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Cite as: [2020] ScotCS CSOH_42, 2020 GWD 17-244, [2020] CSOH 42

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CA135/19

OUTER HOUSE, COURT OF SESSION

OPINION OF LORD CLARK

In the cause

BUCHAN BIOGAS LIMITED

against

BSG CIVIL ENGINEERING LIMITED

[2020] CSOH 42

Pursuer

Defender

Pursuer: Borland QC; Morton Fraser LLP

Defender: Howie QC; MacRoberts LLP

13 May 2020

Introduction

[1] The defender granted a guarantee (“the Guarantee”) in favour of the pursuer, in

respect of claims by the pursuer against another company (“the Contractor”). The dispute

between the parties concerns the construction of the terms of the Guarantee and, put

broadly, whether it requires the defender to pay the pursuer on-demand, or whether the

defender is only required to pay the pursuer in the event that the Contractor has a liability to

the pursuer. The case called for a debate on this issue.

Background

[2] The pursuer wished to build an anaerobic digestion plant in Aberdeenshire, for the

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generation of biogas from waste. On 21 July 2015, Williams Industrial Services Limited, the

Contractor, contracted with the pursuer to engineer, procure and construct the plant for the

pursuer (“the Works Contract”). The defender, a civil engineering and building company,

was a sub-contractor engaged by the Contractor in relation to the works to be carried out

under the Works Contract. The Guarantee was granted by the defender in favour of the

pursuer in respect of the Contractor’s duties under the Works Contract. The Contractor

carried out work under the Works Contract. On 6 February 2018, the Contractor entered

into administration, thereby becoming insolvent for the purposes of the Works Contract and

also the Guarantee. By letter dated 21 August 2019, the pursuer served a demand under the

Guarantee on the defender, in terms of which the pursuer sought payment of £2,019,603.28.

The key terms of the Guarantee

[3] In the Guarantee, the defender is designated as the “Guarantor”, the pursuer as the

“Client”, and the principal debtor as the “Contractor”. The term “Insolvent” is defined in

the Guarantee as having the same meaning as in the Works Contract. In the Works

Contract, the term “Insolvent” is defined as meaning, inter alia, the relevant party entering

into administration. In the Guarantee, the term “Obligations” is defined as meaning each

and every term, provision, condition, obligation, undertaking and agreement on the part of

the Contractor to be performed, observed or carried out by the Contractor as contained or

referred to in the Works Contract. For present purposes, the key terms of the Guarantee are

as follows.

“2. Guarantee

2.1 Subject always to the limitations on the Guarantor’s liability set out in Clause

5, the Guarantor shall indemnify the Client against all loss, debt, damage,

interest, cost and expense incurred by the Client by reason of any failure of

the Contractor to perform, observe or comply with the Obligations and shall,

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on first written demand, pay to the Client, without any deduction or set-off,

the amount of that loss, debt, damage, interest, cost and expense.

Performance obligations

3.1 Subject always to the limitations on the Guarantor’s liability set out in clause

5, if, at any time, the Client informs the Guarantor that any default is made by

the Contractor in the performance of any of the Obligations, the Guarantor

will pay any sum or sums that may be payable in consequence of any default

made by the Contractor in the performance of any of the Obligations.

3.2 Without prejudice to the foregoing generality any determination of the Works

Contract, or of the Contractor’s employment under it, or the Contractor is

Insolvent or otherwise legally extinct shall be conclusive evidence for the

purposes of this Guarantee of the Contractor’s default in the performance of

the Obligations.

Liability as if sole principal obligor

4.1 As between the Guarantor and the Client (but without affecting the

Obligations), the Guarantor shall remain liable under this Guarantee as if it

were the sole principal obligor and not merely a surety.

4.2 The Guarantor shall not be discharged nor shall its liability be affected by

anything which would not discharge it or affect its liability if it were the sole

principal obligor including, but not limited to:

4.2.1 any amendment, modification, waiver, consent or variation, express

or implied, to the scope of the Works or to the Works Contract or any related

documentation;

4.2.2 the granting of any extensions of time or forbearance, forgiveness or

indulgences in relation to time to the Contractor;

4.2.3 the enforcement, absence of enforcement or release of the Works

Contract or of any security, right of action or other guarantee or indemnity;

4.2.4 the dissolution, amalgamation, reconstruction and/or reorganisation

of the Contractor or any person;

4.2.5 any indulgence or additional or advanced payment, forbearance,

payment or concession to the Contractor;

4.2.6 any compromise of any dispute with the Contractor;

4.2.7 any failure of supervision to detect or prevent any fault of the

Contractor; or

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4.2.8 any assignation of the benefit of the Works Contract.

