East Ayrshire Council Against Zurich Insurance Public Limited Company
| Jurisdiction | Scotland |
| Judge | Lord Malcolm |
| Neutral Citation | [2014] CSOH 102 |
| Court | Court of Session |
| Published date | 24 June 2014 |
| Year | 2014 |
| Docket Number | CA72/14 |
| Date | 24 June 2014 |
| OUTER HOUSE, COURT OF SESSION
| |
|
| [2014] CSOH 102
|
| CA72/14
| OPINION OF LORD MALCOLM
in the cause
EAST AYRSHIRE COUNCIL
Pursuer;
against
ZURICH INSURANCE PUBLIC LIMITED COMPANY
Defender:
________________
|
Pursuer: Howie QC; Ledingham Chalmers LLP
Defender: Keen QC, Richardson; Brodies LLP
24 June 2014
[1] East Ayrshire Council (the pursuer) is a planning authority. It granted Scottish Coal Company Limited (the company) planning permission for a surface mine at Dalfad which imposed certain restoration obligations. Those obligations were secured by a restoration bond granted by Zurich Insurance Public Limited Company (the defender). In April 2013 the company was wound up. Since then it has failed in its restoration obligations in respect of, amongst other sites, the Dalfad mine. The liquidators have said that they do not intend to perform any of the company's obligations in this regard. The company is in breach of its obligations under the agreement relative to the planning permission. Accordingly on 7 June 2013 the pursuer served a demand on the defender, in the form of a certificate of default, to make payment of £3.344m in terms of the bond.
[2] The defender has refused to make payment. This is on the basis that the certificate of default omitted to state, as required by the bond agreement, that the pursuer had given the company written notice of its failure in the restoration obligations not less than 60 business days prior to the date of the certificate, and that the company had failed to remedy the breach. In fact no such notice of failure had been served upon the company.
[3] The issue arising in the present action is whether this omission invalidates the certificate of default. This depends upon a proper interpretation of the agreement between the parties. If the certificate of default is valid, it is accepted that the pursuer is entitled to payment of the said sum, and vice versa. The pursuer contends that, in the circumstances, the service of a 60 day notice upon the company would have achieved no practical purpose, since it was certain that there would be no compliance by the company with its restoration commitments. The liquidators had made it clear that the company was disclaiming such obligations. The pursuer points out that the parties' agreement allowed the certificate of default to be in "substantially the form" of the style set out in the bond. In the whole circumstances the absence of any reference in the certificate of default to such a notice was immaterial. It follows that the certificate of default was in "substantially the form" required by the bond.
[4] The defender contends that the contractual stipulation was that reference would be made in the certificate of default to a 60 day demand for compliance having been served on the company, and would include confirmation of its failure to rectify the situation. The defender was entitled to proceed upon the basis of the documentation presented to it, and was under no obligation to inquire into the underlying facts and circumstances. It is accepted that the certificate of default need only be in "substantially the form" required by the agreement, but, given the absence of any reference to non-compliance with a 60 day notice, this has not been achieved.
The terms of the bond
[5] The relevant terms of the bond are as follows. Sub-clause 2.1 provided:
"The cautioner hereby guarantees the performance and discharge by the operator of the restoration obligations and any liability or payment obligation of the cautioner hereunder shall be discharged and satisfied by payment to (or by direction of) the Council in accordance with sub-clause 2.2".
Sub-clause 2.2 stated:
"Subject to clause 3.1, following the service upon the cautioner of a certificate of default the cautioner shall within ten (10) business days pay the sum demanded to the Council in accordance with clause 4".
Sub-clause 2.4 provided:
"Any demand served by the Council in accordance with sub-clause 2.2 shall be conclusive evidence of the liability of the cautioner to pay the sum thereby demanded to the Council, and any payments made to the Council shall constitute a full and sufficient receipt to the extent of such payment".
Sub-clause 3.4 stated:
"The cautioner shall not be bound or required to make any investigation or inquiry in respect of any certificate of default received pursuant to this guarantee bond and shall be entitled to discharge any demand so made which appears to be regular on its face by making payment to the Council without reference to any other party hereto".
[6] Clause 6 provided that the obligations and liabilities of the cautioner shall not be released, discharged, etc by any one or more of certain events, which included any disclaimer, or the occurrence in relation to the operator of any insolvency event. The bond defined "disclaimer" as meaning any disclaimer of the agreement or restoration obligations by a liquidator of the operator.
[7] In the circumstances of the present action a "certificate of default" was defined as meaning a certificate in substantially the form set out in appendix II(A) of the bond. The style set out in that appendix required the pursuer to certify three things, namely:
(a) that the company had "failed to perform and discharge the restoration obligations in accordance with the terms of the agreement" and that the Council is entitled to the specified sum;
(b) that "written notice of such failure has been given to (the company) not less than 60 business days prior to the date of the certificate, and (the company) has failed to rectify such failure" and
(c) that the sum set out in the certificate is "accordingly due and payable to (the pursuer) under the terms of the guarantee bond".
The appendix also provided that payment by the defender as cautioner will "operate as a good and sufficient receipt and discharge to the extent of such payment for all purposes of the guarantee bond without any requirement for (the defender) to make further investigation or inquiry".
