Article

Factual Summary: In order to facilitate the sale of locomotives to a group of inter-related companies (Buyers), the ultimate parent (Parent Guarantor) of another group of companies who were in the business of buying, selling, manufacturing, and servicing locomotives, provided a series of undertakings entitled "Guarantee" to a member of the inter-related companies (Beneficiary). The most recent of these undertakings was characterized by the Judge as the "2009 Guarantee". By its terms which are reproduced from the court decision at the end of this abstract, it was made subject to the law of England.

When 63 cargo locomotives developed defects in their engines and gearboxes, Beneficiaries notified Parent Guarantor of their claim. They also sent two demand letters to Parent Guarantor, the latter of which demanded payment of GB£,17,267,354, claiming that the 2009 Guarantee was an independent demand guarantee.

Beneficiary admitted that at the time of the hearing, the funds were being spent on repairs, and that it would be unable to repay the funds to Guarantor once they were expended. The Judge noted that the dispute regarding the underlying contract involved both liability and amount involved technical issues which would require expert testimony.

Contending that it was entitled to assert defenses, Parent Guarantor sued Beneficiary in England seeking judicial construction of the 2009 Demand Guarantee. The High Court Chancery Division, Blackburne, J., ruled that the 2009 guarantee was not an independent demand guarantee.

Legal Analysis:

The Judge surveyed English law regarding the abstraction of undertakings guaranteeing payment or performance. His analysis is reprinted following this abstract. He concluded that the question was whether the 2009 Guarantee was "primary" or "secondary" and, if primary, whether it was "enforceable merely on demand (as with a performance or demand bond) or conditional on proof of default by [Guarantor] or on satisfaction of some other event or requirement." The Judge also noted the case law presumption against construing an undertaking by a non-bank entity as a "demand bond" exemplified by the decision of the court in Marubeni Hong Kong v. Government of Mongolia, [2005] EWCA (Civ) 395, All ER 117, abstracted in the 2006 Annual Survey of Letter of Credit Law & Practice at 394.

Noting that the 2009 Guarantee was issued by a non-bank, the Judge concluded that "[v]iewing the instrument as a whole [he did] not consider that the presumption against construing it as a demand bond has been rebutted." The factors mentioned by the Judge included the fact that the undertaking is "unlimited in amount and duration and can be the subject of multiple demands . . . the fact that there is no express right of recourse . . . to enable [Parent Guarantor], having satisfied a demand, to effect any recovery from the person primarily liable, the fact that . . . a demand can come from such a wide range of persons and the fact that the benefit of the instrument is expressed . . . to be assignable to any person."

Beneficiary claimed that the language of earlier drafts of the guarantee agreement would lead to the conclusion that it should be construed as a demand bond. The Judge disagreed, stating that "it is not a permissible approach to the construction of an agreement to draw comfort from, let alone be guided by, an earlier and different agreement which the latter agreement has replaced".

The Judge noted that the 2009 Guarantee assumes a default by Guarantor and, therefore, cannot be construed as giving rise to pay a liability on the mere assertion by Beneficiary. The language preserves Beneficiary's liability along with that of the Guarantor. He pointed out that under the 2009 Guarantee, the duty of Guarantor to indemnify Beneficiary would arise from a court of law and not from the at-will demand of the Beneficiary.

Comment:

This decision illustrates why it was a monumental mistake on the part of the English bankers to turn to lawyers in labeling undertakings for transactions other than the sale of goods as "guarantees". It is difficult to imagine anything more confusing than the state of the law as described by the Judge in this opinion. It staggers the imagination that £17 million could be at issue in an undertaking that required a judicial interpretation to determine whether or not it is independent.

Had a standby letter of credit been used, there would have been little or no question as to what was intended unless the undertaking was essentially non documentary in that it was payable only on ascertaining the occurrence of a non documentary event. Moreover, if the undertaking had been subject to rules of practice such as ISP98, UCP600, or URDG 458, the classification of the undertaking would have been apparent.