Limitations

5.1 Subject to Clause 5.2, the Client undertakes to the Guarantor that it shall not

demand any payment pursuant to this Guarantee unless and until:

5.1.1 the aggregate of monetary claims made against the Contractor arising

from the failure by the Contractor to perform, observe or comply with the

Obligations exceeds £1,000,000;

5.1.2 the Client has first demanded payment from the Contractor under the

Works Contract (and the Guarantor shall be notified in writing of such

demand) for all such claims (including those in excess of £1,000,000), and

payment in full under the Works Contract has not been received within 14

days of such demand (or demands);

5.1.3 the Client shall notify the Guarantor in writing if payment from the

Contractor has not been received within 14 days; and

5.1.4 if payment has not been received within a further 28 days from the

date of the notice under Clause 5.1.3 (during which time the Client shall seek

to engage with the Guarantor to discuss the Guarantor’s proposals for

addressing the situation), then the Client shall be entitled to submit a demand

in accordance with Clause 2.1 and the Guarantor shall indemnify the Client in

accordance with Clause 2.1.

5.2 Where the Contractor is Insolvent or otherwise legally extinct the Client shall

not be required to comply with the provisions of Clause 5.1 and the

Guarantor shall indemnify the Client in accordance with Clause 2.1 on the

Client’s first written demand for all claims in excess of £1,000,000 arising from

the Contractor being Insolvent or otherwise legally extinct. The Employer’s

written demand shall constitute conclusive proof (and be admissible as such)

of the Guarantor’s obligation to pay such sums.

5.3 For the avoidance of doubt, the Guarantor shall have no liability under this

Guarantee for the first £1,000,000 of losses the Client suffers arising from the

Contractor being Insolvent or due to the Contractor’s failure to perform,

observe or comply with the Obligations. The maximum aggregate liability of

the Guarantor to make payment to the Client (in respect of one or more

demands) pursuant to this Guarantee shall be £3 million (three million

pounds sterling) less any sums capable of recovery by any subsisting on-

demand bond procured in favour of the Client by the Guarantor.

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5.4 In any action by the client for breach of this Guarantee the Guarantor shall

have available to it all defences, counterclaims and set offs as may have been

available to the Contractor under the Works Contract.

5.5 So long as any sums are payable (contingently or otherwise) under this

Guarantee the Guarantor shall not on any grounds make any claim or

threaten to make any claim whether by proceedings or otherwise against the

Contractor for the recovery of any sum paid by the Guarantor pursuant to

this Guarantee; save where such claim is by way of counter-indemnity for the

Guarantor’s obligations under this Guarantee. Any such claim shall be

subordinate to any claims (contingent or otherwise) which the Client may

have against the Contractor in connection with the Works Contract or any

other agreement until such time as the Client’s claims have been satisfied by

the Contractor.”

The pleadings

[4] The pursuer averred:

“6.1 The pursuer has suffered losses in excess of £3 million arising from the

Contractor being insolvent…

6.3 By virtue of clause 5.2 of the Guarantee, the Demand constitutes conclusive

proof of the defender’s obligation to pay the sum demanded. The pursuer is

therefore contractually entitled to payment from the defender of the amount sought

in terms of the Demand. Decree as first concluded for should therefore be

pronounced.”

[5] In answer, the defender averred:

“6.1 Not known and not admitted. Explained and averred that it is not sufficient,

for a right to payment to arise under the Guarantee, that money has been lost by the

Pursuer that it is irrecoverable in the administration. It is necessary also that the

initial liability of Williams Industrial Services Ltd to the Pursuer arose because of its

breach of the contract between the Pursuer and the said company. In

correspondence dated 8 March 2019 from solicitors in Northern Ireland acting on

behalf of the Pursuer, which the Pursuer has since stated as withdrawn in light of

supposed further and continuing losses, the Defender was informed that the money

being sought by the Pursuer included legal costs and expenses liability arising out of

litigation between the Pursuer and William Industrial Services Ltd over a bond

issued by Allied Irish Bank. On the face of it that sum does not arise from the

combination of the insolvency of Williams Industrial Services Ltd and its prior

failure to meet its contractual obligation. It arises out of litigation about, as appears,

an autonomous instrument and is not a loss against which the Guarantee is issued.

