In this case the court considered whether a parent company was liable as a guarantor for the liabilities of its subsidiary under a bareboat charter of a floating storage and offloading facility.

The facts

By a bareboat charter dated 13 October 2014, the claimant Rubicon as owners chartered the vessel Rubicon Vantage as a floating storage and offloading facility to KrisEnergy (Gulf of Thailand) Ltd, which was a wholly owned subsidiary of the defendant KrisEnergy.

Clause 22.2 of the charter obliged the charterers to procure for the owners a charterers’ guarantee, the terms of which were set out in Exhibit E to the charter. The defendant did provide a guarantee to owners, albeit not quite in the terms of Exhibit E, on or about 13 October 2014.

By the terms of the charter, owners were to organise various works on the vessel before the charter term commenced. Most of these works were directed to extending the working life of the vessel, and in the charter they were called the ‘life extension works’. Owners were responsible for the cost of those works by clause 2.1, but there was a variation order regime under which owners could claim additional costs if the work was varied.

The various works were started on the vessel on 21 October 2014 and all were completed on or about 27 March 2015. The vessel was delivered to the oil field on 24 July 2015 and the charter hire had been paid on time throughout the charter.

On 3 June 2015 a series of invoices were sent by owners to charterers. Four such invoices, totalling US$1,827,901, gave rise to this dispute. Each of them was said to relate to a variation order. Despite various discussions and negotiations ensuing over the next three years, nothing had been paid by charterers in relation to any of the four disputed invoices.

On 3 September 2018 owners made a demand on the defendant under the guarantee for the total sum outstanding under the four invoices. The defendant declined to pay. Legal proceedings were subsequently commenced.

Owners contended the guarantee was, at least in part, an on-demand instrument, that it had made compliant demands, and that the defendant was therefore liable to pay notwithstanding that the underlying claims against charterers were in dispute and have not been adjudicated upon. The defendant accepted that the guarantee was, in part, an on-demand instrument, but argued that it was only an on-demand instrument where liability has been admitted by charterers (even if quantum remained in dispute), and the defendant contended that there had been no such admission of liability. The defendant further argued that the demands did not comply with the terms of the guarantee, so that no liability had arisen under it. Owners argued in reply that there were admissions by charterers, so that even if the defendant was right on the construction point, the guarantee liabilities were triggered.

Clauses 3 to 5 of the guarantee provided:

‘3. Any demand under this Guarantee shall be in writing and shall be accompanied by a sworn statement from the Chief Executive Officer or the Chief Financial Officer of the Contractor stating as follows:

  1. that the amount(s) demanded are properly claimed and due and payable in accordance with the terms of the Contract
  2. the calculation of such sums together with any supporting documentation reasonably required to assess such demand
  3. that the Company was duly notified of the amount(s) demanded in accordance with the terms of the Contract

4. In circumstances where the amount(s) demanded under this Guarantee are not in dispute between the Company and the Contractor, the Guarantor shall be obliged to pay the amount(s) demanded within forty-eight (48) hours from receipt of the demand.

5. In the event of dispute(s) between the Company and the Contractor as to the Company’s liability in respect of any amount(s) demanded under this Guarantee:

  1. the Guarantor shall be obliged to pay an amount(s) demanded up to a maximum amount of United States Dollars Three Million (US$3,000,000) on demand notwithstanding any dispute between the Company and the Contractor

… until a final judgment or final non-appealable award is published or agreement is reached between Company and contractor as to the liability for the disputed amount(s).’

The law

Nicholas Vineall QC, sitting as a deputy High Court judge, summarised the issues to be considered as follows.

  1. Whether the guarantee was an on-demand guarantee only in relation to claims where liability has been admitted by charterers
  2. A series of questions as to the proper construction of the guarantee’s provisions in terms of what constitutes a proper demand
  3. A missed question of fact and law as to whether or not, in the light of the proper construction of the contract, the demands that were in fact made were compliant

The judge observed that a guarantee, on its proper construction, may be categorised into two types:

(a) A true guarantee, which merely imposes a secondary obligation on the guarantee to ‘see to it’ that the principal obligor’s obligations were met. Such a guarantee would often be issued by parties who were not banks or financiers but who had some other commercial relationship with the primary obligor. One particular type of such a guarantee was a parent company guarantee, where a parent company guarantees the liabilities of its subsidiary.

(2) An on-demand bond or performance bond, i.e. one imposing an autonomous obligation on the guarantor to pay, irrespective of the actual liability of the primary obligor. Such guarantee would typically be issued by banks, who, though they were likely to be in a poor position independently to assess the true merits of an underlying claim, were prepared to take on an obligation to pay against documents. Typically, the bank must simply pay against a compliant demand, but if it turns out later that in fact the principal obligor was not liable, the bank will be entitled to recover its money from the payee.

To determine under which of the categories a particular guarantee fell, the judge directed himself to two Court of Appeal cases, setting out presumptions to be applied if the appropriate preconditions for their application were made out: Marubeni Hong Kong and South China Ltd -v- Government of Mongolia [2015] 2 Lloyd’s Rep 231, per Carnwath LJ at para 30, concerning an autonomous bond; and Wuhan Guoyu Logistics Group Co Ltd -v- Emporiki Bank of Greece SA [2014] 1 Lloyd’s Rep 266, per Longmore LJ at paras 26 to 29, concerning a demand guarantee. However, as will be seen, the judge did not consider these cases of direct assistance.

Issue 1: was the guarantee an on-demand guarantee only in relation to claims where liability had been admitted by charterers?