How then can there arise at least 15 reported court cases annually in which the question of classification is at issue?

There are several possible explanations.

One is that the parties were playing games with each other. The beneficiary wants an independent undertaking and the principal does not want to give one. As a result, they compromise on terms that are inherently ambiguous. If this answer is correct, then the beneficiary deserves to end up in court.

Another explanation is that the attorneys drafting the undertaking are following a template for Suretyship guarantees but pushing the borders of independence by drafting strange clauses (conclusive evidence being the latest) rather than by starting at the other (and correct) end, namely starting with a template for an independent undertaking. Such tactics may be good for legal fees (the attorneys make money drafting and even more litigating), but they are bad for business since they produce uncertainty which, in the long run, is expensive to everyone.

Whatever the explanation, beneficiaries should wake up and realize that guarantees, whatever they may provide, do not give them the certainty that they desire if they want an independent undertaking. Some people may think that guarantees are a reliable form of giving an independent undertaking because so many governments insist on using them. There is a difference, however, between a government beneficiary of an undertaking issued by an entity that is subject to jurisdiction in that government's own courts and a similar undertaking issued to a nongovernmental beneficiary. Even if one were to attempt to raise defenses against a simple demand on the former, they would not be given effect. With respect to the latter, however, whether defenses can be asserted depends on how the undertaking is classified, which as this opinion asserts, is a matter of judicial interpretation (read: crap shoot).

Treasury, risk managers, and corporate counsel should recognize that any undertaking longer than one or two pages and containing legalese that tries to clarify what is the legal character of the undertaking is an invitation to litigation. Its value should be compared to using a check or draft and attempting to write out the doctrine of negotiability on it instead of making an order or promise to pay a certain sum of money to the order of a named person or to bearer. Six or seven pages of legalese would probably not achieve what the simple words "Pay to the order of ___ the sum of ___" or "I promise to pay ___ to the order of ____."

Text of 2009 Guarantee: The opinion contained the following "material terms" of the 2009 Guarantee at paragraph 35:

"1.1 Definitions

In this Guarantee (including the recitals), except where the context otherwise requires:

Angel Trains Group means Angel Trains and its Affiliates.

Beneficiary means each member of the Angel Trains Group from time to time and their respective agents, assigns, directors, employees, officers, secondees and servants. Beneficiaries shall be construed accordingly.

Call Off Notice means together each German Call Off Notice and Spanish Call Off Notice and includes a reference to any of them.

German Call Off Notice means each contract for the sale and purchase of, as applicable, locomotives and other items as contemplated by the German MPA

Guaranteed Party means [VL], Vossloh Espana S.A.U. and each other member from time to time of the Guarantor Group.

Guarantor Group means the Guarantor and its Affiliates.

Parties means the parties to this Guarantee.

Relevant Document means each of (a) the German MPA;

(b) each German Call Off Notice;

(c) the Spanish MPA;

(d) each Spanish Call Off Notice; and

any other agreement for the sale and purchase of locomotives and/or related items entered into between any member of the Angel Trains Group and any member of the Guarantor Group, from time to time.

and all notices, consents, certificates and other documents from time to time issued pursuant to or in connection with any of the above and all other agreements, letters and documents designated as such by the Parties and Relevant Documents shall be construed accordingly.

Secured Obligations means any and all present and future monies, liabilities and obligations (whether for the payment of money or otherwise and whether actual or contingent and whether owed jointly or severally or in any other capacity whatsoever) owed by any member of the Guarantor Group to a Beneficiary under or in connection with any Relevant Document. References to Secured Obligations shall include references to any part thereof.

Spanish Call Off Notice means each contract for the sale and purchase of, as applicable, locomotives and other items as contemplated by the Spanish MPA

1.2 Interpretation

Except where the context otherwise requires, in this Guarantee:

(j) references to the obligations guaranteed under this Guarantee shall include a reference to indemnified obligations.