Should these monies continue to be claimed in the present action, the call on the

bond sought to be enforced, is excessive and seeks to recover sums to which the

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Guarantee does not extend, as the Pursuer, through their said solicitors in Northern

Ireland will have been aware.

…

6.3 Clause 5.2 of the Guarantee is referred to for its terms beyond which no

admission is made. Explained and averred that the Guarantee is a cautionary

obligation and not an on-demand bond. On its true construction the said Guarantee

is a reciprocal obligation as so demonstrated by the terms of Clause 5.1, and not an

on-demand bond. Were it such a bond the terms of Clause 4.2 would be needless,

though they are of significance to a cautionary obligations. Clause 3.2 renders

“insolvency” testament to a breach of the contract, if no other breach exists, but that

Guaranteed by the Guarantee remains the same, namely, the loss incurred by the

Pursuer as a result of failure by Williams Industrial Service to comply with the

“obligations” so defined in the Guarantee. In the event of insolvency, the Pursuer

need not go through the expense in Clause 5.1 in making a demand, but the

Guarantee will only cover losses from breach of contract insofar as irrecoverable by

reason of insolvency. Clause 5.4 of the Guarantee affords the Defender all the

defences open to Williams Industrial Services under its building contract, a provision

fundamentally inconsistent with the characterisation of the bond Guarantee so an

“on-demand bond” and with the final sentence of Clause 5.2 which falls to be

rejected as inconsistent with the Guarantee as a whole. The Pursuer is accordingly

obliged to set forth the basis upon which it contends that the sum sued for is the

consequence of breach of the building contract on the part of William, the sum

claimed having no apparent relation to any such loss.”

Submissions

[6] Each party lodged a Note of Argument in advance of the debate. In oral

submissions, senior counsel each adopted the contents of his Note of Argument and

developed his submissions. I have taken into account the full terms of the Notes of

Argument and the oral submissions and I now give a brief summary of each party’s

position.

Submissions for the pursuer

[7] A valid demand having been made by it under the Guarantee (in the form of the

demand dated 21 August 2019) there was an obligation on the defender, as the guarantor, to

make payment to the pursuer of the sum demanded. The single issue was a question of

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contractual construction. Clause 2.1 refers to the defender being obliged to pay the pursuer

on its written demand. Clause 3 states that if the Contractor is "Insolvent" that "shall be

conclusive evidence for the purposes of this Guarantee of the Contractor's default in the

performance of its Obligations". Reference was made to the definitions of "Insolvent" and

"Obligations”. By virtue of clause 3.2 of the Guarantee, the Contractor was to be taken,

conclusively, as in default of its obligations under the Works Contract on account of its

insolvency. It followed that there was an entitlement on the part of the pursuer to serve a

written demand on the defender pursuant to clause 2.1 of the Guarantee. Clause 5.2 of the

Guarantee was a significant provision, its effect being that, where the principal debtor is

insolvent, there is a clear contractual obligation on the defender to pay the pursuer on the

latter's written demand in respect of all "claims" in excess of £1,000,000 arising from the

principal debtor being insolvent. The final sentence of clause 5.2 was very important. The

reference to the Employer's written demand was an obvious typographical error. It should

sensibly be read as a reference to the written demand of the Client, i.e. the pursuer. The

final sentence of clause 5.2 made it crystal clear that, where the principal debtor is Insolvent,

the pursuer’s written demand will constitute “conclusive proof” of the defender’s obligation

to pay the amount demanded. The sentence was unambiguous.

[9] The position that emerged from these provisions was, in summary, as follows. (1) In

terms of clause 5.2 of the Guarantee, if the Contractor is "Insolvent", the defender is required

to indemnify the pursuer, in accordance with clause 2.1, on the latter's "written demand".

(2) The clause 5.2 obligation to indemnify is in respect of "claims", as opposed to decisions in

relation to disputes, awards or decrees, etc. (3) The obligation to indemnify in terms of

clause 5.2 is in respect of claims in excess of an initial £1 million threshold of claims. (4) The

claims must arise from the principal debtor' insolvency. (5) Clause 5.2 provides that the

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pursuer's written demand is "conclusive proof” of the defender's obligation to pay to the

pursuer the sum demanded. (6) That is consistent with indemnification by the defender in

accordance with clause 2.1 which also refers to the obligation to pay on the pursuer's written

demand.

