Tradigrain v State Trading Corporation of India

A performance bond is security for due performance, not a pre-estimate of the beneficiary’s recoverable loss. Unless the contract clearly provides otherwise, the buyer must account to the seller for any amount received under the bond exceeding the buyer’s true loss. The excess is recoverable as a contractual debt, whether or not the seller has yet indemnified the paying bank or a counter-guarantor. The court also indicated, obiter, that the excess ordinarily becomes due once its status as an overpayment has been established by agreement or judgment.

Tradigrain appealed under the Arbitration Act 1996 against a GAFTA Board of Appeal award. The Board had found that the buyer’s call on a performance bond was wrongful and that the buyer had retained an overpayment of US$807,580.45. By a majority, however, it held that Tradigrain could not presently recover the overpayment because neither Tradigrain nor its bank had yet paid the bank which honoured the bond.

The central issue was whether recovery depended on proof that the seller had suffered an actual loss, or whether the excess was immediately recoverable as a debt under the sale contract.

1. The appeal was allowed. The award was varied by adding a provision requiring the Buyers to pay the Sellers US$807,580.45.

2. Cargill International S.A. v Bangladesh Sugar & Food Industries Corporation [1996] 2 Lloyd’s Rep 524, as approved by the Court of Appeal, established that a performance bond is a guarantee of due performance. If the amount received exceeds the buyer’s true loss, the seller is entitled to recover the overpayment. The entitlement arises from an implied contractual term requiring the buyer to account for the bond proceeds, retaining only the amount of loss caused by the seller’s breach.

3. The entitlement is a debt and does not depend on the seller first paying, or becoming liable to pay, the bank which honoured the bond or the bank’s counter-guarantor. The possibility that the seller may hold the money on trust, or otherwise be obliged to account to a bank, does not justify leaving the buyer with the overpayment.

4. The majority of the Board had treated the seller’s absence of present loss as decisive. That reasoning was erroneous. The relevant accounting was between the parties to the sale contract and concerned the amount properly due to the buyer, not the seller’s separate liability to the banks.

5. The judge inclined to the view, obiter, that the overpayment becomes due when its status as an overpayment is established by agreement or judgment. It was unnecessary to determine the precise trust or accounting obligations arising after receipt.

6. The Buyers could no longer challenge the arbitrators’ substantive jurisdiction. They had failed to challenge the jurisdictional award within the period required by section 67(1) of the Arbitration Act 1996, and had not sought permission to reopen the issue.

High Court (Commercial Court): Appeal from GAFTA Board of Appeal Award No 4012 dated 19 November 2004. The appeal was allowed and the award was varied to require payment of US$807,580.45.