SRI LANKAINSURANCE CORPORATION LTD

SRI LANKA INSURANCE CORPORATION LTD

Vs.

ATTORNEY GENERAL

COURT OF APPEAL
NAWAZ., J.
CA/LA/50/2007
DC COLOMBO 37551/MR

Performance bonds-Prescription Ordinance, sections 5, 6, 15- Civil Procedure Code, section 146-Liability of the guarantor in an unconditional bank guarantee-Implied terms in a commercial contract Renunciation of privileges accorded to sureties-NulIum tempus occurrit regi-lnalienable rights of the state

A performance bond was issued by the defendant, the Insurance Corporation of Sri Lanka, with a promise to compensate the beneficiary in the event of default in the performance of a construction contract by the contractor. There was a default alleged in the performance of the contract by the contractor and upon failure to pay on the bond further to a demand having been made, the plaintiff sued the defendant for recovery of the money on the bond.

The question that arose as a preliminary issue before the District Court was whether the plaintiff's action was prescribed. The contention of the defendant was that the action was prescribed in terms of section 6 of the Prescription Ordinance as the same was instituted six years after the first demand was made, whereas the contention of the plaintiff was that the prescriptive period is 10 years in terms of section 5 of the Prescription Ordinance.

The District Judge accepted that the applicable period of prescription was six years but held that the action was not prescribed as the plaint had been filed within six years of the demand. The defendant appealed to the Court of Appeal.

Held:

1. The terminology used is not conclusive and whether a performance bond is payable on demand or upon proof of default, depends on the interpretation of the substance of the obligation undertaken rather than the form. Even if the words "on demand" are absent in the performance bond, one can imply terms into a commercial

contract for the sake of commercial efficacy and conclude that the parties intended the performance bond to be payable upon demand.

2. The performance guarantee/indemnity stands on a different footing from a mortgage bond or a bond conditional upon payment of money and section 5 of the Prescription Ordinance is inapplicable to the computation of the limitation period of an on demand guarantee or indemnity.

3. On demand performance bonds fall under section 6 of the Prescription Ordinance and the prescriptive period of six years would begin to run from the date the first demand was made.

4. If a right which the Government seeks to enforce is not an inalienable right of the Crown but an ordinary right of property or an obligation, then it is bound by the limitation statutes. Section 15 cannot be invoked by the state in commercial contracts entered into by the state or its agents.

5. The plaintiff's action is prescribed as the same was filed six years after the first demand was made.

Cases referred to:

1. Edward Owen Engineering Ltd v. Barclays Bank International Limited (1978) 1 QB 159
2. Turkiye Is Bankasi AS v. Bank of China (1996) 2 Lloyd's Rep 611
3. Turkiye Is Bankasi AS v. Bank of China (1998) 1 Lloyd's Rep 250
4. American Home Assurance Company v. Hong Lam Marine Pte Ltd (1999) 3 SLR 682
5. Wuhan Guoyu Logistics Group Co Ltd v. Emporiki Bank of Greece (Court of Appeal) (2013) EWCA Civ 1679
6. Byrne v. Australian Airlines Ltd (1995) 185 CLR 410
7. Joachimson v. Swiss Bank Corporation (1921) 3 K.B. 110
8. Gurusin Appu v. Carlina Hamine (1897) 2 NLR 307
9. Amerasinghe v. Perera (1934) 35 NLR 306
10. Tissera v. Tissera (1896) 2 NLR 238
11. Suppramaniapillai v. Kalikutty 11 NLR 71 at 72
12. Suthukkumah v. Vachchravagee 12 NLR 289
13. Seman v. Silva (1915) 18 NLR 397
14. Cargill International SA v. Bangladesh Sugar & Food Industries Corporation (1996) 2 Lloyd's Rep 424

15. Edward Owen Engineering Ltd v. Barclays International Limited (1978) QB 159 at 170
16.

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