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In Rubicon Vantage International PTE Ltd v Krisenergy Ltd ([2019] EWHC 2012 (Comm)) the High Court provided a useful restatement of and guidance on the rules of interpretation when construing guarantees that display characteristics of both on-demand and true guarantees. The court rejected submissions that where a guarantee issued by a non-bank party created on-demand obligations, those obligations had to be construed narrowly. Instead, the court focused on the meaning of the words used by the parties in the guarantee, emphasising the importance of clear and unambiguous drafting.
The claimant (Rubicon) was the owner of a floating storage and offloading facility (the vessel). By a bareboat charter dated 13 October 2014 (the charter), Rubicon chartered the vessel to Kris Energy (Gulf of Thailand) Limited (Kegot), a wholly owned subsidiary of the defendant (Krisenergy).
In compliance with its obligations under the charter, Kegot provided Rubicon with a charterer guarantee, granted by Krisenergy (the guarantee). The guarantee was described as a parent company guarantee and had characteristics of both an on-demand guarantee and a true guarantee. The distinction between both types of guarantee is explained below.
Following acceptance of the vessel in March 2015, a dispute arose between Rubicon and Kegot in relation to four invoices issued by Rubicon to Kegot for various agreed works which had been carried out on the vessel by Rubicon prior to March 2015. The invoices remained unpaid and on 3 September 2018 Rubicon made a demand on Krisenergy under the guarantee for the total sum outstanding under the four disputed invoices. Krisenergy declined to pay and Rubicon subsequently commenced proceedings in November 2018.
Clause 3 of the guarantee provided that any demand had to be in writing and accompanied by:
- a statement that the amounts demanded were properly claimed and due and payable in accordance with the terms of the contract;
- the calculation of such sums together with any supporting documentation reasonably required to assess such demand; and
- evidence that Kegot had been duly notified of the amounts demanded in accordance with the terms of the contract.
Clause 4 obliged Krisenergy to pay any amount that was not in dispute between Rubicon and Kegot within 48 hours from receipt of the demand. Clause 5 provided that Krisenergy was obliged to pay any disputed amount up to a maximum of $3 million on demand, but could withhold and defer payment of the balance of the sum demanded in excess of $3 million and any other disputed amount, until liability had been determined by a final judgment, award or agreement.
Rubicon's position was that the guarantee was, at least in part, an on-demand instrument, and that its demand for $1,827,901.44 had complied with the terms of the guarantee. Accordingly, it claimed that Krisenergy was liable to pay, notwithstanding the fact that liability was disputed.
Krisenergy, on the other hand, argued that the guarantee was only an on-demand guarantee in relation to claims where liability had been admitted by Kegot but quantum was disputed. In relying on Marubeni Hong Kong v Mongolia ([2005] EWCA Civ 395), Krisenergy argued that not being a bank, it raised a presumption that the guarantee imposed only a secondary liability (ie, a true guarantee) and not an autonomous obligation to pay, irrespective of the actual liability of the primary obligor. Further, Krisenergy argued that Clause 5 related only to amounts where the dispute was as to quantum and not as to liability.
In light of the parties' positions, the main legal issues considered by the court concerned the proper interpretation of the terms of the guarantee regarding whether:
- it was an on-demand guarantee only in relation to claims where liability has been admitted by Kegot; and
- the Marubeni presumption required the court to construe the on-demand guarantee restrictively.
Nicholas Vineall QC, sitting as a deputy High Court judge, began by considering the characteristics of the two types of guarantee:
- a true guarantee merely imposes a secondary obligation on the guarantor to "see to it" that the principal obligor's obligations are met (ie, requiring the party with the benefit of the guarantee to establish that the principal obligor has liability); and
- an on-demand guarantee (or performance bond) is typically issued by banks, which take on a primary obligation to pay against documents, often in the form of a compliant demand, irrespective of the principal obligor's actual liability. Under English law, such a guarantee gives rise to autonomous obligations.
The court held that the guarantee had features of both types: it had been issued by a parent company in respect of its subsidiary and imposed some obligations on Krisenergy to pay on a compliant demand, even in the event there was a dispute between Rubicon and Kegot. The court considered the application of the principles established in Marubeni, which suggests that in a transaction outside the banking context, the absence of language appropriate to describe an on-demand guarantee created a strong presumption against construing the document as an on-demand guarantee rather than a guarantee imposing only secondary obligations (ie, a true guarantee). However, where it has been determined that a guarantee impose autonomous liabilities to some extent (as was the case here), the Marubeni presumption does not apply.
The court did not accept that the obligations under the guarantee should be construed narrowly in accordance with the Marubeni presumption and held that in accordance with the language of the guarantee, on-demand liability for the first $3 million arose for any claims regardless of whether liability or quantum was disputed. The court also found that Rubicon's demands fulfilled all of the requirements under the guarantee and held that Krisenergy was therefore obliged to pay the sum demanded ($1,827,901.44) within 48 hours.
Security provided by way of a guarantee by parent companies or banks is often an important condition in commercial transactions.
This High Court decision emphasises that while guarantees are not presumed to be on demand, they may have the same effect if that is the natural and ordinary meaning of the words used. The court's approach in focusing on the words chosen by the parties to record their agreement is a reminder of the importance of clear and unambiguous drafting to avoid precisely the type of issue which arose in this dispute about the nature of the obligations created by the guarantee.
