Court Finds 'Personal Guarantee' In Charterparty Dispute Is An 'On Demand Bond'

Ultrabulk A/S v Arun Kumar Jagatramka [2017] EWHC 2792 (Comm)

In the recent case of Ultrabulk A/S v Jagatramka (2017)1, the High Court was asked to determine whether a personal guarantee provided by the defendant company's managing director was indicative of a primary liability or a secondary liability, an important question as the guarantor's level of liability would vary in accordance with the answer. Here, the court held that the personal guarantee was a primary liability equivalent to an on demand bond.

Primary liability v secondary liability

A promise by a surety to a beneficiary to fulfil the obligations of a third party, if that third party fails to do so, can take the form of a primary or secondary liability:

a primary liability (for example an indemnity or a performance bond) is independent of the obligations of the third party which means that if the underlying transaction is set aside for any reason, the primary liability remains valid and cannot rely on the defences available to the third party; and a secondary liability (for example a guarantee), mirrors the obligations of the third party under the primary contract which means that if the underlying transaction is set aside for any reason, the beneficiary can be prevented from claiming performance as the guarantee is dependent on the primary obligation. Facts

Ultrabulk, a Danish company which operates and charters ships, had entered into two agreements with Gujarat NRE Coke Limited (Gujarat), a coke producer in India. Mr Jagatramka (Mr J) was the director of Gujarat. Gujarat was indebted to Ultrabulk in the sum of US$4.25m and, therefore:

it was agreed that Gujarat would pay the outstanding debt in instalments by December 2013; and a personal guarantee was provided by Mr J stating that he was aware of Gujarat's debt to Ultrabulk in the sum of US$4.25m (the Gujarat Liabilities) in the following terms: "NOW, therefore, I, the Guarantor, hereby unconditionally and irrevocably guarantee that if for any reason Gujarat do not repay the Gujarat Liabilities latest by 31 December 2013 then I will on the Beneficiary's first written demand from the Beneficiary, pay a sum equivalent to the Gujarat Liabilities plus the interest"

In June 2015, Ultrabulk demanded the sum of US$4.25m plus interest under the Personal Guarantee but Mr J failed to pay any part of that sum. At the time that Ultrabulk demanded payment under the personal guarantee, Gujarat had already paid US$1.95m towards the...