UK: Court Concludes Advance Payment Guarantees Were Performance Bonds

Last Updated: 7 January 2011
Article by Chris Kidd, Kijong Nam and Reema Shour

Meritz Fire and Marine Insurance Co Ltd v (1) Jan de Nul NV and(2) Codralux SA [2010] EWHC 3362 (Comm)

It is not always evident on the face of an instrument whether it is a demand guarantee imposing a primary obligation on the guarantor or whether it is a contract of suretyship that brings with it only a secondary obligation. The terminology used in an instrument is not conclusive as to its nature. Absent fraud, a demand guarantee must be honoured by the party issuing it without regard to the relations between the beneficiary and the counterparty to the underlying transaction. On the other hand, where the guarantor's liability is merely secondary in nature, it will be contingent on the liability of the debtor pursuant to the underlying transaction.


The claimant insurance company issued three Advance Payment Guarantees ("APGs") to the defendants. The APGs guaranteed the refund of advance payments made by the defendants to a Korean shipbuilding company, HWS, pursuant to the terms of three shipbuilding contracts. The claimant had issued the APGs for the account of HWS as a commercial transaction for a fee.

HWS subsequently merged with another company and the new company, Buyoung Heavy Industries, thereafter transferred its shipbuilding business to Asia Heavy Industries Co. Ltd ("Asia Heavy"). In due course, the defendants issued notices of default under the shipbuilding contracts based on alternative grounds including contractually impermissible delays and builder's insolvency. The defendants subsequently terminated the contracts and demanded the refund of advance payments made under them. When Asia Heavy did not pay any of these demands, the defendants demanded payment from the claimant under the three APGs.

The claimant sought a declaration of non-liability from the court. Amongst other things, it argued that it guaranteed the obligations of HWS and not those of its corporate successors; and that, alternatively, it had been discharged from liability under the APGs as a result of alleged material variations in the shipbuilding contracts by reason of the changes in the builder's corporate identity and extensions of the delivery time of the vessels which it claims were agreed between Asia Heavy and the defendants. The defendants counterclaimed the amounts owing to them, together with interest, arguing that the APGs were unconditional performance bonds and it was therefore irrelevant which corporate entity failed to make the refund or whether there had been material variations to the shipbuilding contracts. In the alternative, if the APGs were classic contracts of suretyship in which the claimant's obligation as guarantor is secondary to the primary obligation of the principal debtor, the defendants argued that there had been no material variations to the shipbuilding contracts. The judge found in favour of the defendants.

Commercial Court decision

Three principal issues fell for decision by Mr Justice Beatson in the Commercial Court:

Issue 1 – were the APGs performance bonds?

The judge concluded that the APGs were performance bonds or demand guarantees. In particular, he emphasised the following attributes which tipped the balance in favour of construing the APGs as demand guarantees: (i) payment was triggered by a demand on presentation of specified documents; (ii) the guarantees were stated to be irrevocable and unconditional, and (iii) they were stated to be subject to the ICC Uniform Rules for Demand Guarantees. In the judge's view, subjecting the APGs to the Uniform Rules was an indication that the parties regarded them as demand guarantees, particularly where he found no inconsistency between the terms of the APGs and the Uniform Rules.

The judge also rejected the claimant's submission that for an instrument to be construed as a demand guarantee, it would have to be issued by a bank. In this case, whilst the claimant was primarily an insurance company, it was also in the business of providing financial instruments in return for a fee. Additionally, the definition of a demand guarantee under the Uniform Rules encompassed a guarantee issued by an insurance company.

Furthermore, "although the point was not without difficulty", the judge concluded that the provision in the APGs whereby the claimant did not have to pay a refund amount demanded by the defendants but disputed by the builder and referred to arbitration until the arbitration award had been issued, did not condition the obligation to pay on the default of the builder. Under the APGs, it was not the fact of builder's default which triggered the claimant's obligation to pay. Rather, in the judge's view, the obligation to pay under the APGs was triggered either on the defendants' demand being made in the specified form or by the arbitrator's award, neither of which involved a determination of whether the builder was in default.

2. If the APGs were contracts of suretyship, was the claimant discharged from liability?

The judge went on to consider the following: if he was wrong and the APGs imposed only secondary rather than primary obligations on the claimant, was the claimant discharged from liability under them as a result of material variations to the shipbuilding contracts? The variations relied on by the claimant were twofold: (i) the changes in the corporate identity of the shipbuilder and (ii) extensions of the delivery time of the vessels which were alleged to have been agreed between Asia Heavy and the defendants and which would have extended the claimant's period of liability under the APGs.

Regarding the changes in the builder's corporate identity, the judge found that the defendants had not agreed to what were unilateral actions, firstly by HWS and subsequently by Buyoung. Absent such an agreement between the principals with reference to the shipbuilding contracts guaranteed, the judge stated that the claimant was not discharged under the APGs.

Mr Justice Beatson also concluded that the claimant was not discharged from the APGs on the grounds of alleged changes to the delivery dates under the contract. This part of his decision did not rest on a finding that there was no such variation of the contracts or that there was only a contemplated variation which was never agreed. Rather, the judge said that his conclusion was based on a finding of affirmation by the claimant of the APGs after the exchange of relevant correspondence relating to delivery dates.

3. Once HWS ceased to exist, could the defendants make a contractual demand triggering liability under the APGs?

The judge's short answer was that, irrespective of whether the APGs were performance bonds or contracts of suretyship, the shipbuilding contracts gave the defendants the right to terminate the contracts and demand repayment on an insolvency event, in this case the dissolution of HWS. The judge said it could not make any difference that HWS was dissolved as part of a reorganisation which put a new corporate entity in its place as the shipbuilder. Otherwise, the APGs would not be available when they were most needed.


The instruments in this case contained features which gave rise to different constructions relied on by both parties. Mr Justice Beatson stated, "the authorities show that the presence or absence of these features are factors which are indicative and not decisive". Indeed, it was a common ground in the case that the terminology used in an instrument is not conclusive and it is necessary to look beyond the terminology to the substance of the instrument as a whole. Having looked at the APGs as a whole as commercial documents, the judge in the instant case concluded that they were performance bonds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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