In many transactions in the trading sector, a parent company guarantee or a corporate guarantee from a company in the same group is asked for, and given, by way of credit support. Typically, no fee is paid to the guarantor for provision of the guarantee; it is not ordinarily in the business of giving financial instruments; and, it does not receive any counter security from the buyer for providing the guarantee.

This article and the legal principles covered in it apply only to that type of guarantee, and not to guarantees given by a financial institution, or to letters of credit.

The Marubeni principle

Commercial parties involved in the trading sector may be unaware of the key principle that where a guarantor is not a bank, there is a strong presumption in English law against giving the words “on demand” the effect of creating an independent/demand guarantee or indemnity.

That principle was confirmed in Marubeni Hong Kong and South China Ltd v Government of Mongolia[2005] EWCA Civ 395 [2005] 1 WLR 2497, which gave its name to the principle.

Post-Marubeni decisions

One indication of the complexity of this area of the law and the difficulty in identifying whether a guarantee is a demand guarantee or not is the number of decisions since Marubeni, in which the courts have gone into great detail, scrutinising the contractual language used by the parties to establish whether it was sufficient to rebut the Marubeni presumption.

In 20081, the Court of Appeal held that where a corporate guarantee (CG) contains clear words to indicate the parties’ intention to make it an independent/demand guarantee or indemnity, the Marubeni presumption may be rebutted and the CG may still be construed as payable on demand.

The wording of the CG was scrutinized by the court and the following provisions were deemed as significant in indicating an on demand liability:

  • As principal obligor’.
  • ‘Not merely as surety’.
  • ‘If … the guaranteed moneys are not paid in full on their due date … immediately upon demand unconditionally pay to the lender the guaranteed moneys’.

Further, the “guaranteed moneys” were defined as “all money liabilities which are now or may at anytime hereafter be due, owing or payable or expressed to be due owing or payable to the lender from or by the borrower…’),. The court held that the wording “expressed to be due”, in conjunction with other operative wording, was sufficient to create an on demand guarantee.

However, in 20102 the court considered a CG as conditional/secondary despite the use of guarantee wording widely used in the market. This was because it appeared iIn a clause drafted on the premise that a default by an underlying obligor had already occurred. This made it a secondary, rather than a primary obligation and so it was not an on demand guarantee.

In 20113, the Court of Appeal ruled certain advance payment guarantees were on demand, including, because they were irrevocable and unconditional, payable on demand and governed by the Uniform Rules for Demand Guarantees.

More recently, in 20124, the Court of Appeal has signalled a change in approach. It was required to consider a document described as a payment guarantee. The first instance court had cited 20 authorities in a long judgment, holding that it was not an on demand guarantee. The Court of Appeal unanimously overturned that decision and encouraged a different approach. It focused on the commercial context of the transaction rather than the detail of the drafting. It concluded in particular that a document will almost always be a demand guarantee where it:

  • Relates to an underlying transaction between parties in different jurisdictions.
  • Is issued by a bank.
  • Contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”).
  • Does not contain clauses excluding or limiting the defences available to the guarantor.

HFW perspective

Commercial parties in the trading sector should be extremely careful when taking or relying on a CG from a non financial institution in circumstances where:

  • No fee is paid to the guarantor for provision of the guarantee.
  • It is not ordinarily in the business of giving financial instruments.
  • It does not receive any counter security for providing the guarantee.

You can make the position more certain by including clear, express wording to the effect that the parties intend the guarantee to be an independent, on demand guarantee and by referencing the Uniform Rules for Demand Guarantees.