The case of Spiersbridge Property Developments Ltd vMuir Construction Ltd [2008] involved a determination related to an action alleging breach of a construction contract. A bank had paid an amount demanded by the persecutor under a performance bond and it had to be decided, whether the demand for the surety exceeded the amount ultimately owed, whether the pursuer was required to account for the excess to the bank or the defender.

The persecutor in this case was a real estate development company and the defender was a construction company. The parties entered into a construction contract in June 2005, according to this contract, the defender had to design and build a development consisting of warehouses and offices.

This case focused on the persecutor claiming for alleged delays in the completion of the works while the defender counterclaimed, requesting an extension in which he could comply with his obligations.

In accordance with clause 2.10.2 of Appendix 1 of the construction contract, the defender, as a contractor, undertook to execute and deliver to the pursuer, as an employer, no later than 14 days after a written request from the pursuer to do then :

“… A performance bond for an amount not less than 10% of the Contract Sum in terms equal to the draft of the performance bond established in Part Five of this Annex.”

The Bank of Scotland subsequently issued a performance bond. The performance bond was in the form of a letter addressed to the prosecutors and contained substantially the same terms as the draft bond mentioned in clause 2.10.2.

Then, in November 2006, the pursuer requested the bank to pay £ 503,193.75 under the bond, which the bank duly paid to the pursuer. The defender stated that he was obliged, through a counter-compensation that he had awarded to the bank, to pay the same amount to the bank and that he had done so properly.

Furthermore, the defense attorney stated in his counterclaim that the grounds on which the persecutor invoked bail were erroneous. The defender argued that the grounds were wrong because he was not in breach of contract as alleged by the persecutor. He stated that the persecutor was obliged to account for the sums received under the bail. The basis for that claim is that the following term must be implicit in the construction contract:

“… In the event that … the persecutor made a call about the bond, he would render an account to the defender for the proceeds of the bond, withholding only the amount equivalent to any loss suffered by the persecutor as a result of the breach of the bond. defender’s contract, if any “.

It was argued that such a term should be implied as a matter of commercial effectiveness. This meant that the dispute over whether the defender had breached the construction contract, as alleged by the persecutor, had not yet been resolved.

Although a “ pre-response test ” had been designated, the parties also disagreed as to whether the persecutor was required to account to the defender for that excess, assuming that he was deemed to be entitled to a sum less than the amount paid under the jump.

Consequently, the persecutor argued that his accountability was owed to the bank and not to the defender. The main concern of the persecutor was that if he paid that excess to the defender, he ran the risk of being sued by the bank for an equal amount.

The parties reached a mutual decision that the issue be decided in a pre-test debate. The question for the decision during the debate was:

“When a lawsuit had been filed on a performance bond for an amount that was ultimately found to exceed the amount owed to the party bringing the lawsuit, was that party required to account for that excess:

(a) To the bank; gold

(b) To the opposing contracting party? “

The prosecutor’s attorney said that there were three contracts that needed to be considered:

§ The surety contract, that is, the performance surety contract between the pursuer and the bank;

§ The construction contract, which was the contract between the persecutor and the defender; Y

§ The banking contract between the defender and the bank by virtue of which the bank agreed to issue the performance bond.

It was necessary to decide to whom the persecutor of excess should account and the route to achieve it. It was alleged that the most delicate route was the implication of a term in the surety contract. The term would indicate that the pursuer would reimburse the excess to the bank. This would be accompanied by a corresponding term to be implicit in the banking contract under which, if it had already been paid by the defender, the bank would reimburse said amount to the defender.

However, this posed some potential difficulties. If the term was implicit in the construction contract where the defender is declared insolvent and the pursuer must account for the excess to the defender, the pursuer’s payment would go to the well for the defender’s general body of creditors. This would mean that, unless the defender had already paid for it, the bank would lose out.

The defense attorney argued that the term should be implicit in the construction contract. If it were the case that the bank could sue over the excess bond, the bank would be assuming the burden of trying to prove in a litigation with the prosecutor that the defender did not breach the contract. Alternatively, that the damage suffered by the persecutor was less than the amount demanded under the bond.

It was argued that this was not a task that a reasonable banker would be particularly willing to undertake, not only because of the difficulty of handling such a case, but also because it would be costly.

It would be much better for the bank to be able to rely on its counter-compensation from the defender at the time the bail was requested. If the bank had the right of action to recover the excess, the prosecutor’s attorney argued that those difficulties could be overcome by transferring the right of action by the bank to the defender. However, this would not work as the terms of the bond prohibited the bank from assigning its rights without the consent of the persecutor. Furthermore, if the defender had paid the bank in accordance with his counter-compensation, he would not have suffered any loss and would not have the right to assign.

After much deliberation, the court held that when a claim was made on a performance bond for an amount that was ultimately found to exceed the amount owed to the party making the claim, that party was found to be held accountable. that excess to the opposite Contracting Party. In the circumstances of this case, the parties had agreed that the persecutor’s obligation to account for any excess must be based on a term implicit in one of the contracts to which he was a party.

This meant that the question became one of which involvement would best give the transaction the desired commercial efficiency.

The court held that the natural implication was an implication of the kind for which the defender argued, namely an implication of a term in the construction contract as follows:

‘… In the event that … the persecutor made a request for bail, he would render accounts to the defender for the proceeds of the guarantee, withholding only the amount equivalent to any loss suffered by the persecutor as a result of the breach of the defender’s contract, if any. ‘

It was argued that an implicit term in the construction contract had none of the disadvantages of involving the bank in the merits of the case. In addition, it also made it possible to establish what loss, if any, the persecutor had suffered as a result of the alleged breach of the construction contract by the defender. This could be determined in litigation or arbitration between the parties to that contract.

The court further held that it was unrealistic to think that the bank would not have agreed with the defender a counter-compensation in terms of which the defender would in turn compensate the bank in the same amount when requesting the bond.

In the event that the call for bail was excessive, the defender would be out of your pocket, not the bank. According to the court, it seemed quite natural that it was the defender to whom the persecutor would have to account for this excess. However, this left a potential problem. The problem is that if the defender is declared insolvent after the bank set the bond, but before the bank could claim counter-compensation against the defender, then the bank would lose out if it had not taken the bond.

This potential problem was considered to be simply a business risk that the bank would decide whether to take on depending on its assessment of the defender’s creditworthiness. As such, the bank could overcome this problem by refusing to issue the bond or by requiring some collateral before agreeing to issue it.

© RT COOPERS, 2008. This Information Note does not provide a comprehensive or complete statement of the law related to the topics discussed, nor does it constitute legal advice. Its aim is only to highlight general issues. Specialized legal advice should always be sought in relation to particular circumstances.