| Date | 2 April 2008 |
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| Judgment | Spiersbridge Property Developments Limited v Muir Construction Limited, Scottish Court of Session, 14 March 2008 |
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| The Issue | Whether an employer who calls a performance bond is obliged to account to the contractor for any overpayment. |
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| Implication |
Where a demand has been made on a performance bond in an amount which is ultimately found to exceed the sum due to the party making the demand, that party is obliged to account for that excess to the opposite contracting party. |
printIn June 2005 Spiersbridge Property Developments entered into a contract with Muir Construction for the design and construction of two light industrial warehouses and office pavilions outside Glasgow. The original contract sum was approximately £5.9m and the contract required that Muir should provide a performance bond for 10% of this amount. In due course, at Muir’s request, a performance bond in the form of a letter addressed to Spiersbridge was issued by the Bank of Scotland, the key terms of which stated “On behalf of the contractor we hereby give you our guarantee and undertake to pay to you any amount or amounts not exceeding in total a maximum of (£590,000) on receipt of your first demand in writing on us at this office with your signature thereon confirmed by your bankers stating that the contractor has failed to perform and observe all the conditions and stipulations of this said contract”. In November 2006 Spiersbridge made a demand in writing requiring payment by the bank under the bond of an amount of approximately £500,000. The bank made payment of that amount to Spiersbridge and under the terms of a counter-indemnity granted by Muir to the bank, Muir was obliged to pay to the bank that same amount. Muir argued vehemently that the grounds upon which Spiersbridge had called on the bond, as set out in the demand served on the bank, were erroneous and without foundation and that it was not in breach of contract as alleged. It claimed that it was entitled to extensions of time for completion of the building works and that Spiersbridge were not entitled to the monies it had secured by calling upon the performance bond. Muir’s position was that there was an implied term of the building contract that in the event that the employer, Spiersbridge, should make a call on the performance bond it would be required to account to the contractor for the proceeds of the bond, retaining only an amount equivalent to any loss suffered by the employer as a result of the contractor’s breach of contract, if any. Muir argued that the bond conferred a considerable commercial advantage on the employer by providing an unquestionably solvent source from which the employer could claim monies for an alleged breach of the building contract. The monies could be obtained by the employer from the bank without proof of breach or damage and without prejudice to any further claims the employer may have for a greater sum by way of damages. In those circumstances the obligation on an employer to account to the contractor was a necessary corrective, if a balance of commercial fairness was to be maintained between the parties. Spiersbridge responded to these concerns by maintaining that its duty to account for any excess monies obtained under the bond was a duty owed to the bank, not to the contractor. Spiersbridge noted its concern that, if it were to make payment of any excess to the contractor, it would run the risk of being sued for the same amount by the bank. In particular Spiersbridge argued that it was concerned about the spectre of insolvency of the contractor. In such a case the payment by Spiersbridge would go into the pot for the general body of creditors of the contractor and the bank would lose out. Counsel for Muir argued that it was impractical to seek to resolve these issues in this manner. The claim which Muir would put forward for the repayment of the excess involved a detailed consideration of the merits of the dispute under the building contract. The bank knew nothing about any dispute under the building contract and it did not wish to be involved in that. Its obligation to pay under the bond was an absolute obligation to pay upon a demand by the employer regardless of the accuracy of the statements in the demand. The bank would simply rely upon its counter-indemnity from Muir at the time the bond was called. The question of the insolvency of the contractor did not affect this analysis. That was a risk the bank had taken in agreeing to put up the bond and it would have analysed the position of Muir before agreeing to do so. Lord Glennie carefully considered these competing contentions. He noted that in the absence of clear words to the contrary, normally the calling of a bond would be followed by an accounting under which the party receiving payment, in this case Spiersbridge, would retain only the amount of its proved losses. He concluded that the natural implications was for an implied term in the building contract that “in the event that the employer should make a call on the bond it would account to the contractor for the proceeds of the bond retaining only the amount equivalent to any loss suffered by the employer as a result of the contractor’s breach of contract”. The insolvency issue was simply a risk that the bank had taken, a commercial risk which it could decide whether or not to take depending upon its own assessment of the contractor’s credit worthiness.
CJ-0813
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