This was an application for summary judgment by Caterpillar against MBAC, a Liberian Insurance Company, for sums said to be due pursuant to two Advance Payment Bonds (“APB”) and two Performance Bonds (“PB”). The application depended on whether the bonds were “on-demand” bonds or guarantees. If they were guarantees, Caterpillar would have to prove liability. Caterpillar had entered into two subcontracts with ICE for the provision of construction services. Between 5 February and 14 March 2014 Caterpillar made advance payments to ICE. Disputes arose between Caterpillar and ICE and on 10 May 2014 Caterpillar purported to terminate the subcontracts and demanded from ICE the return of the advance payments and a further sum by way of liquidated damages. ICE disputed Caterpillar’s claims.
Caterpillar therefore demanded payment from MBAC under the bonds. With regard to the APBs, Caterpillar declared that ICE had failed to execute the tasks for which an advance payment had been made and demanded payment in the sums set out in the bonds. With regard to the PBs, Caterpillar declared that ICE had not met its obligations under the subcontracts and demanded payment in the sums set out in the bonds, adding that the damages caused by ICE exceeded the sums claimed. MBAC refused to pay the sums demanded under the bonds. MBAC said that it was only liable to pay Caterpillar if it was established that ICE was liable to Caterpillar in the sums claimed.
As noted in the Wuhan Guoyu case (Dispatch Issues 145, 150 and 164), there will be a presumption that a bond is an “on-demand” bond where that instrument (i) relates to an underlying transaction between parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor.
To take the APB, clauses 1 and 2 described the nature of the obligation undertaken by MBAC. By clause 1, MBAC:
“guarantees and undertakes to pay, without reference to the CONTRACTOR [ICE], the BENEFICIARY herein [Caterpillar] forthwith on demand …….as may be claimed by the BENEFICIARY to be due from the Contractor on account of the failure of the CONTRACTOR in observance and performance of the terms and conditions of the contract…and in particular, the CONTRACTOR’S failure to fully satisfactorily and timely execute the tasks for advance payment.”
The undertaking was to pay “forthwith on demand” and “without reference to” the Contractor. The sum which was to be paid was that claimed by the Beneficiary as being due from the Contractor. These phrases strongly suggested that MBAC’s liability was to pay the sum which was demanded by Caterpillar rather than that which was proven or admitted to be due from ICE to Caterpillar. On the other hand, the use of the word “guarantee” (which appears not only in the clause but also in the title and opening section of the instrument) and the reference to a failure by ICE to perform its obligations could be said to have suggested that the parties intended that MBAC would only pay where ICE had actually failed to perform its obligations.
However, clause 2 put the matter beyond doubt. Here, MBAC agreed that the decision of Caterpillar: “as to whether any money is payable by the Contractor to the Beneficiary or whether the Contractor has made any such default or defaults as aforesaid and the amount or amounts to which the Beneficiary is entitled” would be binding on them. Further, MBAC was not entitled to “as[k] the Beneficiary to establish its claims” but “shall pay the same to the Beneficiary forthwith on demand”.
Mr Justice Teare noted that the APB: (i) related to an underlying transaction between parties in different jurisdictions; (ii) contained an undertaking to pay on demand; (iii) whilst MBAC was not a bank it was a financial or insurance institution engaged in the business of providing bonds to its customers; but (iv) it did have a clause excluding or limiting the defences available to a guarantor. This, however, was not fatal as the Judge said that this was because the clause may well have been inserted to put beyond doubt that the rule applicable to true guarantees did not apply. Clauses 1 and 2 made it clear that the instrument was undoubtedly intended to be an “on-demand” bond.
The PB was in a different form. Clause 3 provided as follows:
“Whenever Principal shall fail to pay the lawful claims of any Person with respect to the work, including Subcontractors and suppliers, the[y] Surety shall pay the same in an amount not exceed the bonded Sum.”
The reference to a liability arising to pay “lawful” claims might have suggested that this was a guarantee. However, that suggestion was inconsistent with clause 4 which provided that MBAC was to pay Caterpillar once Caterpillar had “declared” that ICE was in default. MBAC was to pay “unconditionally” and without demur “the amount of damages claimed by” Caterpillar. Any such declaration was referred to in the second sentence as a “demand”. If there were any doubt that such words manifested an intention to create an “on-demand” bond such doubt was displaced by the second sentence which stated that any such demand shall be “conclusive” as regards the amount due and payment by MBAC.