CASE DIGEST: Court rejected narrow interpretation of guarantee issued by parent company which sought to limit extent of guarantor's on demand liability to those claims where liability was admitted and only quantum was disputed

In Rubicon Vantage International PTE Ltd v Krisenergy Ltd [2019] EWHC 2012 (Comm), the court determined that the fact that a parent company, and not a financial institution, issued the guarantee was no reason to limit the terms of the guarantee.  The wording of the guarantee was the key consideration when determining the scope of that guarantee.  The principles considered and the judge's findings in this case are highly relevant to the construction industry in which on demand guarantees often form a critical component of a contractor's security package.  Where the contractor is a subsidiary of a large international corporation, it is not uncommon for a guarantee to be provided by a parent company, rather than a financial institution.

Background

The claimant ("Rubicon") chartered a floating storage offloading facility (the "Vessel") to a wholly owned subsidiary of the defendant ("Krisenergy"). Under the charter, Krisenergy's subsidiary was to procure a guarantee for Rubicon. Krisenergy provided that guarantee, which was described as a parent company guarantee and operated, in some (but not all) circumstances, as an on demand guarantee.

Following acceptance of the Vessel, a series of invoices were sent by Rubicon to Krisenergy's subsidiary. A dispute arose between the parties in relation to four of those invoices. Rubicon subsequently made a demand on Krisenergy under the guarantee for the total sum outstanding under the four disputed invoices, which Krisenergy declined to pay. Following the commencement of these proceedings, a second demand was made which added a claim for interest.

One of the main issues considered by the court was whether the relevant part of the guarantee operated as an on demand guarantee:

(i) only in relation to claims where liability had been admitted by Krisenergy's subsidiary but quantum was disputed (as was argued by Krisenergy); or

(ii) also in relation to claims where liability was disputed (as was argued by Rubicon).

The court also considered whether or not, in light of the proper construction of the contract, the demands made by Rubicon complied with the provisions of the guarantee.

Decision

On a proper construction of the guarantee provisions, the court found that an on demand liability arose in relation to the relevant part of the guarantee regardless of whether liability was admitted or quantum alone was disputed. It was therefore unnecessary for the court to decide whether an admission as to liability was in fact made by Krisenergy's subsidiary, and Krisenergy was obliged to pay the sums demanded. Further, on the facts, the court held that Rubicon's demands were complaint with the guarantee provisions.

Key takeaways

The judge considered the two leading Court of Appeal authorities on guarantees (Marubeni Hong Kong and South China Ltd v Ministry of Finance of Mongolia [2005] EWCA Civ 395 and Wuhan Guoyu Logistics Group Co Ltd & Ors v Emporiki Bank of Greece SA [2012] EWHC 1715 (Comm)), which set out a number of presumptions that can apply depending on whether an instrument is issued by a bank or otherwise.

The judge nevertheless concluded that the correct approach in determining the extent of the on demand obligation in this instance was by considering the words chosen by the parties to use to record their agreement, free from any antecedent presumption as to what meaning they were likely to have or as towards a wide or narrow construction. In this regard, the judge rejected, for example, Krisenergy's argument that the fact that Krisenergy was not a bank raised any form of presumption of construction that the on demand obligation it undertook was to be construed narrowly rather than broadly.

Although this case does not establish new law, the approach taken by the judge is a reminder that, whilst the presumptions established in the leading Court of Appeal authorities may assist when construing guarantees, the courts will still apply the basic rules of contract interpretation by looking to the actual words used in the contract.