Cargill International SA v Bangladesh Sugar & Food Industries Corpn

An on-demand performance bond gives the beneficiary immediate security against a contracting party's breach. Payment by the bank does not ordinarily determine the parties' ultimate rights. Unless clear contractual language provides otherwise, they must subsequently account so that the beneficiary retains no more than its proved loss.

References to a bond being “forfeited” may, in their contractual context, mean only that the beneficiary may call or encash it. They do not necessarily make the proceeds irrecoverable. Commercial context, fairness and the compensatory nature of contractual damages support this construction, particularly where the contrary meaning would confer a windfall.

A sugar purchaser received an unconditional performance bond for 10 per cent of the contract value. Disputes arose over alleged breaches concerning the vessel's age and late arrival. The parties agreed that the Commercial Court should determine preliminary issues on the assumption that the sellers had committed those breaches.

Morison J held that the purchaser could call for the bond's full amount even if it had sustained no loss. He also held that the purchaser could ultimately retain only the amount of its actual loss. The purchaser appealed, contending that references in clauses 13 and 16 to the bond being “forfeited” displaced the usual obligation to account and entitled it to retain the proceeds permanently.

The central issue was whether those contractual references to forfeiture clearly excluded a subsequent accounting between the parties.

1. Appeal dismissed unanimously. Lord Justice Potter delivered the leading judgment. Lord Justice Swinton Thomas agreed with his conclusions and reasons. Lord Justice Staughton gave concurring reasons.

2. An on-demand performance bond imposes a primary obligation on the issuing bank and allows the beneficiary to obtain prompt payment without proving loss. As between the parties to the underlying commercial contract, however, payment is ordinarily followed by an accounting. The beneficiary may pursue any additional loss, giving credit for the bond proceeds, while the provider may recover any amount exceeding the beneficiary's actual loss. The reasoning to that effect had previously received approving comment in Comdel Commodities Ltd v Siporex Trade SA [1997] 1 Lloyd's Rep 424.

3. Clear contractual language could displace that usual incident of a performance bond. Clauses 13 and 16 did not do so. Their references to the bond being “forfeited” were imprecise and applied to the bond itself rather than to money paid under it. In context, the words meant that the purchaser could call or encash the bond. They regulated the position between the purchaser and the bank, rather than making the proceeds irrecoverably lost to the sellers.

4. This construction accorded with the bond's commercial function. It gave the purchaser an immediately available, solvent source of security and placed the burden of challenging an excessive payment on the sellers. Permanent retention without corresponding loss could produce a substantial windfall and would conflict with the compensatory basis of contractual damages. If the parties intended that result, they needed to express it clearly.

5. The purchaser was therefore entitled to call for the bond's full amount upon a qualifying breach, without first proving damage. It could ultimately retain only the amount of loss established from that breach. The court left undecided whether a provision permitting permanent retention despite the absence of loss would be penal.

6. The judge's costs order was within his broad discretion. The appeal against that order was also dismissed. The appeal was dismissed with costs, and leave to appeal was refused.

• Court of Appeal: The court unanimously dismissed the purchaser's substantive and costs appeals. It upheld the requirement for a subsequent accounting and refused leave to appeal.
• Commercial Court: Morison J held by an order dated 7 June 1996 that the purchaser could call for the full bond upon an assumed breach, even without loss, but could retain only an amount equal to its actual loss. He ordered the purchaser to pay three-quarters of the sellers' costs of the preliminary issues.