The funds to clean up an opencast coal mine in Ayrshire have been halved because of a legal technicality, undermining plans to restore mines that have left scars across Scotland.

East Ayrshire Council has failed in a bid to get the insurance company, Zurich, to pay out £3.34 million for environmental remediation at Dalfad mine. Instead, the company is now only liable for £1.67m or less.

The Court of Session in Edinburgh rejected the council's claim because it had not given the required 60 days notice. But the council argued that such notice had been impossible because of when the mine's former operator, Scottish Coal, had gone bust.

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Even if the council had won the full amount under the insurance bond, it would probably have fallen far short of the money needed. An independent mining engineer put the full cost of restoring Dalfad at £8.56m. East Ayrshire, which has by far the highest concentration of opencast coal mining in Scotland, has a massive £132m hole in the budget it needs to restore the landscapes scarred by 22 mines. It says it expects to retrieve £14m in bond money by the end of this month, with negotiations continuing.

"The council's failure to secure the expected bonds for restoration of Dalfad is a major blow," said Malcolm Spaven, chair of the Scottish Opencast Communities Alliance.

The Royal Society for the Protection of Birds (RSPB), which has been monitoring the fate of opencast mines, expressed disappointment that the council had missed out on "desperately needed" funds. "This highlights the risks of using complex commercial bonds, which place too much trust in the developers and in the bond issuers," said RSPB Scotland's senior conservation officer for Ayrshire, Zoe Clelland. "A simpler system is needed to ensure it is always the polluters that pay for clean-up when they harm our environment and it doesn't fall to hard-pressed local councils and taxpayers."

David Mitchell, head of legal services at East Ayrshire Council, described the court's decision on Dalfad as regrettable. "It is to be hoped that we will not be judged too harshly for at least trying to secure the maximum recovery possible in this instance," he said. "The council is considering the alternative options which might now be available and have sought further counsel on a number of related issues."

Zurich said on Friday that it could not comment.