Sri Lanka Law Reports
 2 Sri L.R.
INTERTEC CONTRACTING A/S
v.CEYLINCO SEYLAN DEVELOPMENT LTD AND ANOTHER
COURT OF APPEALUDALAGAMA, J. ANDNANAYAKKARA, J.
CALA NO. 396/2000DC COLOMBO NO. 5544/SplSEPTEMBER 21, 2001
Performance Bond – Liability of the Bank to honour a demand – Is the PerformanceBond conditional to a finding of the Arbitrator? – Or is the Bond payable ondemand?
The plaintiff-petitioner entered into a contract to carry out certain work for the1st defendant-respondent, the plaintiff-petitioner also furnished a “PeformanceBond” from the 2nd defendant-respondent Bank, by the said Performance Bond,the Bank undertook to bind themselves to the 1st defendant-respondent in acertain sum should the contractor fail in the due and punctual performance ofthe conditions set out in the contract. As there was a dispute, the 1st defendant -respondent claimed from the Bank the value of the Performance Bond.
The interim relief prayed for by the plaintiff-petitioner was refused by the DistrictCourt.
The Performance Bond is not conditional, it is an unconditional one payableon demand.
The arbitration would be relevant only to determine the failure (if therewas one) in the performance of the main contract. The Bond was notconditional to a finding of the Arbitrator.
Per Udalagama, J.
“I would hold that the Performance Bond is in fact an accessory anda separate obligation to the main contract and one capable of being independently
Intertec Contracting A/S v. Ceylinco Seylan
Development Ltd. and Another (Udalagama, J.)
acted upon providing for payment on demand, the Bank could not violate itsguarantee as per the Bond.”
APPLICATION for Leave to Appeal from the Order of the District Court of Colombo.Cases referred to :
Edward Owen Engineering (Pvt) Ltd. v. Barclays Bank International Ltd.
1978 – 1 QB 159.
United International Merchants Investments Ltd. v. Royal Bank of Canada
1982 – 2 All ER 720.
Indica Traders v. Seoul Lanka Construction – 1994 3 Sri LR 387.
S. L Gunasekare with Nihal Fernando for the petitioner.
K. Kanag-lswaran, PC with Anil Tittawella and A. Rodrigo for the respondent.
Cur. adv. vult.
November 15, 2001UDALAGAMA, J.
The plaintiff-petitioner entered into a contract to carry out certain work imorefully described in the documents marked P2 (a) and P2 (1) andfiled of record in the court below, for the 1st defendant-respondent.The contract also contains an arbitration clause.
The plaintiff-petitioner also furnished to the 1 st defendant-respondenta performance bond valued in Rs. 16,200,000/- from the 2nd defendant-respondent, the People’s Bank. By the said performance bond thePeople’s Bank undertook to bind themselves to the employer (1stdefendant-respondent) in a sum not exceeding Rs. 16,200,000/- shouldthe contractor fail in the due and punctual performance of the conditions 10set out in the contract referred to above. It appears that a dispute
Sri Lanka Law Reports
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arose between the plaintiff-petitioner and the 1 st defendant-respondentin respect of the contract and the 1st defendant-respondent claimedfrom the 2nd defendant-respondent bank the value of the performancebond.
The above facts are conceded.
It is apparent that by letter dated 19. 12. 2000 the Attorney-at-Law for the plaintiff-petitioner notified the 2nd defendant-respondentbank to refrain from making any payment on the performance bondreferred to above.
In fact, the plaintiff filed action against the defendant-respondentseeking a declaration that the 1st defendant is not entitled to demandand/or receive payment on the aforesaid performance bond and fora declaration that the 2nd defendant-respondent is not entitled to makepayment to the 1st defendant-respondent on the said performancebond and also moved for interim relief restraining the 1st defendant-respondent from demanding and/or receivng any payment on theperformance bond and further interim relief restraining the 2nddefendant from making any payment on the performance bond.
By order dated 30. 12. 2000 the Additional District Judge dismissedthe application for interim relief and the plaintiff-petitioner seeks leaveto appeal from the said order.