2. GUARANTEE AND INDEMNITY

2.1 In consideration of the Angel Trains Group placing orders under any Call Off Notice the Guarantor hereby unconditionally and irrevocably as a continuing obligation and as principal debtor and not merely as surety, as a separate, continuing and primary obligation:

(a) guarantees to each Beneficiary the due and punctual observance and performance by each Guaranteed Party of each obligation owed by such Guaranteed Party to that Beneficiary contained in the Relevant Documents to which that Guaranteed Party is a party;

(b) guarantees to each Beneficiary the due and punctual payment by each Guaranteed Party of all of its Secured Obligations;

(c) undertakes with each Beneficiary that whenever a Guaranteed Party does not pay any of the Secured Obligations as and when the same shall be expressed to be due, the Guarantor shall forthwith on demand pay such Secured Obligations which have not been paid at the time such demand is made,

(d) as a separate and independent stipulation, agrees that if any purported obligation or liability of the Guaranteed Party which would have been the subject of this Guarantee had it been valid and enforceable is not or ceases to be valid or enforceable against a Guaranteed Party on any ground whatsoever whether or not known to any Beneficiary, the Guarantor shall nevertheless be liable to the relevant Beneficiary in respect of that purported obligation or liability as if the same were fully valid and enforceable and the Guarantor was the principal debtor in respect thereof and shall be paid or caused to be paid by the Guarantor under this Guarantee upon demand; and

(e) as principal obligor and as a separate and independent obligation and liability, indemnifies each Beneficiary against any losses suffered by it from time to time in connection with or as a direct or indirect result of the failure of a Guaranteed Party to duly and punctually perform its terms, representations and warranties, conditions, covenants and obligations contained in the Relevant Documents to which it is a party or failure to duly and punctually pay the Secured Obligations or as a result of the whole or any part of the Relevant Documents being or becoming void, voidable, unenforceable or ineffective as against that Beneficiary for any reason whatsoever, irrespective of whether such reason or any related fact or circumstance was known or ought to have been known to that Beneficiary.

3. PAYMENTS

3.1 All sums payable hereunder shall be paid on demand to such bank account as may be specified in any demand made by a Beneficiary hereunder, in immediately available funds, free of any restriction or condition and free and clear of and without any deduction or withholding, whether for or on account of tax, by way of set off or otherwise, except to the extent required by law.

4. CONTINUING GUARANTEE

This Guarantee shall be effective from the date hereof. The guarantee constituted by this Guarantee shall be continuing and shall extend to the ultimate balance of the Secured Obligations and to the performance in full of all obligations guaranteed hereunder, regardless of any intermediate payment or discharge in whole or in part or performance in part.

5. DISCHARGE AND RELEASE

5.1 The Guarantor may not terminate this Guarantee by notice to any Beneficiary or otherwise.

6. WAIVER OF DEFENCES

6.l The liabilities and obligations of the Guarantor under this Guarantee shall remain in force notwithstanding any act, omission, neglect, event or matter whatsoever whether or not known to the Guarantor, any Guaranteed Party or any Beneficiary (other than the irrevocable payment of the Secured Obligations to a Beneficiary and the full performance of all obligations guaranteed hereunder) and the foregoing shall apply, without limitation, in relation to:

(a) anything which would have discharged the Guarantor (wholly or in part) whether as surety, co obligor or otherwise or which would have afforded the Guarantor any legal or equitable defence;

(b) any winding up, dissolution, reconstruction or reorganisation, legal limitation, disability, incapacity or lack of corporate power or authority or other circumstances of, or any change in the constitution or corporate identity or loss of corporate identity by, the Guaranteed Party or any other person connected with Guaranteed Party or the Guarantor; and

(c) anything which renders the Guaranteed Party's obligations void, invalid or unenforceable under the Relevant Documents and any defence or counterclaim which the Guaranteed Party may be able to assert against a Beneficiary or affects a Beneficiaries ability to recover amounts from the Guaranteed Party.

