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Note: International Construction & Engineering Inc. (Applicant/Subcontractor) agreed to provide construction services for two power plants in Liberia to Caterpillar Motoren GmbH & Co. (Beneficiary/Manufacturer), a German company. The agreements required Applicant/Subcontractor to provide an Advance Payment Bond (APB) to secure an advance payment and a Performance Bond (PB) (collectively “bonds”) to secure the Applicant/Subcontractor’s further obligations. The agreements required “an instrument offered by a surety acceptable to [Beneficiary]” in the amount of US$1,460,235 in respect of the Buchanan contract and in the amount of US$1,716,162 in respect of the Tokadeh contract “that guarantees the due performance by [Applicant] for an advance payment made by [Beneficiary] to [Applicant] for sundry activities and/or task.” [¶ 4] The Performance Bond (“PB”) was defined as “an instrument offered by a surety acceptable to [Beneficiary] in the amount of 10% of the Contract price…that guarantees the due performance of all Work by [Applicant]”.

Mutual Benefits Assurance Company (Issuer), operating under a license from the Central Bank of Liberia to “function as a non-bank financial institution”, issued the bonds for USD 1,623,711 in Beneficiary/Manufacturer’s favor. The website of its parent indicated that bond insurance was provided which was defined as “a financial guarantee that is usually taken by contractors to indemnify their principals (owner of the contract) against any default. It is a strict liability policy.” [¶ 7]

After issuance of the bonds, Beneficiary/Manufacturer made advance payments to Applicant/Subcontractor. Disputes subsequently arose. Claiming that Applicant/Subcontractor had failed to complete the tasks for which advance payment had been made, Beneficiary/Manufacturer terminated the contract and demanded payment under the bonds from Issuer, which dishonored the demand. As a result, Beneficiary/Manufacturer sued Issuer, seeking the amounts due under the bonds.

The Hon. Mr. Justice Teare of the High Court of Justice Queen’s Bench Division Commercial Court ruled in favor of the Beneficiary/Manufacturer and concluded that “[b]oth the [bonds ] are ‘on demand’ bonds on their true construction … [and Issuer] has no real prospect of a defence and so [Beneficiary/Manufacturer] is entitled to summary judgement on its claims.” [¶ 29]

Issuer contended that it was only liable to pay on the bonds if the Beneficiary/Manufacturer established that the Applicant/Subcontractor was liable to Beneficiary/Manufacturer. Issuer also claimed that it is unaware that its parent company, which provided all products to Issuer, sold “on demand” bonds. Issuer claimed that all references on its parent company’s website to bond insurance were “mere marketing”. On the other hand, Beneficiary/Manufacturer asserted that both bonds are payable on Beneficiary/Manufacturer’s demand.

The Judge ruled that whether the bonds were “on demand” was a question of construction. The Judge stated that under principles applicable to construction “[t]he court must identify the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.” [¶ 13] The Judge referred to what was described as “Paget’s presumption”, which were followed in Wuhan Guoyu v. Emporike Bank, [2012] EWCA (Civ) 1629 [England], summarized at 2013 Annual Review of International banking Law & Practice at 523 and taken from Paget’s Law of Banking. They are “where an instrument (i) relates to an underlying transaction between parties in different jurisdictions, (ii) is issued by a bank, (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 there will be a presumption that it will be construed as an “on demand” bond or guarantee.” [¶ 13]

The Judge concluded that it was not material that the issuer was not a bank, stating “[i]t is not unusual for financial institutions other than banks to issue bonds.” [¶20]

