Can a private individual, instead of a financial institution, issue an on-demand guarantee? Recently, this very topic was explored in the KL Construction Court.
𝐓𝐡𝐞 𝐁𝐫𝐢𝐞𝐟 𝐅𝐚𝐜𝐭𝐬 📖
A Developer appointed a construction company – referred to as “Main Contractor” – to carry out main construction works.
The Main Contractor faced challenges as it grappled with financial constraints and a substantial project completion delay.
To safeguard its interests, the Developer entered into a Performance Guarantee (“PG”) with the representatives of the Main Contractor, where the latter promised to procure the Main Contractor to carry out its works accordingly, failing which, they will pay a sum guaranteed to the Developer.
The breaches persisted and the Developer sought to enforce the PG against the guarantors.
𝐓𝐡𝐞 𝐃𝐢𝐬𝐩𝐮𝐭𝐞 𝐁𝐞𝐟𝐨𝐫𝐞 𝐓𝐡𝐞 𝐂𝐨𝐮𝐫𝐭 🔍
Guarantees come in 2 principal forms:
(a) Unconditional/On-Demand Guarantee: This type of guarantee imposes an unequivocal obligation on the guarantor to pay upon demand without requiring proof of any default by the principal in the main contract.
(b) Conditional Guarantee: This conditional guarantee mandates proof of a default in the principal contract by the principal before any obligation arises.
▶️ Among others, the Main Contractor argued that the PG should not be classified as being on-demand in nature as they were executed by individuals. To support this contention, the Main Contractor relied on Marubeni Hong Kong South China Limited [2008] 1 WLR 2947 and Vossloh [2010] EWHC 2443. These cases posit that a non-banking instrument typically carry a strong presumption against being classified as on-demand guarantee.
▶️ On the opposing front, the Developer argued that there is no prohibition against a private individual issuing an on-demand guarantee. To support this, reference was made to the case of Quay Park [2014] NZHC 2204, which highlighted that there is no good reason to restrict on-demand guarantees to financial institutions defined as ‘banks’. This case also emphasized that when the obligation to pay is stringent, there is no need to read a guarantee leniently just because it is given by individuals. See also Ultrabulk [2017] EWHC 2792.
𝐎𝐮𝐫 𝐑𝐞𝐦𝐚𝐫𝐤𝐬 🗣️💬
Our recent legal discourse delved into uncharted territory. While the Main Contractor argued against categorizing the PG as an on-demand guarantee, citing precedents such as Marubeni and Vossloh, our perspective presented a compelling contrast based on cases like Quay Park and Ultrabulk.
The nature of a guarantee is determined from a construction of the wordings employed in the instrument. The High Court found that the usage of words/phrases such as “pay on demand”, “primary obligation”, “shall not be obliged before enforcing this guarantee to take any action against the Contractor”, “(guarantor) shall forthwith pay whether there are any legal suits or disputes between Company and Contractor”, was indicative of an unconditional and on-demand guarantee. In so deciding, the High Court rejected the argument that the mere usage of the word “indemnify” would render an instrument an indemnity requiring proof of loss. In deciding as above, the High Court acknowledged that while certain English authorities recognise the existence of a presumption that unconditional and on-demand guarantees can only be given by financial institutions, the nature of a performance guarantee ultimately lies in the interpretation of the instrument.
The High Court further dealt with other common issues in the enforcement of a Performance Guarantee, including arguments on want of consideration, commercial duress, unjust enrichment, and the applicability of the contra proferentem rule.