6.2 Without limiting Clause 6.1, none of the liabilities or obligations of the Guarantor under this Guarantee shall be impaired by any Beneficiary:

(a) agreeing with a Guaranteed Party any amendment, variation, assignment, novation or departure (however substantial or material) of, to or from a Relevant Document so that any such amendment, variation, assignment, novation or departure (including any which may have been made before the signing of this Guarantee) shall, whatever its nature, be binding upon the Guarantor in all circumstances, notwithstanding that it may increase or otherwise affect the liability of the Guarantor;

(b) releasing or granting any time or any indulgence of any kind to the Guaranteed Party or any third party (including, without limitation, the waiver of any preconditions for drawing under, or of any breach of, any Relevant Document, or entering into any transaction or arrangements whatsoever with or in relation to a Guaranteed Party and/or any third party;

(c) taking, accepting, varying, dealing with, enforcing, abstaining from enforcing, surrendering or releasing any security, right of recourse, set off or combination or other right or interest held by a Beneficiary for the Secured Obligations and the other obligations guaranteed hereunder or in relation to any Relevant Document in such manner as it or they think fit;

(d) claiming, proving for, accepting or transferring any payment in respect of the Secured Obligations and the other obligations guaranteed hereunder in any composition by, or winding up of, a Guaranteed Party and/or any third party or abstaining from so claiming, proving for, accepting or transferring;

(e) any termination of a Relevant Document;

(f) any act or omission of a Guaranteed Party pursuant to any agreement with the Guarantor or otherwise; or

(g) any other circumstance, matter or thing which (in the absence of this provision) would or might have that effect, except a discharge or amendment of this Guarantee expressly made or agreed to by Angel Trains in writing.

6.3 The Guarantor hereby waives any right it may have of first requiring a Beneficiary to proceed against or enforce any other rights or security or claim payment from any person (including each Guaranteed Party) before claiming from the Guarantor under this Guarantee.

6.4 Subject to the terms of this Guarantee, and in particular this Clause 6, the Guarantor shall be entitled to raise such defences which are available to the Guaranteed Party under the Relevant Document only after the Guarantor has complied with Clause 2.l of this Guarantee. However the Guarantor is not entitled to refuse payment or performance based on this right to reclaim.

7. DEMANDS

Demands under this Guarantee may be made from time to time, and the liabilities and obligations of the Guarantor under this Guarantee may be enforced, irrespective of

(a) whether any demands, steps or proceedings are being or have been made or taken against the Guaranteed Party and/or any third party; or

(b) whether or in what order any security to which a Beneficiary may be entitled in respect of the Secured Obligations and the other obligations guaranteed hereunder is enforced.

11. MISCELLANEOUS PROVISIONS

11.1 This Guarantee is not personal to Angel Trains and may be assigned by Angel Trains to any person, firm or company, provided that Angel Trains shall notify the Guarantor in writing of such assignment, whereupon the Guarantor shall be obliged to make any payment demanded under this Guarantee to the person, firm or company specified in such notice and such payment shall constitute a full and valid discharge of the Guarantor in relation to that payment. The Guarantor is not entitled to transfer, novate or assign any of its obligations under this Guarantee.

11.2 A certificate of a Beneficiary setting forth the amount of any Secured Obligations not then paid by a Guaranteed Party shall be conclusive evidence of such amount against the Guarantor in the absence of any manifest error.

11.3 No failure or delay by a Beneficiary in exercising any right or remedy provided by law under or pursuant to this Guarantee shall impair that right or remedy or operate or be construed as a waiver or variation of it or preclude its exercise at any subsequent time and no single or partial exercise of that right or remedy shall preclude any other or further exercise of it or the exercise of any other right or remedy.