In regards to the APB, the Court ruled that its terms made it “clear beyond doubt that [Issuer] is obliged to pay on demand by [Beneficiary/Manufacturer].” [¶ 19] The Judge noted that Clause 3 provides that ““Whenever Principal shall fail to pay the lawful claims of any Person with respect to the work, including Subcontractors and suppliers, the[y] Surety shall pay the same in an amount not exceed the bonded Sum.” [¶ 23] The Judge noted that this provision is “suggestive of a true guarantee”. [¶ 24] Clause 2 of the APB provided that the Issuer agrees to Beneficiary/Manufacturer’s decision “as to whether any money is payable by [Applicant/Subcontractor] to [Beneficiary/Manufacturer] or whether [Applicant/Subcontractor] has made any such default or defaults as aforesaid and the amount or amounts to which [Beneficiary/Manufacturer] is entitled by reason thereof will be binding” on Issuer. [¶ 2] The Judge, citing the APB, further ruled that “[Issuer] is not entitled to ‘as[k] the [Beneficiary/Manufacturer] to establish its claims’ but ‘shall pay the same to the [Beneficiary/Manufacturer] forthwith on demand’. [¶ 2] Finally, the APB provided that “any such demand …shall be conclusive and binding notwithstanding any difference” between Beneficiary/Manufacturer and Applicant/Subcontractor. [¶ 2]

The Judge further ruled that the PB was an “on demand” bond based on the terms in Clause 4. In pertinent part, Clause 4 of the PB provided:

Whenever [Applicant/Subcontractor] shall be, and is declared by [Beneficiary/Manufacturer] in writing to [Issuer] to be in default with respect to its obligations under the Contract, Surety hereby unconditionally, without any demur, undertakes to promptly pay to [Beneficiary/Manufacturer] the amount of damages claimed by [Beneficiary/Manufacturer] resulting from [Applicant/Subcontractor’s] default under the Contract, not to exceed the Bonded Sum. Any such demand made on Surety shall be conclusive as regards to the amount due and payment by Surety under this Bond. [¶ 24]

The Judge ruled that Issuer, therefore, was obligated to pay on the PB once Beneficiary/Manufacturer “declared” a default, noting that “[a]ny such declaration is referred to in the second sentence as a ‘demand’”. [¶ 25]

The Judge referenced a letter from Issuer to Beneficiary/Manufacturer indicating that the bonds were insured and reinsured, concluding that , the Issuer’s reference to bond insurance on its website was “truthful as opposed to being ‘mere marketing.’” [¶ 7]

TEXT OF THE BONDS as indicated in the Opinion [¶ 9]:

Irrevocable and Unconditional Advance Payment Guarantee

No.: MBA/APB/2/0228/A/014

This IRREVOCABLE AND UNCONDITIONAL ADVANCE PAYMENT GUARANTEE, executed this 10th day of January, 2014, by MUTUAL BENEFITS ASSURANCE COMPANY with address at 17th Street and Tubman Boulevard, Sinkor, Monrovia, Liberia, hereinafter the “GUARANTOR” in favor of CATERPILLAR MOTOREN GmbH & Co. K.G., Liberian Branch, with address at c/o Voscon Inc., 80 Broad Street, 3rd Floor, Monrovia, Liberia, hereinafter the “BENIFECIARY” on behalf of International Construction & Engineering, Inc. having its principal address at Monrovia, Liberia, hereinafter the “CONTRACTOR” hereby:

WITNESSETH:

WHEREAS, the CONTRACTOR has represented to the GUARANTOR that on the 10th day of January, 2014 the BENEFICIARY and the CONTRACTOR have entered into and executed Contract No. POB 267161 C116A (SC1) General Terms and Conditions of Contract for Construction Services for the performance, by the CONTRACTOR for the BENEFICIARY. The Said Contract No. POB 267161 C116A (SC1) is hereby incorporated into, and made an integral part of this instrument by reference; and

WHEREAS, pursuit to the reference Contract No. POB 267161 C116A (SC1), the CONTRACTOR raised and submitted to the BENEFICIARY its request for advance payment in the amount of One Million Four Hundred Sixty Thousand Two Hundred Thirty Five United States Dollars (US$1,460.235.00) against the project cost/contract price for sundry activities and/or tasks to be performed by the CONTRACTOR; and listed as per said request; and

