Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch)

Vossloh (VAG - the guarantor) is the parent company of the Vossloh Group - a group of rail infrastructure and technology companies. Its subsidiary, Vossloh Locomotives GmbH, manufactured and supplied trains to a number of companies owned by Alpha. From September 2000, both company groups entered into a series of agreements including a master purchasing agreement (MPA) under which companies in the Vossloh Group sold trains to various companies in the Alpha group.

On 15 September 2009, the guarantor provided a guarantee of Vossloh Locomotives’ obligations under the MPA, to Alpha and some of its group companies. This guarantee replaced two earlier guarantees made to various companies affi liated to Alpha. Disputes then arose in relation to alleged defective engines and gearboxes and at the end of 29 January 2010, Alpha sent a pre-action protocol letter of claim and a letter of demand to the guarantor under the guarantee claiming losses of over 17 million euro. Alpha accepted that it had not yet spent any money on repair, or incurred a liability to pay anything approaching the amount demanded. It also admitted that if it was paid the €17 million and then spent it, it could not aff ord to pay the money back to VAG. There were a number of potential defences to the claim made under the MPA.

The issue for the Judge was the basis on which, if at all, Vossloh could be required to make payment to Alpha - the Benefi ciary under the Guarantee. As Sir William Blackburne noted, parties are free to agree whatever terms they choose. There is therefore “a spectrum” of contractual possibilities ranging from the contract of guarantee, proper where the liability of the guarantor is exclusively secondary and will be discharged if, for example, there is any material variation to the underlying contract between principal and creditor, to the performance or demand bond where liability in the giver of the bond may be triggered by mere demand and without proof of default by the principal - or as the Judge said where it may be apparent that the principal is not in default.

Alpha argued that this was an on-demand bond and that their certifi cate as to what was payable was conclusive. Vossloh argued that the guarantee was only triggered on proof of a breach of contract by one of the guaranteed parties. The relevant clauses in the guarantee included the stipulation that if any of the guaranteed parties did not pay any “secured obligation” as and when the same was expressed to be due, then Vossloh would forthwith “on demand” pay any such sums which had not been paid at the time such demand is made. There were other references to “on demand.”

As Vossloh was not a bank, this raised a strong presumption that the payment obligations undertaken by it did not constitute a demand bond. However, Alpha stressed the fact that Vossloh’s contractual promises were entered into as a “principal debtor and not merely as surety, as a separate, continuing and primary obligation”. This meant that all the obligations undertaken by Vossloh were primary not secondary obligations. Further, Alpha said that, by clause 6.4, Vossloh was only able to raise defences after it had honoured its payment obligations under clause 2.1.

The Judge disagreed. The guarantee did not give rise to any liability to pay against a mere assertion of breach or failure to pay money. The guarantee assumed that there had been default by the principal in performing the contract or in making payment of a sum that was due. The court agreed with Vossloh and held that the guarantee was not a performance bond. The presumption that a contract is not an on demand bond unless it is issued by a bank was not rebutted here. The wording of the key clause, 2.1, was such that Alpha had, fi rst of all, to establish liability in respect of the sums claimed, before making a call on the bond and the guarantor. The mere use of the words “on demand” were not suffi cient in themselves to establish that the guarantee was in fact “on demand”.