Construction practitioners will be familiar with the need for contractors to provide forms of security on construction projects to provide some protection for the employer in the event of poor performance. However labelled, an on demand bond is very different to a “see to it” guarantee, and the court’s interpretation of an instrument can have significant consequences for the parties as shown by a recent Commercial Court decision.

The Facts

A major engineering project to widen the Panama Canal took place between 2007 and the opening of a third set of locks in June 2016. The new locks allow all but the largest vessels to pass through the canal and therefore provide a significant contribution to expanding international trade flows.

The key contracting parties in relation to the project are the owner of the canal and project sponsor Autoridad del Canal de Panama (“ACP“) and the consortium of construction contractors appointed to carry out the works required to deliver the project, Grupo Unidos por el Canal S.A. (”GUPC“).

The main project construction contract (the “Contract“) between the parties is subject to Panamanian law and contains a detailed dispute resolution procedure, ultimately leading to arbitration in Miami under the ICC rules. A number of disputes under the Contract are subject to ongoing arbitral proceedings.

The TCC Case

In addition to the arbitral proceedings, a recently decided TCC case between ACP and the various parties who own GUPC concerned six advance payment guarantees (the “APGs“) in relation to advance payments made to GUPC by APC under the Contract. The APGs were each subject to English law and exclusive jurisdiction clauses. The advance payments to which the APGs related were repayable under the Contract by 31 December 2016. That repayment date could be extended to 31 December 2018 if GUPC provided letters of credit to cover the outstanding amounts. Such letters of credit were not provided and the advance payments were not repaid by the contractual due date.

The Issues

In the proceedings before the TCC, ACP sought summary judgement that advance payments totalling circa US$288m were due from GUPC’s owners under the APGs.

In response, GUPC’s owners contended that a stay of the TCC proceedings must be imposed under s.9 of the Arbitration Act 1996 or that the court should grant a stay under the Civil Procedure Rules and/or its inherent jurisdiction or case management powers on the basis that as arbitration proceedings were in existence it was more appropriate for these issues to be dealt with by way of arbitration.

The key issue before the Court was whether the APGs were on-demand bonds. If that was correct, GUPC’s contention that a stay to arbitration be imposed did not arise. It follows that if the APGs were found not to be on-demand bonds but “see to it” guarantees, then the conditions for a stay would be met and such a stay must be imposed by the Court.

On Demand Obligations and “See to it” Obligations

ACP’s case was that GUPC’s owners were not guarantors under a “see to it” guarantee in which they assumed a secondary obligation to make good any default by the primary obligor; rather they undertook as “primary obligors” to pay the sums of money themselves if not repaid by the contractual deadline.

GUPC’s owners submitted that the contractual origins of the APGs demonstrated that the instruments were guarantees, where the guarantors’ liability is coextensive with the liability of the principal debtor, rather than unconditional demand bonds. The language of the APGs was similar in key respects to various Panamanian law guarantees provided by GUPC’s owners to APC to secure the performance of GUPC’s obligations under the Contract and there had been no suggestion that those instruments were anything other than guarantees. Had the parties intended to create a different instrument they would have used different wording.

To decide on this issue, Mr Justice Blair provided a comprehensive summary of relevant case law which is helpful in the analysis of the terms of any bond or guarantee:

  • A first demand bond or on-demand bond, unlike a guarantee, is in principle autonomous of the underlying contract. Liability arises under an on demand bond simply on a conforming demand made within the validity of the bond.
  • The incorporation of terms such a principal debtor clause or terms imposing primary liability and the use of the words “on demand” may be of limited value in determining an instrument’s legal nature.
  • The practical question is whether the instrument is effectively payable on demand with or without some supporting documentation: this can only be ascertained by examining its terms.
  • Advance payment guarantees can be issued in either form.
  • When it comes to construing the instrument, the nature of the party giving the guarantee is relevant. It has been held that there is a presumption (the “Marubeni presumption”) against construing an instrument as a demand bond which is not given by a bank or other financial institution.

The Court's Decision

With these principles in mind, Mr Justice Blair turned to two key terms of the APGs:

  • An obligation by which each guarantor “jointly and severally guarantees to the Employer the payment by the Contractor of the Guaranteed Amount as and when due pursuant to the Contract.”To the judge’s mind, this provision created a clear mechanism by which a demand under the APGs had to be determined by reference to GUPC’s obligations under the Contract. This was not in the nature of an on demand instrument.
  • An obligation for the guarantors to perform GUPC’s obligations of which it was in breach in the same manner that GUPC was required to perform them “according to the terms of the Contract“.This was not, in the judge’s opinion, the language of first demand liability.

The Court therefore found that GUPC’s owners were not liable under the APGs to make repayment of the advance payments on demand. Notwithstanding this, Mr Justice Blair also found that ACP was entitled to proceed with an application for summary judgement on an alternative case that GUPC’s owners primary liability was triggered by the failure of GUPC to make repayments “as and when” under the Contract, construed under English law.

The Court also found that GUPC’s owners were not able to stay the TCC proceedings until the arbitral proceedings were concluded, either under s.9 of the Arbitration Act 1996 or under the Civil Procedure Rules and/or its inherent jurisdiction or case management powers.


This case provides a valuable insight into the differences between primary “on demand” obligations and secondary “see to it” obligations and the case law used to assist in differentiating judicially between the two. Any instrument which purports to be payable “on demand” may be fatally undermined by the inclusion of more than a passing reference to (a) the underlying contract to determine the amount due or (b) the performance of obligations by the guarantors under that contract in the event of a claim under the instrument.