WHEREAS, in keeping with the agreement of the parties, a condition precedent to the BENEFICIARY’S disbursing the requested advance payment is the posting and/ or issuance of an Advance Payment Guarantee Bond on behalf of the CONTRACTOR’S and in favor of the BENEFICIARY by a reputable third party institution engaged in the insurance or banking business; and

WHEREAS, the CONTRACTOR has requested, and the guarantor has agreed to issue an Advance Payment Guarantee Bond on the CONTRACTOR’S behalf and in favor of the BENEFICIARY as herein provided and in keeping with the agreement of the BENEFICIARY and the CONTRACTOR on the terms and conditions herein set forth and contained;

NOW THEREFORE, THESE PRESENTS:

1.  We, Mutual Benefits Assurance Company, as GUARANTOR of the CONTRACTOR, do hereby guarantee and undertake to pay, without reference to the CONTRACTOR, the BENEFICIARY herein forthwith on demand at any time no later than the dates and maximum amounts stated herein below as may be claimed by the BENEFICIARY to be due from the CONTRACTOR on account of the failure of the CONTRACTOR in observance and performance of the terms and conditions of the contract No. POB 267161 C116A (SC1), and in particular, the CONTRACTOR’S failure to fully satisfactorily and timely execute the tasks for advance payment and in respect of which the sum of USD1,460.235.00 is paid by the BENEFICIARY to the CONTRACTOR in advance.

2.  The GUARANTOR hereby acknowledges and agrees that the decision of the BENEFICIARY as to whether any money is payable by the CONTRACTOR to the BENEFICIARY or whether the CONTRACTOR has made any such default or defaults as aforesaid and the amount or amounts to which the BENEFICIARY is entitled by reason thereof will be binding on the GUARANTOR and the GUARANTOR shall not be entitled to as[k] the BENEFICIARY to establish its claims or claims under this GUARANTOR or to claim any such amount from the CONTRACTOR its first instance but shall pay the same to the BENEFICIARY forthwith on demand without any demur, reservation, recourse, contest, or protest and/or without any reference to the CONTRACTOR.

Any such demand made by the BENEFICIARY on the GUARANTOR shall be conclusive and binding notwithstanding any difference between the BENEFICIARY and the CONTRACTOR or any dispute pending before any court, tribunal, arbitrator(s) or any other authority — judicial, quasi-judicial or administrative.

3.  The GUARANTOR further undertakes not to revoke this Guarantee during its currency except with the prior written consent of the BENEFICIARY and this Guarantee shall continue to be enforceable until the date of its expiry or the last date of an extended period, if any, agreed upon by the GUARANTOR and the BENEFICIARY in writing, unless during the currency of the Guarantee all amounts due the BENEFICIARY have been duly paid and its claims satisfied or discharged or the BENEFICIARY certifies that the tasks enumerated as per the CONTRACTOR’S request for advance payment have been fully carried out by the CONTRACTOR and the Guarantee is thereby discharged.

4.  This Guarantee shall not be affected by any change in the constitution of the CONTRACTOR or any extension or forbearance to the CONTRACTOR by the BENEFICIARY and GUARANTOR.

5.  The amount herein Guarantee is the sum of US$1,460,235.00 (One Million Four Hundred Sixty Thousand Two Hundred Thirty Five United States Dollars), advance[d] or to be advance[d] the CONTRACTOR by the BENEFICIARY, subject of this Advance Payment Guarantee Bond.

6.  That for and in consideration of the Advance Payment Guarantee herein given the BENEFICIARY for and on behalf of the CONTRACTOR, the CONTRACTOR hereby agrees and undertakes to pay or cause to be paid to the GUARANTOR a Guarantee Bond Premium of US$4,380.71 (Four Thousand Three Hundred Eighty United States Dollars Seventy- One Cents) same being 0.6% of the value of the bond.

