Beware of guarantee wording!

In Bitumen Invest AS v Richmond Mercantile Ltd FZC [2016] EWHC 2957 (Comm), England’s High Court had to determine an application by the Claimant owners of a vessel for summary judgment against the Defendant in respect of the amount due under a Deed of Guarantee (the Guarantee), under which the Defendant was the guarantor. The issue was whether the Guarantee was an “on demand” guarantee payable upon the owner’s certification of sums due or whether the Claimant had to establish liability of the party being guaranteed before any liability arose under the Guarantee. The Court held that the Guarantee was clearly an “on demand guarantee” in view of its wording, which made it clear that the nature of the payment obligation was absolute and unconditional, and there was no room for disputing liability.  

Background 

The Defendant had executed the Guarantee, which guaranteed all liabilities of the charterers (Windrush) under a demise charter-party (Demise Charter) with the Claimant owners. The Demise Charter stipulated that it was to be constructed on “hell and high water” terms, meaning that the charterer’s obligation to pay for the hire and perform any obligations was absolute and unconditional. 

It was a condition precedent to the Demise Charter that the Defendant would execute and deliver a guarantee in favour of the Claimant. The Guarantee provided that:- 

“(A) …the Guarantor hereby unconditionally and irrevocably guarantees … the due and proper performance of all obligations, including payment obligations, which the Charterers [Windrush] incur or may incur towards the Owners under the Charter … and to pay to the Owners on demand all monies as may fall due from the Charterers to the Owners.

…

(C) The Guarantor expressly undertakes to make payment on demand of any amount certified by Owners [Claimant] by written notice to be due to the Owners [Claimant] as a consequence of the Charterers not having fulfilled their obligations under the Charter, within five (5) Business Days after receipt of written notice for payment from the Owners [Claimant]. 

(D) Any payments under this Guarantee shall be made in full, free and clear of any deductions, withholdings, set-offs or counterclaims of any nature whatsoever.” 

The Dispute 

The Claimants contended that Windrush was in breach of the Demise Charter and had made the required demands to the Defendant for the sums due from Windrush. The Defendant denied that the Guarantee was an “on demand” guarantee and that Windrush was in breach of the Demise Charter. 

Court’s Ruling 

The Court granted the Claimant’s application for summary judgment, holding that the Guarantee was clearly an “on demand guarantee” in view of its wording. The key feature, the Court said, was that payment was triggered by the issue of a demand by the Claimant for an amount certified by it as due as a consequence of Windrush failing to fulfil its obligations under the Demise Charter. In the Court’s views, it was clear that the nature of the payment obligation was absolute and unconditional, and there was no room for disputing liability.  

That conclusion was reinforced by paragraph (D) of the Guarantee (see above), as it provided that once the demand had been made, the Defendant was liable to pay the sums certified without any deduction of any kind. The clear, objective intention of the Guarantee, the Court said, was that payment should be triggered upon certification in accordance with paragraph C. The Court considered the nature of such obligations explicable by reference to the character of the overall arrangement, namely the Guarantee formed part of a financing transaction. 

Comment 

At first glance, the wording of the Guarantee did not make it absolutely clear that it was in the nature of a demand bond. For the avoidance of doubt, a demand bond will usually expressly say to the effect that certification by the employer shall be conclusive evidence of default by the contractor without further proof under the demand bond. The English Court in this case accepted less strict wording, which may provide more room for parties to argue about the true nature of their bond in future.

Key Contacts

Joseph Chung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9647