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A presumptuous task: interpreting "see to it" and "demand" guarantees

Posted on 27 October 2022

Guarantees have been described as the lifeblood of international commerce, serving a vital role in providing beneficiaries with protection against counterparty risk. A paradigm example is a shipbuilding contract, where the shipyard contracts with a special purpose vehicle whose only asset may be the shipbuilding contract itself. In such circumstances, the shipyard will invariably seek a guarantee to secure the buyer's obligations to pay instalments of the contract price, whilst the buyer is likely itself to seek a guarantee for the return of such instalments in the event that it is entitled to terminate the contract.

Under traditional guarantees by way of suretyship, sometimes referred to as "see to it" guarantees, the guarantor's liability is secondary, and is contingent upon the obligor's liability. By contrast, pursuant to a "demand" guarantee, the guarantor undertakes to pay a sum "on demand", irrespective of whether the obligor's liability to make payment has been established. In such cases, provided that the demand complies with the requirements of the contract, payment can normally only be withheld in cases of clear fraud. 

However, determining whether an instrument is a "see to it" or an "on demand" guarantee is not always straightforward, as the Commercial Court and Court of Appeal's differing decisions in Shanghai Shipyard Co Ltd v Reignwood International Investment (Group) Company Limited demonstrate. The Supreme Court granted permission to appeal from the Court of Appeal decision, and the appeal is due to be heard in December of this year.


In 2011, the claimant shipyard had entered into an agreement to build a US$200 million offshore drillship for the defendant, a Hong Kong company offering investment services. The defendant subsequently novated the shipbuilding contract to a subsidiary ("the Buyer") and entered into an irrevocable payment guarantee ("the IPG") in favour of the claimant to secure the final US$170 million instalment due under the shipbuilding contract. The IPG was governed by English law, and provided that the defendant:

"IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee[s] in accordance with the terms hereof, as the primary obligor and not merely as the surety, the due and punctual payment by [the Buyer] of the Final [I]nstalment of the Contract Price."

Under the terms of the IPG, if the Buyer failed to pay the final instalment punctually, then upon first receipt of the claimant's written demand, the defendant was obliged to make payment "immediately" and "without requesting [the claimant] to take any further action, procedure or step against [the Buyer]". However, if a dispute arose between the claimant and the Buyer regarding payment of the final instalment, and that dispute was referred to arbitration, the defendant was "entitled to withhold and defer payment until the arbitration award is published."

The Buyer failed to take delivery of the vessel or pay the final instalment, and the claimant made a demand on the IPG. The defendant contended that the vessel was undeliverable and commenced arbitration against the claimant in the Buyer's name. In the meantime, the claimant commenced proceedings before the Commercial Court under the IPG. However, in those proceedings, the defendant contended that, upon its proper construction, the IPG was a "see to it" guarantee, such that their liability only arose if the Buyer was liable under the shipbuilding contract. The defendant also argued that, in any event, it was entitled to refuse payment pending the outcome of the arbitration, notwithstanding the fact that the arbitration had commenced after the date of the demand.

The Commercial Court's Decision

Addressing the characterisation of the IFG at first instance, Mr Justice Robin Knowles noted the distinction between the presumption against the imposition of primary liability outside of a banking context established by the Court of Appeal's decision in Marubeni Hong Kong and South China Ltd v Government of Mongolia (2005), and "Paget's presumption" in favour of primary liability as approved by the Court of Appeal in Wuhan Guoyo Logistics Group v Emporiki Bank of Greece (2012).  Paget's presumption applies where an instrument:

  1. Relates to an underlying transaction between the parties in different jurisdictions;
  2. Is issued by a bank1;
  3. Contains an undertaking to pay "on demand" (with or without the words "first" and/or "written"); and
  4. Does not contain clauses excluding or limiting the defences available to a guarantor,

In this case Mr Justice Robin Knowles did not consider that the language of the IPG "made the grade" of a "demand" guarantee "without the help of a presumption" and, given the fact that the IPG was provided by a parent company rather than a bank, no presumption was successfully engaged. He therefore held that the IPG was a "see to it" guarantee. His decision suggested that the fact that an instrument is not issued by a bank will be of particular significance when considering the application of Paget's presumption.

Mr Justice Robin Knowles held accordingly that the defendant was entitled to refuse payment pending and subject to the outcome of the arbitration.

The Court of Appeal's Decision

Lord Justice Popplewell, giving the leading judgment of the Court of Appeal, took a different view, emphasising that the primary focus should be on the words used by the parties in the appropriate commercial context. In this case, he concluded that the IPG was a "demand" guarantee, observing that the capitalised words "ABSOLUTELY and UNCONDITIONALLY" conveyed that the obligations were not conditional on the liability of the buyer, and that the words "not merely as the surety", gave a clear indication that the document was not a surety guarantee.  He also noted that payment against demand, as provided for in the IPG, was the hallmark of a demand guarantee; and the obligation was to pay "immediately", which would not be appropriate in the case of a surety guarantee.  

As to Paget's presumption, Lord Justice Popplewell doubted the utility of such presumptions and observed that they should be confined to circumstances where all the stated conditions are fulfilled. He also rejected the suggestion that there should be preconceptions or assumptions about the nature of the instrument to be derived from the identity of the guarantor, observing that a beneficiary's aim is to ensure that the guarantor is of sufficient financial and commercial probity to eliminate counterparty risk. While a bank or other financial institution may meet that description, a related party such a parent company may provide similar protection.

Turning to consider the effect of the referral to arbitration, Lord Justice Popplewell concluded that the defendant would only have been entitled to withhold payment if a dispute had been submitted to arbitration before a demand had been made under the guarantee. If that were not the case, the demand obligation would be suspended indefinitely by the existence of a dispute, which would occur in every case of non-payment.


The Court of Appeal's decision provided a welcome clarification of the approach to be adopted to the construction of guarantee instruments, and in particular the importance of textual analysis, focusing on the meaning of the words used by the parties in their documentary, factual and commercial context, rather than the presumptions established in previous caselaw. Those presumptions were reliant in part at least upon the identity of the guarantor, and led to the surprising conclusion that the same wording could be construed differently depending upon the identity of the parties. 

As Lord Justice Popplewell observed: "if a non-bank gives a guarantee adopting a form of wording which, if given by a bank, would be a demand guarantee, I do not see how it can mean something different from an identical instrument if issued by a bank. Such a conclusion would be a recipe for commercial uncertainty and would, in my view, subvert the reasonable expectations of the parties as objectively expressed in the words of their agreement."

It will now be interesting to see what approach the Supreme Court will adopt in its eagerly awaited consideration of the principles applicable to the interpretation of guarantees.

1 Subsequent editions of Paget's Law of Banking have added the words "or other financial institution".

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