Ultrabulk A/S v Arun Kumar Jagatramka  EWHC 2792 (Comm)
In the recent case of Ultrabulk A/S v Jagatramka (2017), the High Court was asked to determine whether a personal guarantee provided by the defendant company's managing director was indicative of a primary liability or a secondary liability, an important question as the guarantor's level of liability would vary in accordance with the answer. Here, the court held that the personal guarantee was a primary liability equivalent to an on demand bond.
Primary liability v secondary liability
A promise by a surety to a beneficiary to fulfil the obligations of a third party, if that third party fails to do so, can take the form of a primary or secondary liability:
a primary liability (for example an indemnity or a performance bond) is independent of the obligations of the third party which means that if the underlying transaction is set aside for any reason, the primary liability remains valid and cannot rely on the defences available to the third party; and
a secondary liability (for example a guarantee), mirrors the obligations of the third party under the primary contract which means that if the underlying transaction is set aside for any reason, the beneficiary can be prevented from claiming performance as the guarantee is dependent on the primary obligation.
Ultrabulk, a Danish company which operates and charters ships, had entered into two agreements with Gujarat NRE Coke Limited (Gujarat), a coke producer in India. Mr Jagatramka (Mr J) was the director of Gujarat. Gujarat was indebted to Ultrabulk in the sum of US$4.25m and, therefore:
it was agreed that Gujarat would pay the outstanding debt in instalments by December 2013; and
a personal guarantee was provided by Mr J stating that he was aware of Gujarat's debt to Ultrabulk in the sum of US$4.25m (the Gujarat Liabilities) in the following terms:
"NOW, therefore, I, the Guarantor, hereby unconditionally and irrevocably guarantee that if for any reason Gujarat do not repay the Gujarat Liabilities latest by 31 December 2013 then I will on the Beneficiary's first written demand from the Beneficiary, pay a sum equivalent to the Gujarat Liabilities plus the interest"
In June 2015, Ultrabulk demanded the sum of US$4.25m plus interest under the Personal Guarantee but Mr J failed to pay any part of that sum. At the time that Ultrabulk demanded payment under the personal guarantee, Gujarat had already paid US$1.95m towards the guaranteed liabilities.
Was the personal guarantee an on demand primary liability or was the guarantee a secondary liability co-existent with Gujarat's liability? In other words, was Mr J obliged to pay the sum equivalent to US$4.25m (as a primary obligation) or was that sum reduced by US$1.95m (as a co-existent secondary obligation)?
On a true construction of the personal guarantee, it was held to be a primary liability on demand bond, and, providing a valid demand was made, then Mr J was bound to pay a sum equal to US$4.25m, and not the lesser amount that Gujarat was liable to pay at that time.
The Court focussed mainly on the language of the personal guarantee:
Mr J agreed to pay "a sum equivalent to" the "Gujarat Liabilities", defined as US$4.25 million (not an amount equivalent to Gujarat's liability at the material time);
Mr J "unconditionally and irrevocably" guaranteed that if Gujarat did not pay the Gujarat Liabilities by December 2013, then Mr J would, on demand, pay a sum equivalent to the Gujarat Liabilities; and
Mr J "irrevocably confirm[ed] that he [would] not contest and/or defend any application and/or proceedings to enforce" the guarantee. Again, such language was consistent with a primary liability and inconsistent with his liability being co-existent with that of Gujarat.
It should be noted that neither the title of the document, nor the party name, will determine whether it is a classic guarantee - documents described as guarantees may actually be guarantees and/or indemnities and/or performance bonds. The language of the document must be absolutely clear as to whether a guarantee or an indemnity or a performance bond is being given.
This case provides further evidence that primary liability performance bonds will be interpreted strictly, in accordance with their terms, and that the beneficiary is under no obligation to prove damages caused by breaches of the underlying contract. The Court will look at the true construction of a guarantee, and a surety will be unable to rely on a presumption against on demand bonds being given by individuals. If a surety has not obtained independent legal advice, then this will not preclude the beneficiary from relying on the guarantee.
Should the beneficiary require the benefit of a primary liability, and wish to avoid reliance on secondary, co-existent liability, then clear wording should be used in the guarantee, for example, by inserting a clear obligation on the surety to pay an identifiable sum, immediately, "unconditionally and irrevocably".