12. GOVERNING LAW AND JURISDICTION

12.1 This Guarantee is governed by and shall be construed in accordance with, English law . . ."

Judge's Analysis:

The following excerpt is Judge Blackburne's survey of English law on the classification of independent guarantees and their distinction from dependent guarantees and other undertakings:

The law

19. Before coming to the 2009 Guarantee I set out my understanding of the relevant law, starting with some general observations. In the summary that follows I have drawn from the section headed "In general" in chapter 44 (on suretyship) in volume 2 of Chitty on Contracts, 30th edition, and from chapter 1 of Andrews and Millett on the Law of Guarantees, 5th edition. The propositions which I set out accord with my experience of the law in this area and, in any event, are extensively supported by authority in the footnotes to both books. I am mindful of the fact that Ms Andrews is the co-author of the second of those textbooks.

20. Contracts of suretyship, of which the 2009 Guarantee is an example, are an area of law bedevilled by imprecise terminology and where therefore it is important not to confuse the label given by the parties to the surety's obligation (although the label may be indicative of what the parties intend) with the substance of that obligation. Because the parties are free to make any agreement they like, each case must depend upon the true construction of the actual words in which the surety's obligation is expressed. This involves "construing the instrument in its factual and contractual context having regard to its commercial purpose", a task which the court approaches "by looking at it as a whole without any preconception as to what it is." See Tuckey LJ in Gold Coast Ltd v Caja de Ahorros Del Mediterraneo [2002] EWCA Civ 1806, [2002] 1 Lloyd's Rep 231 at [10] and [15]. Further, as Ms Andrews observed, the court must endeavour to avoid a construction which renders a clause otiose or duplicative.

21. A contract of suretyship is in essence a contract by which one person, the surety, agrees to answer for some existing or future liability of another, the principal (or principal debtor), to a third party, the creditor, and by which the surety's liability is in addition to, and not in substitution for, the liability of the principal. Even the use of the expressions "creditor" and "debtor" (as in "principal debtor") can be misleading: the liability which is "guaranteed" may consist of the performance of some obligation other than the payment of a debt, and it does not have to be a contractual liability.

22. Contracts of suretyship fall into two main categories: contracts of guarantee and contracts of indemnity. Because they have many similar characteristics, and similar rights and duties arise between the parties, it is not unusual to find the term "guarantee" used loosely to describe what is in reality an indemnity.

23. A contract of guarantee, in the true sense, is a contract whereby the surety (the guarantor) promises the creditor to be responsible for the due performance by the principal of his existing or future obligations to the creditor if the principal fails to perform them or any of them. Depending on its true construction, the obligation undertaken by the surety may be no more than to discharge a liability, for example a particular debt, if the principal does not discharge it so that if for any reason the principal ceases to be liable to pay that debt (it may have been discharged and replaced by some other debt or liability) the surety will not come under any liability to the creditor. The surety's liability in such a case is conditional upon the principal's failure to pay the particular debt so that if the condition is fulfilled the surety's liability will sound in debt. In contrast to that is the more usual case (sometimes referred to as a "see to it" guarantee) where, on the true construction of the contract, the surety undertakes that the principal will carry out his contract and will answer for his default. In such a case, if for any reason the principal fails to act as required by his contract he not only breaks his own contract, but he also puts the surety in breach of his contract with the creditor, thereby entitling the creditor to sue the surety, not for the unpaid debt, but for damages. The damages are for the loss suffered by the creditor due to the principal having failed to do what the surety undertook that he would do. See Moschi v Lep Air Services Ltd. [1973] AC 331 at 344 to 345 (Lord Reid).

24. An essential distinguishing feature of a true contract of guarantee B but not its only one - is that the liability of the surety (i.e. the guarantor) is always ancillary, or secondary, to that of the principal, who remains primarily liable to the creditor. There is no liability on the guarantor unless and until the principal has failed to perform his obligation. The guarantor is generally only liable to the same extent that the principal is liable to the creditor. This has the consequence that there is usually no liability on the part of the guarantor if the underlying obligation is void or unenforceable, or if the obligation ceases to exist (to which principle B the so-called principle of co-extensiveness - there are, however, a number of exceptions). It will depend upon the terms of the contract of suretyship whether a demand must be made on the principal or on the guarantor (or on both) in order to trigger the guarantor's obligation to pay. Many modern guarantees expressly negative the need for the creditor to make a demand on the principal or on the guarantor or to take any other given step before enforcing the guarantee.

