Performance bond or guarantee?

In yet another litigation arising from the collapse of the Scottish Coal Company Ltd, South Lanarkshire Council v Aviva Insurance Ltd [2016] CSOH 83, the question arose as to whether the defenders were required to pay £3.2m to South Lanarkshire Council in terms of a performance guarantee bond to enable restoration of an opencast coal mine in Lanarkshire. A notice under the bond was served on the insurers seeking payment of the cost of restoration within 30 days. It was argued that the bond was merely an ordinary guarantee and not a performance bond which would be payable on the council asserting a breach of conditions and presenting documents. It was also argued that that the terms of the notice did not comply with the requirements as set out in the bond.

The court held that on a proper construction, as a matter of contractual interpretation, the bond bore all of the hallmarks of a performance bond payable on breach of the underlying obligations being asserted and on the presentation of documents. In terms of compliance with notice requirements, the council required to (i) assert that there had been a breach of the relevant conditions applicable to the mine, (ii) assert what the proper and reasonable costs of restoration work to remedy the breach were, with a full breakdown of that cost, and (iii) state that it was intended to carry out that work and provide evidence of that intention. In this case, the council had complied with those requirements, and therefore the claim under the performance bond was valid. Decree de plano was granted, affirming that there was no proper defence to the action.