The Issues and Differences Regarding Demand Guarantees and Suretyship Guarantees - Coursework Example

?Table of Contents Introduction 2 Demand Guarantees 2 Suretyship Guarantee 4 Marubeni Hong Kong and South China Ltd v Mongolian Government 5 Meritz Fire & Marine v Jan de Nul N.V 7 Conclusion 10 References 11 Introduction This essay discusses the issues and differences regarding demand guarantees and suretyship guarantees. These two instruments are put into light utilising the cases of Marubeni Hong Kong and South China Ltd v Mongolian Government [2004] EWHC 472 and Meritz Fire & Marine v Jan de Nul N.V. [2010] EWHC 3362, and the reasons as to why the issuer of the instrument was keen for the instrument to be characterized as a suretyship guarantee. The underlying aspects of suretyship guarantees are that they are effective upon certain conditions, whereas demand guarantees are simply effective upon demand. The underlying reason as to why issuers need instruments to be suretyships is that in a deal of guarantee, the surety accepts a secondary liability to responds for the debtor, who rests primarily responsible. In a contract of indemnity the surety assumes a primary liability, either alone or jointly with the principal debtor. The cases mentioned above will be looked at as to what the courts decide in determining demand and suretyship guarantees, and all information has been extracted directly from the case reports. Demand Guarantees Demand guarantees are written agreements made by a guarantor to assure a beneficiary, subject to the conditions in the agreement. The guarantee is an agreement between the guarantor and the beneficiary. Thus, if an employer is specified a demand guarantee by a bank in respect of the responsibilities of a contractor, the contractor is not a party to the agreement. Therefore, the beneficiary is in a strong situation should there be a default. Demand guarantees are contracts and can be generated by either a simple contract or executed as a deed (Birchal & Ramus, 2012). Banks generally set demand guarantees. There are two basic types: on demand guarantees (often referred to as on demand bonds) and documentary demand guarantees. On demand guarantees essentially necessitate a guarantor to make payment to a beneficiary upon request to do so. In the case of documentary demand guarantees, payment will only be made on the securing, by the beneficiary, of the papers required by the terms of the guarantee. These, for example, may be documents proving a court judgment (Birchal & Ramus, 2012). Banks support demand guarantees since they do not need to get tangled in legal opinions and disputes following a default; their view is generally direct. However, their situation is not so reasonable for those necessary to provide demand guarantees. Take, for example, a contractor required to provide a 20% demand guarantee with regards of a $100,000 contract. The guarantee will be the amount of $20,000. The contractor’s bank supplying the guarantee will handle the price of the guarantee as contractors credit and will, therefore, reduce any credit amenities offered to the contractor by this amount. In addition, the bank will undoubtedly require security from the contractor to backup the credit. Both these activities will disturb a contractor’s cash flow and make it more challenging for him to execute contracts. Indeed, the functional competence of a construction firm can be decreased by the obligation to deliver demand guarantees. A contractor in this situation may also sense insecurity, especially where on demand guarantees are delivered. The contractor has insignificant entitlements to avoid a bank paying against an on demand guarantee. Banks will pay on demand and leave the contractor to settle any dispute directly with the beneficiary (Birchal & Ramus, 2012). Suretyship Guarantee Companies frequently require working capital to function and grow. The owners of small businesses regularly need to cater a guarantee of suretyship for large liabilities. If a business has a meagre credit history, it could be essential to keep a guarantee of suretyship. In either case, an assurance is made to pay a commitment of a business in the occurrence that the business does not pay. In this way, a suretyship or guarantee is produced, and the credit of the part providing it develops the security for the debt owed (Meiners, Ringleb, & Edwards, 2008). A pact for suretyship is an undertaking by a third party to be accountable for the defaulter's payment responsibilities, or performance, to a creditor. The borrower or debtor is referred to as the principal. In addition to being a party offering a suretyship for a fee, the surety could be an owner or shareholder of the business. A suretyship can be formed only by a contract between the surety and the creditor. The surety is obliged to pay the creditor if the primary party does not pay the debt, or deliver performance, to the creditor. A common form of suretyship is a cosignature on a bank loan (Meiners, Ringleb, & Edwards, 2008). A guarantor provides a promise of imbursement to another and consequently is the equivalent of a surety; that is, to guarantee is to undertake the responsibility of a surety. The difference between a guarantee and surety is that a surety is primary liable after the debtor, whereas the guarantor is secondarily liable. Usually, one contract fixes both the surety and the borrower, and the creditor is not compelled to use legal remedies before demanding payment by the surety (Meiners, Ringleb, & Edwards, 2008). Marubeni Hong Kong and South China Ltd v Mongolian Government This case involved a claim made by Marubeni Hong Kong (MHK), an importer/exporter and general trading company against the defendant, the Mongolian Government acting through its Ministry of Finance (MMOF), where the claim in the action fails. The claim was made based upon a letter made by the then Minister of Finance, Mr Byambajav, to MHK that gave indication for the provision of an instrument, which constituted a demand guarantee. The amount due in the contract totalled $18,811,670, and the question regarding a demand guarantee falls where the letter mentioned (under paragraph 4 of the case) that the defendant has promised to reimburse upon simple demand the entire amount that was liable to be paid under the Agreement in the event the debtor defaults on