This interesting case[1] highlights the importance of clear drafting in guarantees and surety bonds, and provides examples of clause “features” which the Court considers to be plain evidence of an “on demand” guarantee as opposed to a “see to it” or “conditional” guarantee.

The case concerned a guarantee issued in respect of a chartered vessel. The Guarantor guaranteed the obligations of its subsidiary, who chartered the vessel (the “Charterer”), to the owners of the vessel (the “Beneficiary”) by way of a deed of guarantee (the “Guarantee”).

The Court was asked to decide whether the Guarantee was an “on demand guarantee”, payable upon the certification of sums due by the Beneficiary, or whether, before liability arose under the Guarantee, the Beneficiary had to establish the liability of the party whose obligations were guaranteed. The key clauses of the Guarantee stated (emphasis added in bold):

“[A] …… the [Guarantor] hereby unconditionally and irrevocably guarantees as primary obligor and not merely as surety the due and proper performance of all obligations, ………….which the Charterers incur or may incur towards the [Beneficiary] …… and to pay to the [Beneficiary] on demand all monies as may fall due from the Charterers to the [Beneficiary] and to discharge all Guaranteed Obligations or any part thereof when the same become due for payment or discharge…

[C] The [Guarantor] expressly undertakes to make payment on demand of any amount certified by the [Beneficiary] by written notice to be due to the [Beneficiary] as a consequence of the Charterer not having fulfilled their obligations under the charter, within five business days after receipt of written notice for payment from the [Beneficiary]”.

[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 Court made it clear that the particular label that the parties apply to a document does not automatically determine the nature of the document, especially if the wording within the document suggests otherwise.

The Court followed the general principle set out in Wuhan Guoyo Logistics Group Co Ltd v Emporiki Bank of Greece [2013] that any guarantee which (a) contains an undertaking to pay “on demand” and (b) does not contain any clauses which exclude or limit the defences available to a guarantor, will almost always be construed as a demand guarantee.

In the current case, the Guarantee stated an undertaking to pay “on demand” as can be seen in clauses A & B above, but excluded all set offs or counterclaims in clause D.

The Guarantor sought to rely on the lack of a “conclusive evidence” clause. Such a clause is often found in on demand guarantees and states that the guarantor can and should rely on the certification as conclusive evidence that the amount claimed is the amount due under the guarantee. However, the Court decided that this was not enough to detract from the wording used in clause C of the guarantee in this case, that payment had to be made on demand, especially given the reference to the Guarantor giving an express undertaking to pay.

Implications

When considering the wording of a bond which is intended to be a conditional performance guarantee, as opposed to an on demand bond, the following wording must be avoided:

  1. Use of the work ‘unconditionally’;
  2. A promise or agreement to pay as primary obligor, as opposed to as secondary obligor liable only insofar as the principal is liable, as is the case with conditional bonds; and
  3. Use of the words ‘on demand’.

It is also worth noting the point above that the title of the bond is not necessarily determinative of its nature.