The crucial question for the beneficiary of a security document, whatever it may be called (bond or guarantee), is “when would a demand under the document actually be payable?” Is it immediately (provided the demand complies with the requirements of the document) – an on-demand bond? Or is it really only after a default under the main contract has actually occurred – a guarantee? On-demand bonds provide better protection for beneficiaries as, subject to fraud or an express and enforceable prohibition on an improper demand in the main contract, the beneficiary must be paid on presentation of his demand. That is so even if there is a real dispute between the parties to as to whether the sum demanded is in fact due. Unfortunately, it is not always immediately clear from the drafting of such documents exactly what they are.

 

The recent case of Wuhan Guoyu Logistics Group Co Ltd Anor -v- Emporiki Bank of Greece SA1 highlights some of the difficulties. The drafting of a security document in a shipbuilding context was so complicated and obscure that High Court and the Court of Appeal came to different conclusions as to what it really was. The High Court said that it was a guarantee but the Court of Appeal said it was an on-demand bond.

Obviously, the decision of the Court of Appeal prevails and it made it clear that, in future, the answer to the question of “on-demand bond or guarantee?” will usually be settled by applying a legal presumption.

The presumption is that, where an instrument complies with the following four matters, it will “almost always” be an on-demand bond:

 

  • where it relates to an underlying transaction between parties based in different jurisdictions;
  • is issued by a bank;
  • contains an undertaking to pay “on demand”; and (iv)does not contain clauses excluding or limiting the defences available to a guarantor.
  • contains an undertaking to pay “on demand”; and (iv)does not contain clauses excluding or limiting the defences available to a guarantor.

The presumption will obviously have most relevance to security documents issued in relation to international construction projects when the employer and contractor come from different countries.

 

For domestic projects, it may still be relevant, however, even if the parties are both based in England. The Court of Appeal has previously found (in Gold Coast Ltd -v- Caja de Ahorros2) a document to be an on-demand bond where only one of the matters referred to in the presumption was missing (in that case, item (iv) above).

 

Sometimes, at least two of the four matters may be missing – for example, if both parties are from the same country and the bond is given by an entity which is not a bank. In these circumstances, the answer to the crucial question “bond or guarantee?” will depend upon the actual wording of the document. Particularly so since the Court of Appeal has also stated (in IIG Capital LLC -v- Van Der Merwe3) that, outside the banking context, there is a strong presumption against security documents being treated as on-demand bonds.

 

To make the answer free from doubt, if a beneficiary wants an on-demand bond, the document should be called a bond, the main obligation should be a primary obligation to pay on first written demand and it should not include a clause which excludes or limits the defences available to a guarantor under a guarantee. Lord Justice Longmore in the Court of Appeal made it clear that “everything must in the end depend on the words actually used by the parties“.

 

Notes:

1     [2012] EWCA Civ 1629.

2     [2002] 1 Lloyd’s Rep 617.

3     [2008] EWCA Civ 542.

 

This article was originally written and published on the internet by Ashurst in January 2013.

 

This article is intended to provide general information about legal topics. Nothing in this article or in the documents available through it, is intended to provide legal advice. You should not rely on any information contained in this article, or in the documents available through it, as if it were legal advice.

 

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