Outer House orders payment of £1.25m performance bond despite dispute over demand letter formalities

About this case:

• Citation:
  [2026] CSOH 67
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Sandison

The pursuer issued a demand for payment to the defender under a performance bond guaranteeing a contractor’s obligations in a development project. After the defender denied liability on account of formal defects in the demand letter, the pursuer’s claim came before the Outer House of the Court of Session.

The case was heard by Lord Sandison, with Nick Ellis KC appearing for the pursuer and Gavin Walker KC and Tony Convery for the defender.

Non-compliance with prescribed form

The pursuer, a members’ club at the Archerfield golf links, contracted with a third party, Taylor’s Property Developments (Yorkshire) Ltd, to pursue the development of residential property in East Lothian. Seeking to secure the contractor’s obligations, it obtained a performance bond from the defender, a British Virgin Islands company, amounting to around £1.25 million.

In September 2025, the pursuer made a demand for payment under the bond. It alleged that the contractor had “carried out defective work, in breach of its contractual obligations”. In its written notice, it stated that such obligations “include[d], but are not limited to” various numbered clauses of the contract. Some 18 specific instances of claimed defective work were also enumerated in bullet points. The notice was signed by Gerald Sarvadi, taking the designation of “General Partner”.

The defender refused to pay, reasoning that the pursuer’s demand letter did not comply with the terms of the bond. Clause 4 of the bond required a demand for payment to follow a form prescribed in an appendix. Clause 4.2 required likewise that the demand “stat[e] … in what respects the Contractor has” failed “to perform the Contract in accordance with its terms and conditions”. The pursuer, it argued, had not complied with this provision insofar as it did not provide an exhaustive list of every alleged breach, referencing in each case the relevant clause of the contract. Moreover, Mr Sarvadi’s designation as “General Partner” put the demand letter in non-compliance with the terms of the bond, for the law did not recognise any such position in relation to a limited liability partnership such as the pursuer.

In response, the pursuer submitted that its description of the losses claimed for had satisfied the requirement in the prescribed form to provide “brief details” of the relevant breaches. A reasonable reader would understand that the breaches detailed were only those relevant for the demand. Although Mr Sarvadi’s designation was in a technical sense erroneous, that was of no importance for the defender’s purposes: the bond made no provision about the position to be held by the signatory of a demand letter and, even if it did, Mr Sarvadi’s description as “partner” was sufficient to indicate authority to bind the firm.

Positively searching for specious reasons to deny liability

Construing the terms of the bond, Lord Sandison began his decision by noting that: “[T]his is a case where the bond prescribes as an indispensable condition for the effective exercise of the contractual right it confers on the beneficiary that the notice purporting to exercise that right must not only be in a particular form, but also must contain certain specific information. Put another way, the four matters of substance identified in clause 4 represent part of the ‘formal and technical requirements’ for a valid demand [referencing Mannai Investment Co Ltd v Eagle Star Life Assurance Co (1997)].”

Assessing the level of strictness to be applied to evaluating the demand letter’s compliance with those requirements, he continued: “[T]he law usually applies the criterion of what is now called the ‘reasonable recipient’, which involves asking whether [the] substance [of the notice] is sufficiently clear and unambiguous to leave a reasonable recipient exercising his common sense in the context and circumstances in no doubt that [the] nature of the message being conveyed is that which the power requires to be conveyed, ignoring immaterial errors which would not have misled him and not requiring an absolute clarity or an absolute absence of any possible ambiguity.”

Applying those principles to the facts of the case, Lord Sandison reasoned: “It is clear that the only factual matters which commercially sensible parties may be taken to have intended should be included in a demand letter are those said to have given rise to the breaches of contract identified in the demand as productive of the losses in respect of which the guarantee is being called upon, as opposed to matters which, for one reason or another, may amount to further and different breaches of contract but which are not said to have resulted in such losses. The pursuer has no interest in being required to provide details of the latter kind of breach and the defender, correspondingly, has no interest in hearing about anything that is not being made the subject of the claim against it.”

Regarding the defender’s arguments in respect of the extraneous material supplied by the pursuer in the demand letter, he continued: “I can understand the suggestion that an unreasonable reader of the letter, positively searching for specious reasons to deny the liability which it had undertaken, might seize upon what was said in order to construct an argument about the presence of some ambiguity more theoretical than real, but that is not the standard of construction which falls to be applied. Strictness does not equate to absolute clarity or to an absolute absence of any possible ambiguity in this context. The formal requirements of the bond in relation to the matters of substance which the demand letter had to assert in order to be valid were met.”

Concluding by rejecting the defender’s submissions in respect of Mr Sarvadi’s designation as “General Partner”, he added: “The letter is couched in the first-person plural, asks for payment to be made to a bank account in the name of the pursuer, and is signed by Mr Sarvadi as ‘General Partner’. In my opinion, if a reasonable person, with no knowledge of any background beyond its terms, were to be shown the letter and asked by whom it appeared to have been sent, that person would not only unhesitatingly answer that it appeared to have been sent by Mr Sarvadi on behalf of the pursuer, but would be left wondering why the question had even been asked.”

Lord Sandison accordingly granted decree de plano in favour of the pursuer.