[10] The proper approach was that taken in Gold Coast Ltd v Caja De Ahorros Del

Mediterraneo, [2002] 1 Lloyd’s Rep 617. The reference to payment on the first written

demand was reflected in clauses 2.1 and 5.2 of the Guarantee in this case. In Marubeni Hong

Kong and South China Ltd v Government of Mongolia [2004] 2 LLR 198, Creswell J again

considered the nature of the document as a whole and the obligation to provide an

indemnity. Clear language is needed, but that test was met here and so the presumption

was displaced or rebutted (see also IIG Capital LLC v Van der Merve [2008] 2 LLR 187, per

Waller LJ at [30]). There was nothing that pointed towards it being a secondary liability and

in particular that factor was absent in the insolvency situation, where clause 5.2 could

scarcely be clearer. Clause 5.2 in the Guarantee here contained a conclusivity clause that is

even stronger than in Marubeni. The decision in Vossloh AG v Alpha Trains UK Ltd (2010) 132

Con LR 32 (at [26]) showed that shifting the risk of insolvency was the intention. Insolvency

is conclusive evidence of default. Clause 5.2 was conclusive evidence of both liability and

the amount. Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd [2015] 2 LLR 123 refers

(at [73]) to the target being cashflow. The key principles were summarised by Blair J in

Autoridad del Canal de Panama v Sacyr SA [2017] 2 LLR 351 (at [80] et seq). It showed that the

inclusion of clause 4.2.1 in the Guarantee is not necessarily a significant factor, such clauses

often being included in on-demand cases, out of an abundance of caution.

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[11] Turning to the issue of construction of the Guarantee, the application of clause 5.4

could not stand in an insolvency situation as it would include defences on the merits (i.e.

that the Contractor was not in default) whereas insolvency is different. One could certainly

have a document which is a hybrid. Here, in a non-insolvency situation, clauses 3.1 and 5.1

provided for a particular regime and in that situation clause 5.4 could have meaningful

application; issues of default and consequences are all live issues in a non-insolvency

situation. But there was a different and distinct regime in the case of insolvency, provided

for in clauses 3.2 and 5.2. Contrary to the defender’s submission that the last sentence of

clause 5.2 fell to be rejected, the court was invited to read the Guarantee as a whole.

Clause 5.4 could not stand against the pursuer when the Contractor is insolvent. A defence

on liability would “hit the wall” of clauses 3.2 and the final sentence of clause 5.2. Thus,

clause 5.4 did not apply in insolvency. The defender contends that clause 4.1 of the

Guarantee is the kind of provision one sees in cautionary obligations or ordinary Guarantees

rather than in on-demand bonds, but that was contradicted in the case law: Gold Coast Ltd

(at [25]) and Autoridad del Canal de Panama (at [81] (5)). Looking at clause 4.2.4, the position

stated in clause 4.2 applies even where the Contractor is dissolved and under clause 4.2.6

any compromise is also irrelevant for the purposes of liability of the guarantor. The

defender’s reliance on the fact that the instrument was called a Guarantee was misplaced.

Labelling is not a significant factor in determining the nature and type of instrument: Gold

Coast Ltd (at [21]); Spliethoff’s Bevrachtingskantoor BV (at [84]). The defender’s contention that

clause 5.2 refers back to clause 2.1 was incorrect. Bitumen Invest AS v Richmond Mercantile

Ltd FZC [2016] EWHC 2957 (Comm) supported the pursuer’s position, which was obviously

the probable intention in a situation where the Contractor is insolvent. This was

commercially sensible, as vouched by Vossloh AG. In relation to legal extinction, the parties

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had provided for this scenario. Contrary to the defender’s position, in an insolvency

situation there was plainly a good commercial reason to provide for cash flow and to secure

monies that might not otherwise be available from an insolvent Contractor. In relation to

the passing of the risk back to the principal debtor, reference was made to Speirsbridge

Property Developments Ltd v Muir Construction Ltd 2008 SCLR where Lord Glennie held that

such a term was implied into the building contract.

Submissions for the defender

[12] The document should be examined without any preconceptions as to the category

into which it falls (Gold Coast Ltd) but there were presumptions, known as the “the Paget

presumption” and “the Marubeni presumption”, each rebuttable. The Marubeni

presumption, operates where the Paget presumption, which applies in an international

banking context, does not, and is a strong presumption. The drafting of the document may

not be entirely internally consistent but the better view was that the instrument is a

Guarantee or cautionary obligation. Wording in the Guarantee which might suggest that it

is an on-demand contract faded away when the rest of the surrounding text is read. The

default required to be a real one in order to trigger a liability on the part of the defender and,

by virtue of clause 2.1, the liability was for the loss incurred by the pursuer “by reason of

any failure by the Contractor to perform the Obligations”. The reference in clause 2.1 to

payment on a “first written demand” was born of fear of the problem illustrated by Royal