[8] The maximum sum payable under the bond was £3,344,607, which was payable in respect of a default occurring within the period of 18 to 24 months after the date of the bond, which was 8 June 2011. Thereafter, for the period of 24 to 30 months, the sum payable on demand reduced to just over £1,672,000, and continued to reduce over time until the expiry of the bond in 2019. The certificate of default was served on the eve of the 18 to 24 months period, thereby enabling the pursuer to call for payment of the maximum sum.
Submissions on behalf of the defender
[9] Mr Keen QC drew attention to the timing of the certificate of default and to the step-down provisions in the bond. Had the service of the certificate been delayed to allow the 60 day notice procedure to be carried out, the claim would have reduced from £3.334m to £1.672m. That was the real reason for the omission of any reference to a 60 day notice. No further certificate or certificates of default have been served upon the defender. A valid certificate was "conclusive evidence of liability". It followed that the defender was entitled to proceed upon the basis of the documentation, and refuse payment if the certificate was not consistent with the agreed requirements. The certificate had to be regular on its face.
[10] The key task for the court is to interpret the agreement of the parties as set out in the bond. The absence of any reference to service of a 60 day notice and subsequent non-compliance by the company meant that the certificate was not in "substantially the form" of the style set out in appendix II(A). A valid certificate of default is a pre-condition to the defender's liability to make payment. Mr Keen made reference to IE Contractors Ltd v Lloyds Bank plc [1990] 2 Lloyd's Rep 496: Sea-Cargo Skips AS v State Bank of India [2013] HWHC 177 (Comm): Siporex Trade SA v Banque Indosuez [1986] 2 Lloyd's Rep 146: Frans Maas (UK) Ltd v Habib Bank AG Zurich [2001] CLC 89 (QB): and T & L Sugars Limited v Tate & Lyle Industries Ltd [2014] EWHC 1066 (Comm).
Submissions on behalf of the pursuer
[11] Mr Howie QC stressed that there is no ambiguity or confusion arising from the terms of the certificate of default. He agreed that the question as to the validity of the demand is determined by a proper construction of the parties' intention as expressed in the bond agreement. He drew attention to the provisions relating to disclaimers and insolvency events. Where such occur it is plain that no restoration will take place, whatever notices are served upon the company or its liquidators. Reference was made to paragraph 27 in Lord Hodge's opinion in The Liquidators of the Scottish Coal Company Limited, Noters [2013] CSOH 124. It would have been pointless to serve a 60 day notice in the present circumstances. The defender was under an obligation to make payment of the £3.344m within 10 days of the demand. On any view the liquidators of the company could not have satisfied any 60 day notice without breach of the pari passu rule as between creditors of the insolvent company. No preference could have been shown to the pursuer in respect of the mine at Dalfad. In any event, the 60 day notice procedure was designed for relatively minor and remediable breaches in the designated progress of restoration as the mine was quarried. In respect of such breaches a 60 day notice would allow remedial work before matters reached the stage of a call under the performance bond, which would trigger counter-indemnity obligations and other complications. The procedure was intended for "temporary" breaches, not permanent disclaimers of the kind issued by the liquidators of the company. In short Mr Howie submitted that, in the particular circumstances of this case, the written declaration envisaged by appendix II(A)(b) did not apply, thus its absence has no impact upon the...
To continue reading
Request your trial
-
The Fife Council Against The Royal And Sun Alliance Insurance Plc
...Lanarkshire Council v Aviva Insurance Limited [2016] CSOH 83 (at paras 3, 6, 30 and 33), East Ayrshire Council v Zurich Insurance PLC [2014] CSOH 102 (at paras 7, 8, 22 and 26) and Scrabster Harbour Trust v Mowlem plc 2006 SC 469 (at para 47). I need not set out these passages at length. Mo......
-
The Fife Council Against Royal & Sun Alliance Insurance Plc
...concerned with the interpretation of performance bonds. Starting with the case of East Ayrshire Council v Zurich Insurance PLC [2014] CSOH 102 he noted the terms of the bond there under consideration (at paragraph 5) and the style certificate of default (in paragraph 7). He noted the fourth......
-
South Lanarkshire Council Against Aviva Insurance Limited
...hold the presumption to be irrebuttable if the meaning is plain.” [10] More recently, in East Ayrshire Council v Zürich Insurance PLC [2014] CSOH 102, Lord Malcolm drew the following points from the case law in England and Wales: “18. … 1. The normal principles of construction of contract a......
-
South Lanarkshire Council Against Coface Sa
...(UK) Ltd, (1997) 85 PLR 97, and the recent very helpful discussion by Lord Malcolm in East Ayrshire Council v Zürich Insurance PLC, [2014] CSOH 102. The construction of such bonds is governed by the normal principles that apply to the construction of contracts; those principles are well kno......
-
Bonds: Style Over Substance?
...Background ongoing saga of the Scottish Coal Company liquidation provides the background to East Ayrshire Council v Zurich Insurance [2014] CSOH 102. East Ayrshire Council (EAC) granted planning permission for a surface mine at Dalfad subject to restoration obligations on Scottish Coal. The......
-
Security for performance
...Housing and Development Board [1998] 1 SLr(r) 544 at [14]–[15]. See also East Ayrshire Council v Zurich Insurance Public Limited Company [2014] CSOh 102 at [19]–[22], per Lord Malcolm . 204 [1985] 2 Lloyd’s rep 546. See also Meritz Fire and Marine Insurance Co Ltd v Jan De Nul NV [2010] EWh......