25. In contrast to the contract of guarantee is the contract of indemnity. In one sense all contacts of guarantee (strictly so called) are contracts of indemnity (as indeed are many contracts of insurance) since, in its widest sense, an indemnity is an obligation imposed by operation of law or by agreement of the parties. In the narrower sense in which, in the current context, the expression occurs, a contract of indemnity denotes a contract where the person who gives the indemnity undertakes his indemnity obligation by way of security for the performance of an obligation by another. Its essential distinguishing feature is that, unlike a contract of guarantee (strictly so called), a primary liability falls upon the giver of the indemnity. Unless (as is quite possible) he has undertaken his liability jointly with the principal, his liability is wholly independent of any liability which may arise as between the principal and the creditor. It will usually be implicit in such an arrangement that as between the principal and the giver of the indemnity, the principal is to be primarily liable, so that if the indemnifier has to pay first he has a right of recourse against the principal. (It will not be so if, for example, the indemnifier has not undertaken his indemnity obligation at the request of the principal.) It is this feature which leads to the person giving the indemnity to be described as a "surety" although, strictly, the contract of indemnity cannot itself be a contract of suretyship.

26. The fact that the obligation to indemnify is primary and independent has the effect that the principle of co-extensiveness does not apply to a contract of indemnity. The indemnity not only shifts the burden of the principal's insolvency on to the indemnifier but it also safeguards the creditor against the possibility that his underlying transaction with the principal is void or unenforceable. It also prevents the discharge of the principal or any variation or compromise of the creditor's claims against the principal from necessarily affecting the liability of the indemnifier under his contract with the creditor. Otherwise, the rights and duties of the parties to a contract of indemnity are generally the same as those of the parties to a contract of guarantee.

27. So much for some of the essential differences. Whether a particular contract of suretyship is of the one kind or the other or, indeed, a combination of the two turns on its true construction. A contract which contains a provision preserving liability in circumstances where a guarantor would otherwise be discharged (for example, the granting of time by the creditor to the principal or a material variation of the underlying contract between the principal and the creditor, without (in either case) the guarantor's consent) will usually indicate that the contract is one of guarantee because such a provision would be unnecessary if the contract were one of indemnity. On the other hand, a provision stating that the surety is to be liable in circumstances where the principal has ceased to be liable (for example, on the principal's release by the creditor) may be indicative either of a guarantee (because the provision would be unnecessary in the case of a contract of indemnity) or of an indemnity (because it makes clear that the liability of the surety was intended to continue regardless of the liability of the principal). See, for example, Clement v Clement, (unreported, Court of Appeal, 20 October 1995). Context is important in deciding what the nature is of the obligation under consideration as even minor variations in language, plus a different context, can produce different results. See IIG Capital LLC v Van Der Merwe [2008] EWCA Civ 542, [2008] 2 Lloyd's Rep 187 ("IIG") at [20] (Waller LJ). But if, in a contract of guarantee (strictly so called), the parties are minded to exclude any one or more of the normal incidents of suretyship "clear and unambiguous language must be used to displace the normal legal consequence of the contract . . ." See IIG at [19] (Waller LJ).

28. This brings me to the so-called "performance bond", sometimes known as a "performance guarantee", often as a "demand bond" or "demand guarantee" or even as a "first demand guarantee". In the context of the present dispute I prefer the expression "demand bond". In essence it is a particularly stringent contract of indemnity. It is a contractual undertaking by a person, usually a bank, to pay a specified amount of money to a third party on the occurrence of a stated event, usually the non-fulfilment of a contractual obligation by the principal to that third party. Sometimes the wording of the contract has the result that the liability of the person who has given the bond arises on mere demand by the creditor, notwithstanding that it may be evident that the principal is not in any way in default or even that the creditor himself is in default under his contract with the principal. It all depends on the wording of the instrument. It is often a difficult question to determine whether, on its true construction, a particular contract which provides for payment on demand is a performance or demand bond (where the obligation to pay is triggered by a demand alone or by a demand accompanied by the provision of specified documents) or whether it is a guarantee (strictly so called) where the obligation to pay is of the "see to it" kind, i.e. conditional on proof by the creditor of default by the principal.

