South Lanarkshire Council v Coface SA

CourtCourt of Session (Inner House)
Neutral Citation[2016] CSIH 15


[2016] CSIH 15


Lord Menzies

Lady Smith

Lord Drummond Young



in the cause



Pursuer and Respondent;



Defender and Reclaimer:

Act: Duncan QC, Edwards; Ledingham Chalmers LLP

Alt: Lord Davidson QC; MacRoberts LLP

4 March 2016

[1] Early in 2010 the reclaimer granted a performance guarantee bond in favour of the respondent in security of the obligations of the operator of an opencast mine to restore the land following the cessation of mining operations. Following the insolvency of the operator, the respondent raised proceedings for the payment of the sum of £4,499,410.32 which was said to be due by the reclaimer under the bond. The reclaimer asserts that the notice served by the respondent to call up the reclaimer’s liability under the bond was invalid.

[2] In July 2008 Scottish Coal Co Ltd applied to the respondent for planning permission to develop and operate an opencast coal mine at a site at Mainshill, near Douglas, South Lanarkshire. On 30 June 2009 conditional planning permission was granted. Two of the conditions are material for present purposes. First, Scottish Coal was obliged to enter into a minute of agreement regulating the development of the site in accordance with section 75 of the Town and Country Planning (Scotland) Act 1997, and secondly, Scottish Coal was obliged to submit a detailed restoration scheme for the site to the respondent for its approval. The section 75 agreement was concluded in June 2009. Clause 8.4 required that Scottish Coal should carry out and complete detailed restoration work and what were described as aftercare works in the manner provided in the planning consent following the cessation of mining operations. Clause 14.1 required Scottish Coal to obtain a restoration bond, in the form of a validly executed performance bond, in favour of the respondent to secure their obligations to carry out the specified restoration work. A draft performance bond was annexed to the section 75 agreement.

[3] The reclaimer, which is a major financial institution based in France, agreed to act as guarantor in respect of the performance bond. The reclaimer, Scottish Coal and the respondent executed a performance guarantee bond dated 22 and 28 January and 13 February 2010. The bond guaranteed performance by Scottish Coal of the restoration obligations contained in the section 75 agreement, and contained detailed provisions for the calling up of the bond; these are set out below. The bond came into operation on 1 February 2010. The maximum aggregate liability of the reclaimer was fixed at £4,499,411. That sum was, however, subject to a system of variable limits specified in the schedule to the bond, which took the form of bands set generally at seven monthly intervals over the period of 54 months from the date of commencement of the works. The maximum limit for each of the bands was to be index linked according to a formula provided in the bond. The relevant band was to be determined by the time when a claim under the bond was made.

[4] Scottish Coal encountered financial difficulties, and on 29 April 2013 the court pronounced an order for its winding up on the ground of insolvency. The interim liquidators instructed that mining operations should cease at Mainshill, and that all operations should cease apart from certain tasks required for safety and the sale of coal already extracted. They further informed all of the local authorities in whose areas Scottish Coal was carrying out opencast works that the company’s funds were insufficient to pay for any restoration works. On 1 May 2013 the respondent wrote to the reclaimer by first class recorded delivery post and first class post to intimate that it was likely that the bond would be called up. Certified copies of the bond and the Court of Session interlocutor winding up the company were enclosed with the letter, and it was stated that the liquidators had now ceased all works on site. The letter continued by stating that Scottish Coal were in breach of their planning obligation and planning consent conditions, with the result that calling up of the bond was likely. The current bond value was estimated at £4,499,410.32, but that was due to decrease to £2,701,472 on 1 July 2013. Consequently the respondent was under time pressure to serve a formal breach notice, but it was suggested that, by agreement, an undertaking could be given by the reclaimer to continue the time limit which would delay the serving of a formal notice.

[5] The reclaimer did not reply to the foregoing letter, and on 29 May 2013 the respondent wrote to the reclaimer in the following terms:

“I refer to my letter of 1 May 2013 enclosing certified copy Bond. As I have not heard from you, I attach Notice in terms of Clause 3 of that Bond.

Notice in respect of Clause 14 of the Agreement as defined in the Bond was served on the Company and their Provisional Liquidators on 17th May [2013]”.