7.  The validity of this Advance Payment Guarantee Bond shall commence from the date of payment of the advance payment by the BENEFICIARY and receipt of same by the CONTRACTOR and continue in full force and effect until and up to June 30, 2014

8.  The last date for invocation of this Advance Payment Guarantee bond or assertion of any claim arising in connection therewith by the BENEFICIARY shall be no later than thirty (30) days from the last date of the validity of the Guarantee.

9.  This bond shall be governed by the laws of England and any disputes under this Bond shall be settled by any competent court in London, England.

Performance Bond

WHEREAS, Caterpillar Motoren GmbH & Co. K.G., Liberian Branch, a company organized under the laws of Liberia (“Obligee”), has awarded to International Construction & Engineering, Inc., a company organized under the laws of Liberia (“Principal”), a comprehensive General Terms and Conditions of Contract for Construction Services, duly executed and delivered on the 10th day of January, 2014 (the “contract”), on the terms and conditions set forth therein; and

WHEREAS, as a condition to Obligee’s payment of any payment under the Contract, Principal is required to furnish a bond (this “Bond”) guaranteeing the faithful performance of its obligations under the Contract, including payment of claims by Subcontractors and suppliers.

NOW, THEREFORE, Principal and Mutual Benefits Assurance Company (“Surety”), an admitted surety and International Construction & Engineering Inc., are held and firmly bound unto Obligee the amount of Seven Hundred Thousand Six Hundred Twenty Seven United States Dollars ($700,627.00) (the “Bonded Sum”), for payment of which sum Principal and Surety jointly and [severally] firmly bind themselves and their successors and assigns.

This Bond shall remain in full force and effect, it being expressly understood and agreed that the liability of Surety for any and all claims hereunder shall in no event exceed the Bonded Sum.

The following terms and conditions shall apply with respect to this bond;

1.  The Contract is incorporated by referenced herein, Capitalized terms not separately defined herein have the meanings assigned such terms in the Contract;

2.  The guarantees contained herein shall survive Final Acceptance;

3.  Whenever Principal shall fail to pay the lawful claims of any Person with respect to the work, including Subcontractors and suppliers, they Surety shall pay the same in an amount not exceed the bonded Sum;

4.  Whenever Principal shall be, and is declared by the Obligee in writing to Surety to be in default with respect to its obligations under the Contract, Surety hereby unconditionally, without any demur, undertakes to promptly pay to the Obligee the amount of damages claimed by the Obligee resulting from the Principal’s default under the Contract, not to exceed the Bonded Sum. Any such demand made on Surety shall be conclusive as regards to the amount due and payment by Surety under this Bond.

5.  If Surety does not proceed as provided in Paragraphs 3 and 4 of this Bond with reasonable promptness, Surety shall be deemed to be in default on this bond fifteen (15) days after receipt of an additional written notice from the Obligee to Surety demanding that Surety perform its obligations under this bond, and the Obligee shall be entitled to enforce any remedy available to the Obligee.

6.  No alteration, modification or supplement to the Contract or the nature of the work to be performed thereunder, including without limitation any extension of time for performance, shall in any way affect the obligations of Surety under this Bond. Surety waives notice of any alteration, modification, supplement or extension of time other than Change Orders for Principal directed changes in excess of such amount.

7.  This bond shall be governed by the laws of England and any disputes under this Bond shall be settled by any competent court in London, England.

8.  Correspondence or claims relating to this Bond should be sent to Surety at the following address; 17th, STREET, TUBMAN BOULEVARD SINKOR, MONROVIA, LIBERIA.

This Bond and all obligations of surety shall terminate on June 3, 2015, unless expressly extended in writing by Principal and Obligee.

* Ramsey R. SALEEBY served as Assistant Counsel for the Institute of International Banking Law and Practice. Mr. SALEEBY is currently General Counsel for Armantek. LLC.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.