[2019] EWHC 2012 (Comm)

Rubicon chartered a Floating Storage & Offloading Facility to Kegot, a wholly owned subsidiary of Krisenergy. As part of the contractual arrangements, Krisenergy provided a guarantee. Rubicon sent a series of four invoices to Kegot, totalling some US$1.8m. No payments were made. On 3 September 2018 Rubicon made a demand on Krisenergy under the guarantee for the total sum outstanding. Proceedings were commenced and a second demand was made on 29 January 2019.

Rubicon said that the Guarantee was, at least in part, an on-demand instrument, that it had made compliant demands, and that Krisenergy was therefore liable to pay even though the underlying claims were in dispute and had not been adjudicated upon. Krisenergy said that it was only an on-demand instrument where liability had been admitted and that had not happened. Krisenergy further said that the demands did not comply with the terms of the Guarantee, so that no liability had arisen. The key terms were as follows:

“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: (a) that the amount(s) demanded are properly claimed and due and payable in accordance with the terms of the Contract; (b) the calculation of such sums together with any supporting documentation reasonably required to assess such demand; and (c) 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:

(a) the Guarantor shall be obliged to pay any 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).”

Deputy Judge Vineall QC referred to the CA case of Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA (see Dispatch Issue 164) where the court held that, where an instrument (i) related to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, there is a presumption that the instrument is a demand guarantee.

In the Judge’s view, the correct approach was to begin simply by considering the words the parties chose to use to record their agreement, free from any presumption as to what meaning they were likely to have, or as towards a wide or narrow construction. Doing that, the meaning of clauses 4 and 5 was clear. Both were predicated on the assumption that there was a valid demand, i.e. a demand complying with clause 3.

By clause 4, if the amounts demanded were not in dispute as between Rubicon and Kegot, then Krisenergy must pay them within 48 hours of receipt of the demand. The operative wording used was “... where the amount(s) demanded are not in dispute”. That must mean that the amounts demanded are not in dispute either as to liability to pay, or as to the quantum of what must be paid. So, if a there is a demand for US$3m, and Kegot does not dispute liability to pay US$2m of that sum, it must, under clause 4, pay US$2m, but it is not obliged, under clause 4, to pay the other US$1m.

Clause 5 was directed to what was left over from clause 4. It was engaged if and insofar as there was a dispute as to Kegot’s liability to pay some part of the sums demanded. There was an important limitation which applied to clause 5 liabilities, namely that Krisenergy was only obliged to pay, under clause 5, up to a maximum of US$3m. Further, clause 5 was not limited to disputes about quantum. A “dispute ... as to liability ...” means what it says: a dispute as to liability. It was not limited to disputes as to quantum. The on–demand liability arose with regard to the first $3m worth of claims in relation to which Krisenergy disputed that it was obliged to pay. It did not matter whether the dispute is as to liability or merely as to quantum.

What was required by clause 3 to make a valid demand? The parties agreed that the demand here was accompanied by a sworn statement satisfying limbs (a) and (c). Limb (b) was more problematic. The Judge said that it was clear that something had gone wrong with the wording because it did not make good grammatical sense. Accordingly the Judge could not apply the literal meaning. Following, the case of Rainy Sky SA v Kookmin Bank 2011 UKSC 50, and given that this was a commercial contract, the Judge had to determine what the parties meant by the language used. This involved ascertaining what a reasonable person would have understood the parties to have meant. The relevant person here, was one who has available all the background knowledge which would have been reasonably available to the parties. The Judge had no doubt that such a 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. That amounted to no more than a reordering of the actual words used, and it makes good commercial sense. When Krisenergy received a demand it would need to decide within 48 hours whether to pay. To do that, Krisenergy needed the calculation and needed the documents.

Did the demands comply with clause 3? It was common ground that a calculation of the sums due accompanied the demands, but what about the “supporting documents reasonably required to assess such demands”. The Judge said that what was needed included documents reasonably required for Krisenergy to be able to find out quickly from Kegot whether the claim was admitted or disputed, and to form a provisional view as to whether the claims that gave rise to the demands were bona fide or fraudulent. Here all four Rubicon invoices were accompanied by a breakdown of the sums invoiced. There were some 270 pages of supporting documents, presented in a logical order which were “amply sufficient” to satisfy the requirements of clause 3. Therefore the first demand was a valid demand within the meaning of clause 3 and Krisenergy was obliged to pay the sum demanded within 48 hours.