The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

and NEIL HARTNELL

Tribune Business Editor

A FRANKLYN Wilson-chaired Eleuthera resort development has seen its efforts to enforce $11 million worth of performance bonds rejected by the Supreme Court, which ruled that there was a "pre-ponderance of evidence" to show they were not valid and binding against FirstCaribbean International Bank (Bahamas).

Justice Stephen Isaacs, in a judgment handed down on Friday, ruled that FirstCaribbean was "not liable" to Cotton Bay Villas and Cotton Bay Estates for the two bonds - valued at $8 million and $3 million respectively - which were signed by Ian Rutherford, the bank executive who previously had responsibility for the accounts of well-known contractor, Edward Penn.

Recalling the origins of the dispute, Justice Isaacs said in his judgment that the bonds were issued - some time between August and October 2005 - at Mr Penn's request to guarantee two construction contracts with Cotton Bay, one for Phase I work, and the other for Phase II.

Mr Wilson and Cotton Bay alleged they were to cover 100 per cent of the contracts' values but, crucially, the judge noted that when it came to documenting the performance bonds, the "originals were never produced and only undated telefax copies are available".

When problems with Mr Penn's performance and payments to workers arose, and Cotton Bay tried to call in the performance bonds, FirstCaribbean challenged their validity, saying the documents were incomplete; not sealed by the bank; not stamped for Stamp Tax; and that Mr Rutherford did not have the authority to sign them. Then began the legal battle, as Cotton Bay attempted to have the Supreme Court enforce them.

The judgment also revealed that Mr Penn owed $3.47 million to FirstCaribbean as at end-December 2006, and that the contractor's account was "classified".

It also noted that the "purported beneficiary" of another $22 million bond signed by Mr Rutherford on Mr Penn's behalf agreed that it was not valid, with the latter knowing how such guarantees were obtained - having obtained facilities, including two performance bonds, worth $1.565 million in 2004, followed by another $702,200 the following year.

And the judgment noted that Mr Rutherford was also "terminated with immediate effect" by the FirstCaribbean Board on April 19, 2007, due to his signing of the Penn performance bonds without their approval.

Cotton Bay's main witness was Mr Wilson himself, who said that both Mr Rutherford and Charles Hall, the latter who took over the Cotton Bay performance bonds after the bank released the former, had orally assured both were valid. This was denied, though, by Mr Hall.

"Phase I was commenced in August 2005," the judgment noted. "Problems with Penn's performance arose by October 2005, and both Rutherford and Hall attended a meeting with Wilson on November 17,2006, but the minutes of that meeting do not reflect the alleged representations.

"When cross-examined, Wilson said that the meeting was called for the specific purpose of addressing the validity of the performance bonds in the context of putting the bank on notice that the plaintiffs were contemplating calling in the bonds, but neither is this reflected in the minutes." Some five more meetings were held over a two-month period, and Justice Isaacs said the bonds issue did not appear in any minutes.

Finding there was "no conclusive evidence" to back-up the claims regarding the supposed assurances given by Messrs Rutherford and Hall, Justice Isaacs said: "In the witness stand, Wilson seemed to be drawing on his memory as best he could.

"I doubt that Wilson was deliberately attempting to mislead the court, but rather trying to get across his understanding of the nature and validity of the performance bonds, obviously after having taken legal advice.

"What was crucial to the issues in cross-examination is that Wilson acknowledged that the signature page and the signature on both performance bonds appeared to be identical, even though they were executed at different times. I note that what he received from Penn were telefaxed copies of the bonds, and Wilson did not recall asking to see the originals. Further, the amount on each bond was left blank."

Donna Smith, an attorney for Cotton Bay, while never having dealt with construction or performance bonds prior to the Penn issue, testified that she felt the 100 per cent coverage and blank spaces on the faxed copies was "unusual".

She eventually received a March 10, 2006, letter from Mr Rutherford stating that a bond in favour of Mr Penn's company was valid, but Justice Isaacs said the real question was whether the former had legally bound FirstCaribbean to the first disputed bond.

At trial, Justice Isaacs was impressed by the evidence of Sharon Brown, then FirstCaribbean International Bank (Bahamas) managing director and now its deputy chairman. He described her as an "impressive witness, knowledgeable, articulate and unhesitating under cross-examination. I found her to be a very credible witness".

Ms Brown testified that Rutherford had no authority to sign the performance bonds in question, as his lending authority was limited to $250,000. Credit facilities of greater than $2 million had to be approved by FirstCaribbean's Board, and as managing director she had to sign all such documents, which would then be sealed and recorded in the corporate register to be ratified at quarterly directors' meetings.

The Cotton Bay performance bonds were not recorded in the register, and Justice Isaacs noted: "Her [Ms Brown's] evidence is that the performance bonds were not approved by the relevant credit committee or the Board of Directors, neither were they sealed. She also said that no request for confirmation of corporate execution was received by herself or the corporate secretary.

"She was aware of only one other bond issued without a seal, and the parties to that bond agreed it was invalid. The bond was issued to Peace Holdings with Rutherford's signature on it."

With no dispute that the performance bonds were not stamped, and the original documents not having been produced either, Justice Isaacs said the faxed copies could not be submitted as evidence. He added that $53,334 in Stamp Duty would have been payable on the first $8 million bond, and $20,000 on the $3 million bond.

The judgment recorded that Mr Wilson, when it was pointed out that page three for both bonds appeared to come from the same document, replied in cross-examination that "somebody went to a lot of trouble to create what is purported to be two different documents".

Mr Wilson said he received the first $8 million bond via fax on June 22, 2005, with Cotton Bay alleging that the first bond was executed between August and October 2005 - the dates being different.

"There is the additional problem that pages one and two of the bond were faxed on a different day from page three, and neither date matches the date on the cover sheet," Justice Isaacs wrote.

"As to the second bond, Wilson testified in cross-examination that it was physically delivered in about June 2006. A facsimile was produced, however, which bears a date in 2005 on the fax machine."

Justice Isaacs concluded: "The state of the bonds makes it impossible to construe their meaning and effect. In the instant case, the original bonds are nowhere to be seen, and the facsimiles produced raise serious questions as to their being true copies of the originals."

FirstCaribbean also called on reports from two experts, Paul Worrell, a chartered quantity surveyor, and David Nicoll, an international commercial banker, which were admitted as evidence despite attempts by Cotton Bay to have them thrown out.

Justice Isaacs accepted their conclusions, namely that the amount of the two performance bonds would not have exceeded 35 per cent of the construction contract price, not the 100 per cent alleged by Cotton Bay. They also said the state of the bond documents "should have caused any reasonable professional and/or business person to be suspicious of their genuineness, validity and legality".

Justice Isaacs said there was no evidence to suggest the bank had sealed the bonds, and that Mr Rutherford did not have the authority to sign them.

Cotton Bay also argued that if the bonds were not originally valid and enforceable, FirstCaribbean was estopped from denying their validity, and there was a collateral on the contract on which the plaintiffs could rely to enforce the bonds.

But Justice Isaacs said it was obvious that the performance bonds did not identify the contracts to which they purported to relate, did not indicate the amount they secured, did not identify the surety, did not properly identify the contractor and were not dated.