Offshore contractors are frequently asked to provide a guarantee from a bank or a parent company as security for their obligations under a contract. The form of this guarantee does not always receive the attention it deserves and it is unwise to leave it as a matter for last minute consideration as this can result in unforeseen risks. There are many types of guarantee, indemnity and performance bond which all have different obligations and effects as a matter of English law.

1. REFUND GUARANTEES
Owen McHugh
Legal Director
June 2012
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2. Introduction
Introduction
 Kinds of Guarantees
 Consequences
 Distinguishing Features
 Cases
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3. Kinds of Refund
Kinds of Refund
Guarantee
Guarantee
 On demand bond
 Surety “see to it” guarantee
NB No standard practice
Label may mislead
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4. On demand bond
On demand bond
 L/C
 Demand (certificate) Pay
 Dispute under SBC
- not relevant
 Buyer strong
 Bank and Builder exposed
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5. Surety “see to it” guarantee
Surety “see to it” guarantee
 Bank will pay if Builder
(i) is liable to pay
(ii) fails to pay
 Dispute under SBC
- very relevant
 Buyer still better off but not as strong
 Bank and Builder less exposed
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6. Factors
Factors
common to on
common to on
demand bonds
demand bonds
and sureties
and sureties  Statute of fraud requirements
- in writing
- signed by or for guarantor
 Within the power of guarantor
 Signatory has authority to bind
 Not contrary to local law
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7. Indications of
Indications of
on demand
on demand  Label
bond
bond
 “Primary obligor not as surety”
 Unconditional and irrevocable promise to pay
 Paget on Banking:
(i) International
(ii) Issued by bank
(iii) “on demand” / “on first written demand”
(iv) No exclusion of defences
 Subject to (ICC) Uniform Rules for Demand Guarantees
 Certification
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8. Case Law
Case Law
1. Gold Coast v Ahorros (2002) App Ct
Held: On demand bond
Despite 1. “When the instalment becomes
refundable under the SBC” (Arbitration in
progress)
2. Clause 5. Variation of SBC will not
affect liability under the guarantee
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9. Case Law
Case Law
1. Gold Coast v Ahorros (2002) App Ct
Tuckey LJ
No standard practice
Paget on Banking indications 1-3
overrode clause 5
Buyer needs money to repay
financiers quickly
NB Builder had completed and sold vessels
- but not accounted to Buyer
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10. Case Law
Case Law 2. Rainy Sky (2011) Supreme Court
Held: Bank was liable where Builder insolvent.
Construction issue; did bank agree to pay “such
sums” i.e.
- instalments, or
- sums defined in clause 2 of the
guarantee
No dispute that Buyer had a good claim under SBC
Wording ambiguous – most commercial
construction
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11. Case Law
Case Law
3. Meritz v Jan de Nul (2011) App Ct
Held: Meritz liable under on demand bond
Despite 1. Insurance Company not a bank
2. “If in connection with the terms of the
SBC the Buyer shall become
entitled to a refund”
Incorporation of ICC Uniform Rules for Demand
Guarantees (1992)
On demand bond means:-
Irrelevant if - Variation of SBC, or
- Buyers claim under SBC
disputed/wrong
Only issue is whether demand complies.
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12. Summary
Summary
No standard practice.
Gold Coast and Meritz lean towards on demand bond
But note commercial factors.
If on demand bond
- Variation of SBC irrelevant
- Does demand satisfy the terms of the bond?
- Dispute under SBC irrelevant
- Buyers can claim under on demand bond even
if claim under SBC not justified
Careful drafting essential.
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