Law firm Clyde & Co’s senior associate Paul Collier and associate Jennifer Li examine the implications for “on demand” and “see to it” guarantees following Shanghai Shipyard v Reignwood International Investment (Group) Company Ltd [2021]
The Court of Appeal’s judgment in the case of Shanghai Shipyard v Reignwood International Investment (Group) Company Ltd [2021] provides important guidance for shipyards and other companies in the marine sector in respect of the construction of guarantees, addressing when a guarantee is likely to be construed as an “on demand” guarantee (where the obligation to pay arises through a demand being made under the guarantee) and when a guarantee is a “see to it” guarantee (where the beneficiary is only entitled to receive payment after establishing a liability of the obligor).
A shipyard agreed to construct a drillship for US$200M, with the risk of non-payment of the final instalment of US$170M guaranteed by a guarantor, Reignwood.
The buyer refused to accept delivery of the vessel on the basis that the vessel was not deliverable, and the shipyard made a demand for payment of the final instalment under the guarantee.
The Commercial Court held that the guarantee was a “see to it” guarantee. This was overturned by the Court of Appeal’s construction of the guarantee, where terms such as “we irrevocably, absolutely and unconditionally guarantee” were used which were said to convey that the guarantor’s obligation to make payment was not conditional on establishing the liability of the buyer. Further, the Court of Appeal rejected the argument that the words “not merely as the surety” were surplusage and stated they were consistent with the guarantee being an “on demand” guarantee.
“The Court of Appeal’s decision will be welcomed by beneficiaries seeking to call on guarantees”
The Court of Appeal also referenced other wording in the guarantee that referred to immediate payment on demand as evidence that this was an “on demand” guarantee. The guarantor was unable to use arbitration to delay payment as it had failed to commence arbitration proceedings within the time frame stated in the guarantee. The Court therefore held that the shipyard had accrued a right to payment under the guarantee and there was no language in the guarantee that removed this right.
Clyde & Co Comment
The Court of Appeal’s decision will be welcomed by beneficiaries seeking to call on guarantees not given by banks or financial institutions and who wish to assert the guarantor is obliged to pay upon presentation of a valid demand.
The Court of Appeal’s judgment is helpful in indicating that it is the wording of the guarantee, rather than the identity of the parties, which is key to establishing whether a guarantee is an “on demand” or “see to it” guarantee. Parties should therefore carefully review the wording of guarantees they are considering providing or receiving prior to execution.
If a party requires an “on demand” guarantee, they should ensure that the wording is suitable for that purpose and the guarantee does not contain wording which could be argued constitutes a “see to it” guarantee.
Similarly, parties who are providing a guarantee who wish to ensure that it will only function as a “see to it” guarantee, or who wish to withhold or defer payment pending the outcome of arbitration proceedings concerning an underlying contract, should ensure that the guarantee contains wording making that clear.
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