The notice enclosed with the letter was in the following terms:

“On behalf of and as authorized by South Lanarkshire Council… I hereby give Notice in terms of Clause 3 of Performance Guarantee Bond (Restoration) numbered 271839, granted by you as Cautioner in favour of the said South Lanarkshire Council and dated 22 and 28 January and 13 February both months 2010, that the Scottish Coal Company Limited… now in Provisional Liquidation, are in breach of Clause 8.4 (firstly) of Minute of Agreement among the said South Lanarkshire Council and the Scottish Coal Company Limited… and Douglas and Angus Estates…. The cost of the Restoration Works as defined in the said Bond is… £9,199,892.00 Sterling”.

[6] The letter of 29 May 2013 was followed by correspondence between the respondent and the reclaimer’s solicitors, but with no definite outcome. On 25 July 2014 the respondent wrote to the reclaimer, referring to the notice of 29 May 2013 and to the reclaimer’s failure to pay the sum then demanded or any other sum to the respondent, and demanding payment of the sum of £4,499,411 by 4 August 2014. A further letter sent on the same day demanded payment of a lesser sum, but that is not founded on by the respondent.

[7] In the bond, Scottish Coal was referred to as “the Company”, the reclaimer was referred to as “the Cautioner”, and the respondent was referred to as “the Council”. Clause 1 referred to the section 75 agreement in respect of the grant of planning permission for the development of the opencast coal site at Mainshill and the fact that Scottish Coal had requested the reclaimer and the reclaimer had agreed to guarantee the performance of the restoration, but not the after-care, obligations of Scottish Coal to the respondent in terms of clause 8.4 (firstly) of the agreement. Clause 2 then provided:


2.1 The Cautioner subject to the terms hereof hereby guarantees to the Council the due and proper performance by the Company of the restoration (but not aftercare) obligations contained in Clause 8.4 (firstly) of the Agreement (hereinafter referred to as the Restoration Obligations).

2.2 In the event of a breach of the Restoration Obligations as referred to in Clause 2.1 above, the Cautioner shall, if called upon by the Council, pay to the Council the cost to the Council of the works required to be carried out in implement of the Restoration Obligations (which works are hereinafter referred to as the Restoration Works).


3.1 Prior to the obligation upon the Cautioner to pay any sums due hereunder becoming enforceable by the Council, notice in writing of any breach of the Agreement by the Company and the cost of Restoration Works to be carried out must be provided to the Cautioner at its above-mentioned address for service.

3.2 The Cautioner shall not be obliged to investigate the authenticity or validity of a claim; a written demand for payment from an authorized official of the Council being sufficient evidence of any sum due hereunder”.

Clause 5 recorded that the maximum aggregate total liability of the Cautioner in relation to all claims made by the Council under the bond was not, in the absence of agreement to the contrary, to exceed £4,499,411. Provision was made for index linking of sums due. In addition, in a table contained in the schedule to the bond the maximum liability under the bond was to vary according to the period subsequent to the date of commencement of the works. After the 34th month the maximum liability declined from £4,499,410.32 (which was the maximum possible liability under the bond) to £4,373,161.54 (which after index linking would reach the sum of £4,499,410.32), and after the 41st month the maximum liability declined to £2,286,447.23 which after index linking would give the sum of £2,701,472 referred to in the respondent’s letter of 1 May 2013.

Construction of the bond
[8] The issue between the parties is whether the bond was effectively called up by the notice sent by the respondent on 29 May 2013: whether that document was an effective notice in the light of the terms of the bond. The Lord Ordinary held that it was, and we agree. The argument for the reclaimer is in essence that the document sent by the respondent was not a valid notice according to the terms of clause 3 of the bond. The Lord Ordinary’s construction, it was said, failed to have regard to the diversity of expressions used in clauses 2 and 3; the use of different expressions was an indication that different concepts were involved. The result was that calling up the bond involved a two‑stage process. First, notice in writing of the breach of the section 75 agreement must be served in terms of clause 3.1, and secondly, that notice must be followed by a separate demand for payment as required by clause 3.2. Only in that way, it was said, could the reclaimer know how much it had to

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