Bank of Scotland Ltd v Brown 1982 SC 89. Clause 4 excluded defences which would be apt to a

Guarantee, but are quite meaningless in the context of an autonomous bond (see Vossloh AG

(at [27])). The author of the instrument was aware of the distinction between an on-demand

bond and a Guarantee. It was not realistic to suggest that clause 4 is redundant; rather its

purpose was to preclude certain defences from being raised. Not insignificantly, the

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instrument is called a “Guarantee”. The draftsman was aware of a distinction between a

Guarantee and an on-demand bond (see clause 5.3). The instrument does not speak of the

making of “irrevocable” or “unconditional” payment against the demand. Clauses 2.1 and

5.1 pointed towards the obligation being of a secondary nature and clause 5.5 was clearly

designed to attack a cautioner’s rights of relief against the principal. The Marubeni

presumption was reinforced by clause 4.1. The pursuer’s reliance on clauses 3.2 and 5.2 was

misplaced. Conclusive evidence clauses can be found in both Guarantees and on-demand

bonds (Autoridad del Canal de Panama, (at [81](6)) and are to be strictly construed with any

ambiguity being resolved in favour of the guarantor (Vossloh AG (at [52])). The conclusive

evidence clauses do not cover any given amount of money. The construction proffered by

the pursuer was unlikely to have been the intention of reasonable businessmen.

[13] This was not the classical on-demand bond position. In reality, the object of the

instrument was to secure a correctly calculated payment compensating, but not over-

compensating, the beneficiary for the loss it actually sustained through the Contractor’s

breach of the main contract. Furthermore, the Guarantee was not concerned with securing

cash flow (the hall-mark of the on-demand bond: Spliethoff’s Bevrachtingskantoor BV) or

allocating the risk of financing any loss which the beneficiary may have sustained pending

the resolution of the merits of the Works Contract disputes. That was made patent by the

existence of clause 5.4, which is directly contradictory to the pursuer’s position. It further

contradicts the conclusive evidence provisions in clauses 3.2 and 5.2. If these were to be

construed as barring any challenge by the defender to the assertion of liability to pay such

figure as may be inserted in the written demand made by the beneficiary, those clauses are

repugnant to the rest of the instrument and should therefore be rejected as being

inconsistent with the remainder of the instrument. Alternatively, even if not rejected

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outright, the court would be left with drafting which is internally inconsistent on matters

material to the classification of an instrument as an on-demand bond or as a cautionary

obligation. In that situation, the drafting of the instrument would not be sufficient to

displace the Marubeni presumption.

[14] When one looked at the definitions in the EPC contract, a Guarantee differs from a

bond, and a bond means the on-demand bond from a financial institution. The on-demand

bond has to be in the form set out in schedule 7 and it refers to the obligor being irrevocably

and unconditionally liable. Those drafting the Guarantee knew that an on-demand bond

barred any discussion of underlying obligations. While cases such as Gold Coast Ltd

indicated that labelling does not mean anything very much, here a professionally drawn-up

contract showed differences in the wording between a Guarantee and an on-demand bond.

The only point in having clause 4 was because the instrument is a Guarantee and not an on-

demand bond. Contrary to the submissions for the pursuer, insolvency is not a different

circumstance. If the court is faced with the need to reject clauses in a document then

rejection should follow. The reference in clause 5.2 to the word “claim” was not of any

specific significance because what is to be indemnified is in accordance with clause 2.1. If

the pursuer’s position is correct then the defender, exercising its rights under the Speirsbridge

Property Developments Ltd approach would not get anything back. Clause 4 deals with the

question of being legally extinct but the pursuer argues that the defender needs to pay to the

pursuer whatever it claimed, even when the Contractor is extinct and the defender has no

chance of getting it back. Clause 5.5 again gave no prospect of getting money back. There

was no sense in saying the defender is protected when the Contractor is solvent, but if the

Contractor is insolvent the pursuer could be overcompensated, and the defender could not

insist on the pursuer just getting what it is due, and the defender will not be able to recover

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the sums claimed. The pursuer’s position involved a contradiction of the expression “any

action” in clause 5.4. Rejecting clauses is generally not an appropriate approach but having

regard to the Marubeni presumption there is nothing to overcome that presumption.

Accordingly there were two possible resolutions: the court could either reject the conclusive

evidence provisions in the final sentence of clause 5.2 and the relevant part of clause 3.2 or

simply use the Marubeni presumption.

