Introduction This report analyzes the Supreme Court of Sri Lanka case SC Appeal No. 166/2014, which arose from a dispute between K.D.A. Hettiarachchi (Plaintiff) and Ceylinco Insurance Company Limited (Defendant) regarding the enforcement of a performance bond. The case progressed through the District Court and the High Court before reaching the Supreme Court, which delivered its final judgment.

Background of the Case The Plaintiff entered into an agreement with M/s T.F.N. Pinto and Sons (the Contractor) for the construction of a building at 316, Galle Road, Colombo 3. The project was overseen by Design Team Three (Pvt) Ltd (Consultant). The contract value was Rs. 24,416,118, and the Plaintiff paid the Contractor an advance of Rs. 4,892,000, to be deducted from interim payments. Additionally, 10% of each interim payment was retained as security for defects liability.

Due to financial difficulties, the Contractor suspended work in early 1995 and requested the release of retained funds amounting to Rs. 1,223,055.92. The Plaintiff, upon the Consultant’s recommendation, agreed to release the funds against a performance bond issued by Ceylinco Insurance. However, the Contractor failed to resume work and abandoned the project. Consequently, the Plaintiff demanded payment under the bond, which the Defendant refused, leading to legal proceedings.

Proceedings and Judicial Findings

1. District Court Decision
   • The District Court ruled in favor of the Plaintiff, holding that the Defendant was liable to pay the full amount under the bond.
   • The court interpreted the bond as an “on-demand” guarantee, requiring the Defendant to make payment upon default of the Contractor.
   • The judgment did not adequately examine whether the Plaintiff had suffered actual damages but focused on the contractual terms.
2. High Court Appeal
   • The Defendant appealed, arguing that the bond was conditional and required the Plaintiff to prove actual damages.
   • The High Court overturned the District Court’s decision, concluding that the Plaintiff failed to establish the quantum of damages suffered.
   • The High Court reviewed judicial precedents on performance bonds and ruled that since the bond was conditional, liability did not arise automatically upon demand.
   • The judgment emphasized the importance of distinguishing between “on-demand” guarantees and “conditional” performance bonds.
3. Supreme Court Analysis
   • The Supreme Court examined the nature of the bond and determined it was a conditional bond, not an “on-demand” guarantee.
   • The Plaintiff was required to prove damages resulting from the Contractor’s default.
   • The Supreme Court extensively analyzed legal precedents, including English case law such as Edward Owen Engineering Ltd v Barclays Bank International Ltd and Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co Ltd, which outlined the principles governing performance bonds.
   • Despite evidence that the Contractor abandoned work, the Plaintiff failed to provide sufficient proof of the financial loss suffered.
   • The Court highlighted that in Tins’ Industrial Co Ltd v Kono Insurance Ltd, a similar conditional bond required proof of actual damages before liability was triggered.
   • The Plaintiff also neglected to conduct joint measurements, as requested by the Defendant, to determine the extent of incomplete work, which was a crucial requirement for establishing damages.
   • The judgment reaffirmed the principle that conditional performance bonds are enforceable only when the beneficiary proves loss, rejecting the argument that mere non-performance is sufficient to trigger payment.

Conclusion and Judgment The Supreme Court affirmed the High Court’s ruling, dismissing the Plaintiff’s appeal. It held that the Plaintiff failed to establish damages, a prerequisite for claiming payment under the bond. Consequently, the Defendant was not obligated to honor the claim.

Judicial Implications

• The case underscores the necessity of drafting clear contractual terms that distinguish between different types of guarantees.
• The ruling reinforces the requirement that a party seeking payment under a conditional bond must prove financial loss.
• The decision aligns Sri Lankan jurisprudence with international standards on performance bonds, ensuring contractual fairness.
• The case serves as a precedent for future disputes regarding insurance-backed guarantees and construction contracts.

The case highlights the importance of adhering to legal procedures and evidentiary requirements in contract enforcement, ensuring that claims under performance bonds are substantiated with actual loss assessments.

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