The Commercial Court (Knowles J) has handed down judgment in a preliminary issues trial concerning the proper characterisation of a shipbuilding guarantee: Shanghai Shipyard Co Ltd v Reignwood International Investment (Group) Company Limited  EWHC 803 (Comm).
The principal issue was whether the guarantee was a traditional “see to it” guarantee imposing a secondary liability on Reignwood, or a “demand bond”, entitling the Shipyard to payment on demand. This issue continues to arise in a large number of cases, so the decision provides welcome further guidance on the correct approach.
The guarantee was given by Reignwood to the Shipyard to secure payment of the final instalment by its subsidiary under a shipbuilding contract between the subsidiary and the Shipyard. The final instalment (US$170m) was payable upon delivery of a drillship. However, a dispute arose between the Shipyard and the subsidiary under the shipbuilding contract over whether the final instalment was due, which is subject to LMAA arbitration. Reignwood refused to make payment under the guarantee pending resolution of that arbitration, on the basis it was a “see to it guarantee”, not a demand bond.
In his judgment, Knowles J applied the presumption – from Marubeni Hong Kong and South China Ltd v Government of Mongolia  1 WLR 2497 – that outside the banking context (which this case was), there is a strong presumption against interpreting an instrument as a demand bond.
He also recognised (but did not apply) what has become known as “Paget’s presumption”, from Paget’s Law of Banking (15th ed), which holds that where an instrument (i) relates to an underlying transaction between parties in different jurisdictions, (ii) is issued by a bank or other financial institution, (iii) contains an undertaking to pay ‘on demand’ (with or without the words ‘first’ and/or ‘written’) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand bond. This presumption was applied by the Court of Appeal in Wuhan Guoyo Logistics Group v Emporiki Bank of Greece  1 Lloyd’s Rep 266, in which Longmore LJ described it as a tool to obviate the need for citation of reams of authority, and to try to achieve consistency.
Factor (ii) was absent in this case, since Reignwood is not a bank or financial institution. Knowles J considered that in the absence of factor (ii), cogent indications that the instrument was intended to operate as a demand bond were necessary, since the other three factors were “not necessarily a powerful combination” to point towards primary liability. There was no cogent indication in the words of the guarantee. Paget’s presumption did not apply, and the instrument was held to be a “see to it” guarantee.
Harry Wright acted for the successful Defendant, Reignwood, led by Zoe O’Sullivan QC (of Serle Court). They were instructed by Onside Law LLP.
Please view the full judgment here.