Guarantee enforceable ‘on demand’

Posted: 19th December 2012

shipIn the context of a very substantial shipbuilding contract, the Court of Appeal has ruled that a bank’s guarantee, which underpinned the buyer’s timely payment of instalments, was enforceable ‘on demand’ whether or not liability to pay the relevant sum had in fact been established.

The bank had issued a guarantee at the behest of the buyer that an instalment of more than US$10 million would be paid to the seller on receipt of certification that the first steel plate of a bulk carrier vessel had been cut in the seller’s workshop. Such a certificate was provided and, when the money was not paid, the seller sought to enforce the guarantee against the bank.

The bank disputed that the instalment had in fact been due on various grounds, including that the cutting of the first steel plate had not been witnessed by an agent of the buyer. The bank denied any obligation to pay under the guarantee until liability to pay the instalment had been established on evidence by the seller.

The bank’s arguments succeeded at first instance. However, in allowing the seller’s appeal, the Court of Appeal ruled as a matter of interpretation that the guarantee took effect as an ‘on demand bond’ that had to be fulfilled forthwith regardless of any on-going disputes between the parties as to liability.

Although it was common ground that the shipbuilding contract has come to an end, there were continuing disputes between the parties as to how that had happened. Both buyer and seller claimed that the other party was in repudiatory breach and that they had cancelled or rescinded the contract in consequence. Whether or not the instalment was in fact due is also in dispute; however, the Court of Appeal’s ruling means that the bank’s guarantee must be honoured prior to the resolution of those matters.