Bonds And Guarantees: An Update

1. Introduction

   1.1 A number of recent cases have arisen in relation to Bonds and Guarantees, and this paper sets out, by way of an update, those cases. In addition, a number of old cases are also included as a reference point.

2. Interpretation - On Demand or Guarantee?

   2.1 The case of Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited [2010] EWHC 2443 (Ch) concerned a security document given by a parent company of the Vossloh Group. The Guarantee related to the number of trains sold to the Alpha group. The beneficiary claimed that the words 'principal debtor and not merely as surety, as a separate, continuing and primary obligation' meant that the obligation was a primary obligation not a secondary guaranteeing obligation.

   2.2 The Judge did not agree. A mere assertion of a breach or failure to pay money was not sufficient. Reading the guarantee as a whole, it required there to be a default by the principal in performing the underlying contract or in making a payment of the sum due. The mere use of the term 'on demand' was also insufficient. Alpha Trains therefore had to establish liability in respect of the sum due before making a call on the bond.

   2.3 In Carey Value Added, S.L.B Groupo Urvasco SA [2010] EWHC 1905 (Comm) the High Court had to consider whether a security document was truly an on demand bond or a secondary guarantee obligation. The expression 'all obligations of the Obligors under or in connection with the transaction documents' were extensive with the borrower's liability. The guarantor was therefore responsible as primary obligor for any failure of the borrower. This did not amount to an immediate unconditional on demand bond.

   2.4 The case of Kookmin Bank v Rainy Sky SA & Others [2010] EWCA Civ 582 considered the interpretation and scope of 'all such sums due'. Six almost identical on demand advance payment bonds had been provided as security for obligations undertaken by a Korean ship builder in relation to six ship building contracts. The ship builder later became insolvent, and so the beneficiary sought repayment of instalments that had been made. The bond was in respect of 'all such sums due to you under the contract'.

   2.5 The call on the bond was resisted on the basis that demands for instalments made were not sums due. The Court disagreed, holding that the word 'such' should not be ignored. This word referred back to the sums in relation to the pre-delivery instalments under the ship building contract, as the...