The dispute appears to have arisen on the contradictory stancestaken up by the two parties as to whether the performance bondreferred to above should or should not be complied with or acted uponuntil at the arbitration referred to above it is concluded that thecontractor has defaulted. It is the contention of the plaintiff-petitionerthat until and unless determined by the arbitrator that the plaintiff had
Intertec Contracting A/S v. Ceyllnco Seylan
Development Ltd, and Another (Udalagama, J.)
failed in the due and punctual performance of the contract referredto above that the 2nd defendant-respondent is restrained from making 40any payment to the 1st defendant-respondent. Vide submissions ofthe learned Counsel for the 1st defendant-respondent, his contentionis that the performance bond referred to above is ancillary to the maincontract and the obligation created by the said bond is separate anddistinct and that same is exclusively between the 1st defendant-respondent and the 2nd defendant-respondent bank. Perusing theperformance bond (marked X2) I am inclined to the view that 2nddefendant-respondent bank by the performance bond referred to aboveguaranteed payment in respect of the contract between the plaintiffand the 1st defendant. In fact, the relevant paragraph in the performance sobond, inter alia, reads as follows :
‘The bank in consideration of such agreement as aforesaidhereby guarantee, undertake, bind and oblige themselves to theemployer, that if the contractor fail in the due and punctualperformance and fulfilment of the contract referred to then in thatcase to make payment on demand at Colombo to the employerof a sum not exceeding Rs. 16,200,000/-.” As described by HalsburyLaws of England, 4th edn.: “A guarantee is an assessory contractby which the promisor undertakes to be answerable to the promiseefor debt default or miscarriage of another person whose primary 60liability to the promisee must exist or be contemplated”.
From the wording referred to above I am unable to agree withthe learned Counsel for the plaintiff-petitioner that the said bond isconditional. On the contrary I would agree with the learned DistrictJudge and hold that same is, in fact, an unconditional one payableon demand.
Sri Lanka Law Reports
 2 Sri L.R.
The learned Additional District Judge appears to have relied onthe following judgments to arrive at a finding on the nature of aperformance bond :
Edward Owen Engineering (Pvt) Ltd. v. Barclay’s Bank 70International Ltd™
United International Merchants Investments Ltd. v. Royal Bank
These authorities deal with the obligations arising out of a contractwhereby banks are required to pay on guaranteed bonds they executed.The learned Additional District Judge also relied on Indica Tradersv. Seoul Lanka Construction which dealt with section 54 of theJudicature Act in relation to ingredients necessary for the issue ofan interim injunction and I am inclined to the view that he came toa correct finding as to the strength of the petitioner’s case.so
It is observed that the learned Additional District Judge has alsocome to definite finding that the performance bond is, in fact,unconditional and payment due accordingly on demand even thoughthe dispute between the plaintiff-petitioner and the 1st defendant-respondent is subjected to arbitation. The learned District Judge hadalso come to a finding for that reason that he is precluded frominjuncting the 2nd defendant-bank from paying the sum mentioned inthe bond until the confirmation of a violation of the terms of the maincontract between the plaintiff and the 1st defendant is ascertained. I
I am inclined to hold that the words To make payment on demand” 90are crucial words when interpreting the construction of the terms ofthe bond itself. These words could not refer to a situation as submittedby the learned Counsel for the plaintiff-petitioner, that payment on theperformance bond is subject to a finding by the arbitrator”.
CAIntertec Contracting A/S v. Ceylinco Seylan
Development Ltd, and Another (Udalagama, J.)251
I would hold that arbitration would be relevant only to determinethe failure (if there was one) in the performance of the main contract.
I would unequivocally reject the contention of the petitioner that theperformance bond was conditional to a finding of the arbitrator.
As stated earlier, I would on the contrary hold that the same was,in fact, a bond payable on demand. This fact is apparent from the 100bond itself.
Perusing an authority cited by the learned Counsel for the 1stdefendant-respondent, namely, Edward Owen Engineering Ltd. v.Barclay’s Bank International Ltd. referred to above which authoritywas also relied on by the learned District Judge, I would with approvalconcur with Lord Denning when he observed therein that :
“A bank which gives performance guarantee must honour thatguarantee according to its terms. It is not concerned in the leastwith the relation between the supplier and the customer nor withthe question whether the supplier had performed his contractual noobligation or not, nor with the question whether the supplier isin default or not. The bank must pay according to its guarantee,on demand if so stipulated, without proof or condition. The onlyexception is when there is a clear fraud of which the bank hasnotice.”
In the instant case there is no allegation of fraud.
In all the circumstances aforesaid I would hold that the performancebond (X2) is, in fact, an assessory and a separate obligation to themain contract and one capable of being independently acted uponproviding for payment on demaind. The words “If the contractor fails 120in the due and punctual performance and fulfilment of the contract
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 2 Sri L.R.
referred to” in my view do not make a performance bond conditionalbut, in fact, considered with the words, “make payment on demand”inserted therein that same is, in fact, unconditional. The bank couldnot violate its guarantee as per the bond.
For the reasons stated above I am inclined to interfere with thefinding of the learned District Judge and the plaintiff-petitioner’s appealis dismissed with costs fixed at Rs. 10,500/-.
The stay order issued by this Court dated 19. 12. 2000 is set aside.
NANAYAKKARA, J. – I agree.
INTERTEC CONTRACTING A,S v. CEYLINCO SEYLAN DEVELOPMENT LTD AND ANOTHER