29. A good example of the need to distinguish between the two is provided by the recent decision of the Court of Appeal in Marubeni Hong Kong v Government of Mongolia [2005] EWCA Civ 395, [2005] 2 Lloyd's Rep 255. In that case the claimant sold goods to a Mongolian company for a price payable by instalments. The agreement provided for a document described as a "guarantee" to be issued in a specified form by the Mongolian Central Bank on behalf of the defendant government. In the event a letter in a modified form ("the MMOF Letter") signed on behalf of the Mongolian Ministry of Finance was provided. It stated that in consideration of the sale agreement "the undersigned Ministry of Finance unconditionally pledges to pay to you upon your simple demand all amounts payable under the Agreement if not paid when the same becomes due . . . and further pledges the full and timely performance by the Buyer of all the terms and conditions of the Agreement." An accompanying legal opinion from the Deputy Minister of Justice of Mongolia referred to the "guarantee" and expressed the opinion that the "guarantor" had full power to enter into the "guarantee". The contract in the letter was stated to be governed by English law and that disputes were subject to the jurisdiction of the English court. Goods were supplied under the sale agreement. Various payment rescheduling agreements were later entered into. Following default by the purchaser of the goods to make payments due, one of the questions which arose was whether the obligation of the Mongolian Ministry of Finance had been discharged by the variations to the sale agreement since, it was contended, this had occurred without its consent. The contention assumed that the MMOF Letter constituted a guarantee (strictly so called) and not, as was contended by the claimant seller, a performance bond. Cresswell J held that it was a guarantee and that the defendant government was discharged by the variation to the sale agreement. The government appealed. The appeal failed.

30. In the Court of Appeal Carnwath LJ gave the leading judgment with which the other two members of the court agreed. He felt able (at [23]) to distinguish previous authorities, where the court had found there to be a performance or demand bond, on the basis that performance or demand bonds, however described, "are a specialised form of irrevocable instrument developed by the banking world for its commercial customers" which the courts had accepted as equivalent to irrevocable letters of credit. "It cannot be assumed" he continued "that cases relating to such banking instruments provide any useful guidance when construing guarantees given outside the banking context." He stated ([at 28]) that such cases "provide no useful analogy for interpreting a document which was not issued by a bank and which contains no overt indication of an indication to create a performance bond or anything analogous to it." He pointed out that the MMOF Letter was not a banking instrument and that it was not described, either on its face or in the supporting legal opinion, in terms appropriate to a demand bond or something having similar legal effect. Accepting that the terminology used in the transaction was not conclusive he stated nevertheless (at [30]) that, in a transaction outside the banking context, the absence of such language, created "a very strong presumption" against the existence of such an obligation. He went on (at [31]) to consider whether there were sufficient indications in the wording of the MMOF Letter, to displace the presumption. Notwithstanding the words "unconditionally pledges" and "simple demand" in the words of obligation in the Letter, he observed that the obligation was only to arise if "the amounts payable under the agreement (are) not paid when the same becomes due". He said that there was no reason not to give those words their ordinary meaning and (at [32]) that the pledge of "Ythe full performance and observance by the buyer of all the terms and conditions of the agreement" reinforced that sense. He noted that the Letter contained a primary obligation in the form of an indemnity against cost or damage resulting from the buyer's default but considered that it did not qualify the ordinary meaning of the earlier part of the Letter.

31. I should refer to one other authority to which my attention was drawn. This was IIG (referred to briefly above). It is an example of a transaction, outside the banking context, where the presumption against the existence of a demand guarantee (or the like) was successfully rebutted. Indeed, it was the only one of which Ms Andrews said that she was aware.

