A case in which advance payment guarantees, often a feature of construction projects, are in the spotlight.
An employer may provide a contractor with funds to buy materials or machinery, obtaining an advance payment guarantee in respect of those funds. Advance payment guarantees can be either primary (‘on demand’) or secondary (‘see to it’) obligations.
Autoridad del Canal de Panama (ACP), a Panamanian public corporation, was appointed to operate and manage the Panama Canal.
The decision was taken to substantially widen the canal to permit a third lane of traffic and to double the cargo capacity of the waterway. This required the construction of a third set of locks. ACP put the project out to tender in 2007; a consortium consisting of Spanish, Belgian, Panamanian and Italian companies bidded for the project and won. It subsequently became necessary for the contractor to be a Panamanian company and so the consortium set up a new company, Grupo Unidos por el Canal SA (GUPC), and the construction contract was transferred to it. In June 2016, the enlarged canal commenced operations.
However, during the construction phase, in mid-2012, GUPC ran out of money and asked ACP to make some advance payments on the basis that an advance payment guarantee governed by Panamanian law be extended by the consortium companies in favour of ACP. Further advance payment guarantees subject to English law in favour of ACP were entered into in June 2015 and February 2016, relating to the existing advance payments.
The advance payments were not repaid on the agreed deadlines.
Numerous disputes between the parties were already being dealt with by way of ICC arbitration in Miami. However, ACP then commenced separate proceedings, applying for summary judgment in the High Court in connection with the advance payments and the related guarantees. Its case for summary judgment rested on the premise that the advance payment guarantees were first demand instruments. The claim amounted to approximately US$288 million.
There was another application before the court for a stay, but this is not considered here.
ACP argued that the guarantees, like performance bonds, should have been paid upon presentation/demand; GUPC had no real prospect of successfully defending the claim; and summary judgment was therefore appropriate.
It contended that:
- the parties had intended the advance payments and related guarantees to stand apart from the main construction contracts.These were entered into at a time when disputes had already arisen in respect of the main contracts, with arbitration proceedings ongoing in Florida. Both parties knew that these underlying disputes would not be resolved by December 2016, the repayment date set in respect of the advance payments. There were already separate Panamanian law ‘see to it’ guarantees in place between the parties which covered the disputed payments and guarantees. If the advance payment guarantees were not first demand instruments, and not intended to be so by the parties, why enter into them?
- in clause 2.1, the advance payment guarantees stated that the guarantor was contracting ‘as primary obligor and not as surety’
- the ‘Guaranteed Amount’ was narrowly defined, leaving no uncertainty as to the calculation of the sums to be paid – this was simply the relevant advance payment less anything secured by a letter of credit
- the words ‘unconditionally and irrevocably’ were included
- payment had to be made within 14 days of demand
- ACP was entitled to make a ‘conclusive determination’ of the amounts due under the guarantees, consisting of principal and interest.
The law concerning unconditional bonds/guarantees
The court had to decide whether the advance payment guarantees were secondary obligations (under which the guarantor’s liability was co-extensive with the debtor) or demand bonds. Blair J gave a helpful summary of the law:
- a first demand bond was “in principle autonomous of the underlying contract”, being similar to a letter of credit (Edward Owen Engineering Ltd v Barclays Bank International Ltd  QB 159; Meritz Fire and Marine Insurance Co Ltd v Jan de Nul NV  1 All ER (Comm) 1049)
- the practical question to be answered was whether the instrument was “effectively payable on demand” (Marubeni Hong Kong and South China Ltd v Mongolian Government  WLR 2497)
- advance payment guarantees securing advance payments made by an employer to a contractor could be either a guarantee or a performance bond, depending on its terms
- there was “a presumption against construing an instrument as a demand bond” when it had not been given by a bank/financial institution (Marubeni and IIG Capital LLC v Van der Merwe  EWCA Civ 542)
- an instrument would “almost always be construed as a demand guarantee” when it related to an underlying transaction where the parties were in different jurisdictions; it was payable ‘on demand’; it was issued by a bank/financial institution; it did not include the usual protective guarantee-type clauses (Gold Coast Ltd v Caja de Ahorros Del Mediterraneo  1 Lloyd’s Report 231; Wuhan Guoyu Logistics Group Co v Emporiki Bank of Greece SA (No 1)  1 Lloyd’s Rep 273; Caterpillar Motoren GmbH & Co KG v Mutual Benefits Assurance Company  EWHC 2304 (Comm))
- a provision requiring payment by the guarantor against certification by the beneficiary was “likely to be inconsistent with” a ‘see to it’ guarantee
- the incorporation of the Uniform Rules For Demand Guarantees was “likely to be determinative”.
Blair J found in favour of the defendants:
- the Panamanian law guarantees, acknowledged by both parties as ‘see to it’ guarantees, were drafted in very similar terms
- the words making GUPC ‘primarily liable’ merely begged the question of the nature of that primary liability. It was still necessary to decide whether the guarantees were, in accordance with their terms, payable on first demand
- the words ‘unconditionally and irrevocably’, ‘forthwith’ and ‘upon demand’ were neutral, being found in both guarantees and demand bonds
- the presence of protective language pointed towards the instrument being a ‘see to it’ guarantee
- the fact that GUPC was obliged to pay ‘as and when due pursuant to the Contract’ was ‘important’ and was characteristic of a contract of suretyship
- GUPC was obliged to perform the obligations of ACP ‘according to the terms’ of the contract. Blair J noted that this was “not the language of first demand liability”
- ACP was empowered to certify the quantum outstanding, but this did not enable it to make any judgment on whether GUPC was liable to pay
- The ‘conclusive determination’ provision only entitled ACP to determine the principal payable under the guarantees, not the interest
- the fact that English governing law and the jurisdiction of the High Court had been chosen did “not point one way or the other as to the nature of the instruments as first demand instruments”.