The judge considered that the guarantee in the present case, perhaps unusually, fell into both categories. It was described as being a parent company guarantee, and it was as a matter of fact a guarantee provided by the defendant, the parent company of the principal obligor charterers. The parties agreed that its effect was to make the defendant liable to pay any amount which charterers were liable to pay but has not paid, provided that a compliant demand was made. However, the parties also agreed that there were some circumstances in which the defendant could be liable to pay in response to a compliant demand even if there was an unresolved dispute between owners and charterers.

The judge could not see any logical reason why the mere fact that the party, which submitted itself to an autonomous on-demand obligation was not a bank, was likely to assist in determining the extent of the obligation it had undertaken. The judge rejected the submissions that the fact that the defendant was not a bank raised any form of presumption of construction that the on-demand obligation it undertook was to be construed narrowly rather than broadly. The correct approach in determining the extent of the on-demand obligation in this guarantee was to begin simply by considering the words the parties chose to use to record their agreement, free from any antecedent presumption as to what meaning they were likely to have, or as to a wide or narrow construction.

Adopting that approach, the meaning of clauses 4 and 5 was clear. Both were predicated on the assumption that there was a valid demand, in the sense of a demand complying with clause 3:

  1. By clause 4, if the amounts demanded were not in dispute as between owners and charterers, then the defendant must pay them within 48 hours of receipt of the demand. The operative wording used ‘where the amount(s) demanded were not in dispute’ meant that the amounts demanded were not in dispute either as to liability to pay, or as to the quantum of what must be paid
  2. Clause 5 was held to be directed to what was left over from clause 4, and was engaged if and insofar as there was a dispute between the parties as to charterers’ liability to pay some part of the sum or sums demanded. The opening words of clause 5, i.e. ‘In the event of dispute(s) … as to charterers’ liability in respect of any amount(s) demanded under this guarantee’, referred to liability to pay some or all of the sum claimed, i.e. disputes could relate to either liability or quantum

If there was a demand for US$3 million, and the charterers did not dispute liability to pay US$2 million of that sum, it must under clause 4 pay US$2 million, but it was not obliged, under clause 5, to pay the other US$1 million. An important limitation applied to clause 5 liabilities, namely that the defendant was only obliged to pay, under clause 5, up to a maximum of US$3 million. Accordingly, the judge held that the on-demand liability arose in relation to the first US$3 million worth of claims, and it did not matter whether the dispute was as to liability or quantum.

Issue 2: the clause 3 requirements for a valid demand

The first point to note was that any demand made under clause 3 might lead to monies being paid under the see-to-it obligation of clause 4, or under the autonomous obligation under clause 5, or under a combination of the two. This particular provision, like the agreement as a whole, therefore covered both primary and secondary type obligations.

The parties agreed that a demand was invalid unless it was accompanied by a sworn statement satisfying limbs (a) and (b) of clause 3, and they agreed that both the first and second demand did in fact satisfy those limbs. They disagreed about what was required by limb (b) of clause 3 and the question was whether the supporting documentation had to accompany the demand.

The judge considered that the wording of clause 3 did not make good grammatical sense. Given that this was a commercial contract, the judge opined with reference to Rainy Sky SA -v- Kookmin Bank [2012] 1 Lloyd’s Rep 34 that his task was to determine what the parties meant by the language used, ascertaining what a reasonable person would have understood the parties to have meant. The relevant person for these purposes was one who had available all the background knowledge which would have been reasonably available to the parties.

The judge had no doubt that such person would understand the parties to have intended a requirement that the demand actually be accompanied both by the calculation of the sums demanded and by any supporting documentation reasonably required to assess the demand. The judge then reformulated by reordering the actual words used. The judge considered that given the tight timescale for the defendant to decide whether to pay upon receipt of a demand (within 48 hours), the supporting documentation, including the actual provision of calculations and documents, should be accompanied with the demand so as to make the defendant in a position to consider whether this was a demand for amounts that were not in dispute (triggering clause 4), or for amounts that were in dispute (triggering clause 5), or a mixture of the two.

Issue 3: was clause 3 complied with?

It was common ground that a calculation of the sums due did accompany the demands, but the parties disagreed as to whether or not the demands were also accompanied by ‘any supporting documents reasonably required to assess such demands’. The question was: did the first demand comply with those requirements?

The first demand, dated 3 September 2018, was accompanied by the four owners’ invoices, and each of the four invoices was accompanied by a breakdown of the sums invoiced. There were in all 270-odd pages of supporting documents, presented in a logical order. In the judge’s view, those documents were amply sufficient to satisfy requirements of clause 3, and they provided the defendant with all that it reasonably required to assess the first demand. The defendant could have been in no doubt about the basis on which the claim was advanced and how the sums were calculated, and had available to it all of the key supporting material.

In conclusion, the judge held that both demands were valid within the meaning of clause 3, and the defendant was obliged to pay the sums demanded.

Comments

This case provides valuable guidance on how to apply the rules of construction to determine the different categories of guarantees or bonds. The key consideration when determining the scope of the guarantee is the wording of that particular guarantee.

The Court of Appeal in Marubeni provided an additional protection to non-bank entities when construing whether autonomous on-demand liabilities have been created; however, the judge rejected the defendant’s argument that the established presumption should be applied by analogy so that the scope of the defendant’s autonomous on-demand liabilities should be construed narrowly. In other words, for a guarantee issued by a parent company rather than a financial institution, there is no requirement for a narrow construction of the guarantor’s obligations.

This case also serves as a reminder for both guarantors and beneficiaries of guarantees that the terms relating to what would constitute a valid demand should be carefully drafted. If the terms are too vague, the court will look at the words used in the contract and ascertain their meaning in light of good commercial sense from the perspective of a ‘reasonable person’ to assess whether a compliant demand has been served.

This article first appeared in Lloyd’s Shipping & Trade Law