payment, and would further meet all terms and condition sof the Agreement. The claimant interpreted and utilized the MMOF Letter, as the defendant accepting a primary liability (joint and/or several) to the claimant. On the other hand the defendant stipulated that on a true construction of the MMOF Letter it did not undertake a primary liability, and that it was dismissed from burden to undertake the guarantee. It followed that the MMOF letter was supplied on behalf of the defendant with explicit genuine authority, given it was appropriately categorized as a guarantee. However, there was no sanction for the Finance Minister to assume a primary liability. It simply suggested particularly to “guarantees”. However, it cannot be accepted that the instrument in question was to be categorised as a first demand bond. A first demand bond would certainly provide that payment to be made up to a stipulated sum on first demand or on first demand maintained by specified paperwork. In the case of first demand bonds the commitment to pay surfaces on first demand without any independent proof of the legitimacy of the claim. And therefore, the MMOF Letter was not a first demand bond. Thus the defendant agreed to recompense any amount of money which was due and not yet paid, and further promised “the full and timely performance and observance by the Buyer of all the terms and conditions of the Agreement.” This confirms secondary liability by the defendant, and can further be backed by the fact that the MMOF letter did not include a “principal debtor” clause. Clear language is mandatory in determining primary liability and in this case, the main weight of the instrument was a guarantee. The MMOF Letter also stated that the defendant would cater to “any obligations of the Buyer to pay any amount under the Agreement when the same becomes due and payable or to perform or observe any term or condition of the Agreement”, which indicates intention in support for secondary liability, and therefore, not a demand guarantee. Meritz Fire & Marine v Jan de Nul N.V This case involved the claimant, Meritz Fire and Marine Insurance Co Ltd (“Meritz”), pursuing an assertion that it was not accountable under Advance Payment Guarantees (“APGs”) it supplied to the defendants guaranteeing the repayment of payments made by the defendants under three shipbuilding contracts, not making it a demand guarantee, and therefore is discharged as a surety. The first two contracts guaranteed the sum of US$6.3 million per contract and €15.05 million for the third contract. The defendants paid the shipbuilders more than the contractual amount in the form of contractually specified interest, and therefore seeking payment from Meritz as demand guarantee. The question needed to answered, in addition to other things, as to whether APGs are demand guarantees or classic contracts of suretyship. However, the court decided that this constituted a demand guarantee. Observing at the comprehensive construction of APGs and, and analysing their particular wording, it included three traits that the editors of Paget’s Law of Banking (13th ed. 2007) 34-4, at 865 state will indicate an instrument be most likely be interpreted as a demand guarantee. These three attributes are: (a) The agreement is created between different jurisdiction parties; (b) there is no indication for surety guarantee as a defence, or the inclusion of any secondary liability; and (c) Payment is to be made upon demand, and that too within a stipulated time frame after the demand is made”. The fourth of the attributes referred to by the editors of Paget and Andrews and Millett is that a bank issues the instrument. Meritz was not a bank but an insurance company and the claimant placed considerable weight on this. He observed that insurance companies, unlike banks, are habitual in compensating if the insured event has occurred rather than against documentation. He relied on the statements of Carnwath LJ in Marubeni Hong Kong v Government of Mongolia as obiter dictum, where the decision was made that the letter did not constitute a demand guarantee. However, the above case was conducted in the context of an instrument issued by the government of Mongolia, a body that was “not in the business of providing irrevocable financial instruments”. Therefore, this factor was disregarded. The claimant was able to provide strong arguments against an APG being a demand guarantee such as conditionality and the particular manner in which arbitration is dealt with. However, the court did not consider these to tip the balance against interpreting the APGs as demand guarantees, due to the particular fact that: (a) Payment was initiated through the provision of stipulated documentation, (b) An unconditinol and binding agreement was formed, and The non-existence of any defences, which were normally available to a surety within the contract, also gave weight to the fact that the instruments were interpreted as demand guarantees. The court further addressed the point whether APGs were performance bonds. Clause 17 in the agreement allowed the defendants to terminate contracts upon dissolution or liquidation of the Builders. The APG allowed for any reimbursement through the use of a certificate, thereby allowing for a payment upon demand in conjunction with clause 17. The contract therefore expressly provided for payment under the APGs in the case of the completion of HWS, the shipbuilder, and did not mark any change that HWS was ran as part of a redeployment, which lays a new corporate body in its place as the shipbuilder. Conclusion The above two cases set forth the distinctions between demand and surety bonds. As in the case of MHK, a demand guarantee was not determined mainly due to not expressly mentioning it. And as in the case of Meritz, a demand guarantee was effective due to the specificity of the contacts, which lead the courts to decide on the balance of probabilities that a demand guarantee was effective. References Birchal, S., & Ramus, J. (2012). Contract Practise for Surveyors (4, Illustrated, Revised ed.). Routledge. Meiners, R. E., Ringleb, A. H., & Edwards, F. L. (2008). The Legal Environment of Business (10, Illustrated ed.). Cengage Learning . Alex Notes Meritz Fire & Marine v Jan de Nul N.V. [2010] EWHC 3362 Marubeni Hong Kong and South China Ltd v Mongolian Government [2004] EWHC 472 Read More