Reply for the pursuer

[15] The reference to different documents which more explicitly call themselves on-

demand bonds was neither here nor there. The defender’s position that this is a document

that “has suretyship written all over it” could not stand against the clear language of clauses

4.1 and 4.2 which refer to the sole principal obligor and not simply a surety. The defender’s

position that the protective clauses of the kind in clause 4 were a powerful indication of it

being truly a Guarantee and not an on-demand document was directly contradicted by the

authorities. It was demonstrably and clearly wrong for the defender to suggest insolvency

made no difference under the terms of the Guarantee. Clauses 3.1 and 3.2 dealt with two

different situations, non-insolvency and then insolvency. The same could be said about the

differing regimes in clauses 5.1 and 5.2. When clause 5.2 applies, the pursuer does not have

to comply with the rigmarole in clause 5.1. Claims are not determined matters. Clause 2.1

refers to indemnify without deduction or set off. Cases such as IIG Capital LLC showed that

something called a Guarantee may well be an on-demand instrument where the guarantor is

the principal obligor and not a surety. On the submission about the position the defender

would be in following the insolvency or extinction of the Contractor, the point was simply

that clause 5.2 and 3.2 were moving the risks of insolvency of the Contractor on to the sub-

contractor, which was entirely sensible. This was vouched by Vossloh AG (at [26]). Rejection

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of clauses is a very extreme position for a party to adopt and the court should be extremely

slow to accept the submissions for the defender on that matter, particularly if, as in this case,

there is a possible and tenable alternative construction. The language was of sufficient

clarity to rebut the Marubeni presumption; it could scarcely be made any clearer than the last

sentence of clause 5.2. The pursuer’s position was not to reject the words “in any action”

which appear in clause 5.4, but to construe these in the context of the whole of the

instrument. That approach involved a much less radical position than rejecting two clauses

in the instrument. There was a clear logical fallacy at the heart of the defender’s position

that the court should either reject the final sentence in clause 5.2 and the whole of clause 3.2

or, if not, proceed on the basis that the presumption applied. If the court did not reject those

provisions then there was clear language of the sort that required to rebut the presumption.

Decision and reasons

Relevant legal principles

[16] The issue is one of construction of the terms of the Guarantee. I approach that matter

in the usual fashion, as set out in Rainy Sky SA v Kookmin Bank Co Ltd [2011] 1 WLR 2900,

Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Services Ltd [2017] UKSC 24,

and as endorsed by the Inner House (see eg HOE International Ltd v Andersen 2017 SC 313

and Ashtead Plant Hire Company Limited v Granton Central Developments Limited

[2020] CSIH 2). However, it is noteworthy that there are no averments as to any specific elements

of the factual matrix or background which are said to have an impact on the meaning of the

language used in the instrument. The principal focus is therefore on the natural and

ordinary meaning of the language used, taking into account the relevant aspects of the

contractual context. Submissions were made on behalf of each party as to why the

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construction it put forward was to be preferred as being more compatible with business or

commercial common sense. As in Midlothian Council v Bracewell Stirling 2018 SCLR 606, that

is a factor in this case.

[17] The particular legal principles which have been applied by the English courts in

cases of the present kind are summarised neatly by Blair J in Autoridad del Canal de Panama v

Sacyr SA, the key points for present purposes being the following:

“[80] In approaching the construction question, the following principles appear

from the case law:

(1) Unlike a Guarantee, a first demand bond is in principle autonomous

of the underlying contract - liability may arise simply on a conforming

demand within the validity of the instrument. For this reason, it has been

likened to a letter of credit (Edward Owen Engineering Ltd v Barclays Bank

International Ltd [1978] QB 159 at page 171, Meritz Fire and Marine Insurance Co

Ltd v Jan de Nul NV [2011] BLR 320; [2011] I All ER (Comm) I 049 at para 70,

WS Tankship II BV v The Kwangju Bank Ltd [20 I I] EWHC 3103 (Comm) at

para 111, Spliethoff's Bevrachtingskantoor BV v Bank of China Ltd [2015] 2

Lloyd's Rep 123 at para 69).

