarantor’s] liability and whether the Notice conveyed the necessary information consistent with those requirements, understood from the perspective of a reasonable recipient.” The court held that the doctrine of strict compliance was “inappropriate in respect of a clause which did not stipulate for any documentation and whose language (‘evidence’) otherwise pointed to extrinsic matters which the doctrine is intended to preclude”.

Moreover, the court interpreted the requirement in clause 3.1 which necessitated “reasonable evidence of the intention and ability of [Beneficiary] to proceed forthwith any such operation”, reaching the conclusion that the clause relates to the “seriousness of purpose of the [Beneficiary] to carry through any scheme of remedial works and to the financial resources or wherewithal of the [Beneficiary] to do so”, which the court accepted as sufficient. Accordingly, in the second opinion (1 September 2017) the Guarantor was ordered to pay the sum demanded under the bond, because all requirements were complied with by the Beneficiary.

Excerpt from the Text of the Bond (clause 3.1):

“Prior to the obligation upon the [Guarantor] to pay any sums due hereunder becoming enforceable by the [Beneficiary], (i) notice in writing of any Default and (ii) a full breakdown of any proper and reasonable cost of any operation carried out as referred to in Clause 2 aforementioned must be provided to the [Guarantor] in writing at its above mentioned representative office in the United Kingdom, (iii) together with reasonable evidence of the intention and ability of the [pursuer] to proceed forthwith with any such operation.”

[KCM]

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