LLP Shanghai Shipyard Co. Ltd. v Reignwood International Investment (Group) Company Ltd

[2021] EWCA Civ 1147

This was an appeal about the construction of a guarantee given to support the obligation of a buyer to pay the final instalment of the price under a Shipbuilding Contract. Was the guarantee in question a demand guarantee, such that the Guarantor’s liability thereunder arose upon and by reason of the Demand, or was it a  “see to it” guarantee or a conditional payment obligation, such that the Guarantor’s liability thereunder arose upon the Demand only if the Buyer was liable to pay the Final Instalment under the terms of the Contract.

LJ Popplewell in the CA reminded the parties that, where the debt or performance obligation arises under a contract between the obligor/debtor and obligee/creditor, the essential feature of such a guarantee, for present purposes, is that the liability of the guarantor depends upon there being a liability of the obligor/debtor. Such guarantees, however, sometimes describe the guarantor’s obligations as those of a primary obligor, to make clear that the default of the obligor gives rise to an independent and primary liability of the guarantor, who is liable and in breach of his obligation by the very fact of default by the obligor without more; hence the “see to it” characterisation of the guarantor’s obligation. 

Alternatively, security for performance of a payment obligation may be provided by an undertaking to pay a sum on demand, or within so many days of a demand, irrespective of whether the obligor/debtor is under a liability to make the payment. These undertakings are also commonly termed guarantees, but their defining characteristic is that they are payable on or by reference to an event, namely the demand, and without reference to the obligor’s liability. The demand may have to be in prescribed form, and/or may have to be accompanied by prescribed documents, but it is the demand which triggers the liability to pay. The defining characteristic of a demand guarantee, for present purposes, is that the guarantor’s obligation to pay arises by reason of the demand, without the beneficiary having to establish a liability of the obligor.

Here, the CA thought that the critical language which pointed strongly towards the guarantee being a demand guarantee included the following:

(1) The capitalised words “ABSOLUTELY” and “UNCONDITIONALLY” in clauses 1 and 3 would convey to a businessman that the obligations were not conditional on the liability of the Buyer.

(2) The words in clause 1 “[as primary obligor] and not merely as the surety” were  a clear indication that the document was not a surety guarantee. They were at the heart of the obligation.

(3) The words in clause 4 that trigger the obligation “upon receipt by us of your first written demand”. Payment against demand was very the hallmark of a demand guarantee.

(4) The words in clause 4 “[upon receipt by us of your first written demand] we shall immediately pay to you ...”  would not be appropriate in the case of a surety guarantee, in which some period would be needed for the guarantor to investigate and form a view on whether there was an underlying liability to make the final instalment payment under the Shipbuilding Contract.

(5) Clause 7(a), expressly provided that obligations on the Guarantor are to be unaffected by any dispute under the Building Contract. 

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