(2) What the instrument is labelled, the incorporation of terms such as a

principal debtor clause, or terms imposing primary liability, both of which

are very common in guarantees of all kinds, and the use of words such as "on-

demand", may be of limited value in determining its legal nature. The

practical question, as in the present case, is in substance whether the

instrument is effectively payable on demand, with or without some

supporting documentation: this can only be ascertained by examining its

terms (Marubeni Hong Kong and South China Ltd v Government of Mongolia

[2005] 2 Lloyd's Rep 231; [2005] I WLR 2497 at para 30, IIG Capital LLC v van

der Merwe [2008] 2 Lloyd's Rep 187 at para 25, Vossloh AG v Alpha Trains (UK)

Ltd [2011] 2 All ER (Comm) 307 at paras 23 and 28, Carey Value Added SL v

Grupo Urvasco SA [2011] 2 All ER (Comm) 140 at para 22).

(3) As was said in Gold Coast Ltd v Caja deAhorros del Mediterraneo [2002] I

Lloyd's Rep 617 at paras 10 and 15, the court approaches the task of

construing it by looking at the instrument as a whole ‘without any

preconceptions as to what it is’. To take advance payment Guarantees as an

example, the issuance of such Guarantees securing advance payments made

by an employer to a contractor can be in either form - it depends on what the

parties agreed (see Gold Coast at para 11 ).

(4) When it comes to construing the instrument, the nature of the party

giving the guarantee is relevant. It has been held that there is a presumption

Page 16 ⇓

against construing an instrument as a demand bond which is not given by a

bank or other financial institution (Marubeni at para 30, IIG Capital v van der

Merwe at para 9). It has also been held that an instrument issued by a

financial institution which relates to an underlying transaction between

parties in different jurisdictions and contains an undertaking to pay “on-

demand", and does not contain clauses excluding or limiting the defences

available to a guarantor, will almost always be construed as a demand

Guarantee (Gold Coast at para 16, Wuhan Guoyu Logistics Group Co v Emporiki

Bank of Greece SA [2014] I Lloyd's Rep 266 at para 27, Caterpillar Motoren GmbH

& Co KG v Mutual Benefits Assurance Co [2015] 2 Lloyd's Rep 261 at para 20).

(5) The presence of "protective clauses", ie clauses excluding or limiting

the defences available to a guarantor (such as those arising from variations of

the principal contract) have sometimes been treated as indicative of guarantee

liability (because they are unnecessary in the case of a first demand

instrument), but this is not necessarily a significant factor, since there may be

other reasons for including the clauses, (eg) out of an abundance of caution

(Gold Coast at para 25). The absence of any such clauses may be a pointer to

the instrument being a first demand instrument (Meritz, supra, at para 74).

(6) Whilst "conclusive evidence" clauses may not in themselves point to

the nature of the instrument, since they can be found in either kind, a clause

which - if effective - requires payment against certification by the beneficiary,

is likely to be inconsistent with the need for the beneficiary to establish the

liability (other than through such certification) of the principal debtor in

order to enforce the guarantee (North Shore Ventures Ltd v Anstead Holdings Inc

[2011] 2 Lloyd's Rep 45; [2012] Ch 31 at para 67, Bitumen Invest AS v Richmond

Mercantile Ltd FZC [2017] I Lloyd's Rep 219 at para 27). However, conclusive

evidence clauses, which have found support historically through the

perceived institutional reliability of the party entrusted with making the

relevant calculations, are strictly construed, with any ambiguity being

resolved in favour of the guarantor (Bache & Co (London) Ltd v Banque Vernes

et Commerciale de Paris SA [1973] 2 Lloyd's Rep 437 at page 440, Bangkok Bank

Ltd v Cheng Lip Kwong [1989] SLR I 154 at page 1159, North Shore at para 46).”

Application of the legal principles

[18] It is an unusual feature of this case that each side, for the construction it proffered to

be upheld, required the language of the instrument to be disturbed. Notwithstanding the

open and wide manner in which clause 5.4 is expressed (referring to “any action”), the

submission for the pursuer effectively required other words to be read into that clause

(albeit that it was submitted that this was really a matter of construction) in order to restrict

Page 17 ⇓

its meaning to a non-insolvent situation. For the defender, it was submitted that one whole

clause (3.2) and a full sentence in another clause (5.2) required to be omitted from

consideration, or as it was put, rejected. In considering the wording of the instrument, I

shall assess what degree of disturbance to it (if any) is required.