32. In that case the claimant, a New York entity, gave financial assistance to a company of which Mr and Mrs van Der Merwe were directors. Each of them entered into a document described as a "guarantee" which stated that the guarantor "as principal obligor and not merely as surety" agreed that "it will immediately upon demand unconditionally pay to the Lender the Guaranteed moneys which have not beenYpaidY" The document provided that "A certificate in writing signed by a duly authorised officerYstating the amount at any particular time due and payable by the GuarantorYshall, save for manifest error, be conclusive and binding on the Guarantor for the purposes hereof." Following a demand on the company which went unpaid the claimant sent letters to the Van Der Merwes reciting the company's failure to pay and certifying the amount due and payable by each of them under the guarantee. It demanded payment within two days. The Van Der Merwes did not pay. The question was whether, properly construed, the obligation which each of the Van Der Merwes had undertaken was a demand bond or whether it gave rise to guarantees strictly so called. The relevance of this was that under New York law, which governed the loan agreement, there was on the evidence a defence which would provide the borrower (the company of which the Van Der Merwes were directors) with a complete answer to the claimant's demand on it and would therefore (on the principle of co-extensiveness assuming the obligation was no more than a guarantee strictly so called) provide the Van Der Merwes with a defence as well. The Master gave summary judgment to the claimant. The Van Der Merwes' appeal to Lewison J was dismissed. A further appeal to the Court of Appeal was likewise unsuccessful.

33. In the Court of Appeal, Waller LJ (with whom the other two members of the court agreed) considered, in agreement with Lewison J, that the obligation was in the nature of a demand bond or guarantee under which the Van Der Merwes were primary debtors. Acknowledging that the issue turned on the true construction of the agreement and that, following what had been said in Marubeni, there was, outside the banking context, a strong presumption against instruments of this kind being demand bonds unless there was clear wording to the contrary, Waller LJ was of the view that the clear language of the operative clauses was effective to rebut the presumption. He referred (at [20]) to the context in which the transaction arose, namely "a company run by two shareholders borrowing money for a business over which those shareholders have complete control." He pointed out (at [31]) that the guarantor (Mr or Mrs Van Der Merwe) had agreed "as principal obligor and not merely as surety" that he (or she) would "immediately upon demand and unconditionally pay ... the Guaranteed moneys" and that guaranteed moneys were defined as "all moneys and liabilities ... which are now or may at any time be due, owing or payable, or expressed to be due owing or payable, to the lender from or by the borrower ... " (emphasis added). He also pointed to the clause stating that a certificate in due form stating the amount due was, except for manifest error, conclusive and binding, noted that there was no manifest error in the certificate served on the Van Der Merwes, and, in agreement with Lewison J, considered that the presence of that clause put the matter beyond doubt.

34. The result of the foregoing brief survey is that, with the parties free to agree whatever terms they choose, there is in this field of law a spectrum of contractual possibilities ranging from the classic contract of guarantee, properly so called, at the one end, where the liability of the guarantor is exclusively secondary and will be discharged if, for example, there is any material variation to the underlying contract between principal and creditor, to the performance or demand bond (or demand guarantee) at the other end, where liability in the giver of the bond may be triggered by mere demand and without proof of default by the principal (and indeed where it may be apparent that the principal is not in default). There may be little to distinguish (and it may not matter) whether the obligation undertaken is in the nature of a guarantee (strictly so called) or an indemnity. Where it does matter, the question is whether the liability to be enforced is secondary (or ancillary) to that of the principal (however qualified that liability may be), in which case the obligation is in the nature of a guarantee, or primary, in which case it will be in the nature of an indemnity and, if the latter, may be enforceable merely on demand (as with a performance or demand bond) or conditional on proof of default by the principal or on satisfaction of some other event or requirement. Where on the spectrum a particular case falls may call for a nice judgment on the part of the court faced with the task of construing the instrument in question. The instant case calls for just such a judgment.

[JEB/jds]

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