In Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd  EWHC 2443 (Ch), the Claimant had guaranteed the Defendant’s obligations to a number of beneficiaries under a contract. The Claimant brought an action for a declaration as to the circumstances under which its liability to these beneficiaries would arise, arguing that such liability was triggered upon proof of a breach of contract by any one or more of the entities who could be identified as a guaranteed party. The Defendant argued that the Claimant’s liability was triggered by demand alone.
The court agreed with the Claimant and granted the declaration sought. As the guarantee was not given in a banking context, there was a strong presumption that the payment obligations undertaken by the Claimant did not constitute a “demand bond” and it was for the beneficiary to displace this presumption. On an analysis of the language of the contract, the liability assumed by the Claimant was not triggered merely by a demand on the part of a beneficiary.
Further, it was necessary to demonstrate the existence of a breach or failure of obligation. The contract incorporated what the court referred to as a “pay now, argue later” clause and this pointed to the existence of a secondary, rather than a primary, liability. It assumed that the guarantor could raise defences which the guaranteed party could have raised if the demand had been addressed to it, and postponed the exercise of that right until after the demand had been fully met. Such defences would be immaterial in relation to a primary liability.
Finally, the court referred to the conclusive evidence provision in the guarantee which required a certificate “setting forth the amount”. Even when taken together with other provisions in the guarantee, this did not have the effect of transforming the contract into a demand bond.