[19] In embarking on this exercise, I start by, as it were, clearing the decks. It was not

vouched in the productions or submissions that the terms of the Guarantee were derived

from, or based upon, a form of Guarantee included in the standard forms of EPC contractual

material. It is no doubt correct that one could speculate that an instrument of this degree of

sophistication may well, at least in part, have come from a standard form, but I had no

grounds in fact for reaching that conclusion. I proceed upon the basis that it is simply

unknown whether the Guarantee was so derived or based, or on the other hand was a

bespoke drafting exercise. The defender’s submission that the person who drafted the

Guarantee must have been aware of the wording of the standard on-demand instruments

which form part of that contractual material may also be correct, but I did not understand

this to be a matter of agreement and I therefore disregard that point. As to the use of the

term “Guarantee”, that label offers no assistance to the issue of construction. Similarly, the

fact that the person who drafted the Guarantee referred, in clause 5.3, to any “on-demand

bond” procured by the defender does not assist in pointing towards either side’s proposed

construction being correct.

[20] Clause 2.1, as the first substantive term, makes several clear points. It begins with

the words “Subject always to the limitations on the Guarantor’s liability set out in Clause 5”.

The word “always” is of importance: the limitations in clause 5, which include those stated

in clause 5.4, always apply. The clause goes on to say that “the Guarantor shall indemnify

[the pursuer] against all loss, debt, damage, interest, cost and expense incurred by the

Page 18 ⇓

[pursuer] by reason of any failure of the Contractor to perform, observe or comply with the

Obligations”. The natural and ordinary meaning of indemnify is to compensate or give

recompense. The indemnity is also predicated upon a failure by the Contractor under its

contract with the pursuer. The next sentence refers to the obligation to pay “on first written

demand … without any deduction or set-off, the amount of that loss, debt, damage, interest,

cost and expense”. The first written demand is therefore for payment of that loss, debt or the

like, referring back to the loss, debt or the like incurred by reason of any failure of the

Contractor.

[21] Clause 3.1 also begins with the “Subject always” point in relation to clause 5, and

states that the defender “will pay any sum or sums that may be payable in consequence of

any default made by the Contractor in the performance of any of the Obligations”. It is

therefore again triggered by a default. The sum or sums are payable “if … the [pursuer]

informs the [defender] that any default is made”. The natural and ordinary meaning of

“informs” is the passing on of an actual fact, rather than merely asserting that there is

default or simply making a demand. Accordingly, default must have occurred for the

pursuer’s right set out in this provision to be triggered.

[22] One of the clauses which the defender submits ought to be rejected or ignored is

clause 3.2. In my view, it would be very odd for a clause containing a concept of such

potential significance (the reference to conclusive evidence) simply to be ignored. It is also

presented as a separately numbered and expressed clause in the Guarantee, which is

indicative of the parties intending it to form part of the Guarantee. I was given no basis for

concluding that it had somehow been included as a result of an error. In those

circumstances, it must be taken into account. It stipulates matters that form conclusive

evidence of default by the Contractor in the performance of its obligations, including the

Page 19 ⇓

Contractor being insolvent or legally extinct. Thus, in the circumstances covered by clause

3.2, the issue of whether or not there has been a default no longer arises: the existence of the

stated circumstances, such as insolvency or extinction, is conclusive evidence of default.

However, that is the extent of the conclusive evidence. Read in context, including the terms

of clause 2.1, what then becomes due is any sum or sums that may be payable in

consequence of the default, but only in order to indemnify (that is, compensate) the pursuer.

In addition, liability also remains subject to the limitations on the defender’s liability set out

in clause 5, including clause 5.4.

[23] Clauses 4.1 and 4.2 make reference to the defender remaining liable and not being

discharged, with the defender being treated as “if it were the sole principal obligor and not

merely as surety”. There is plainly some force in the pursuer’s position that this equates the

defender to a sole principal obligor rather than a cautioner or surety. But, equally, the

defender’s point that the inclusion of such language would be wholly unnecessary if the

defender was indeed the sole principal obligor is well made. The individual points listed in

clause 4.2 do not add anything of substance for present purposes; these are simply examples

of things which would not discharge or affect the defender’s liability “if it were the sole

principal obligor”. In my opinion, clauses 4.1 and 4.2 appear capable of being consistent

with either side’s construction but they do not operate as clear pointers in either direction.

The case law properly regards such expressions as of limited significance.

[24] Turning to clause 5.1, it suffices for present purposes to note that it provides for the

pursuer not being able to demand payment from the defender under the Guarantee unless

certain precursor steps have been taken, such as having first demanded payment from the

Contractor. Clause 5.2 states that where the Contractor is insolvent or otherwise legally

extinct the pursuer shall not be required to comply with clause 5.1 and “shall indemnify [the

Page 20 ⇓

pursuer] in accordance with Clause 2.1 on the [pursuer’s] first written demand for all claims

in excess of £1,000,000 arising from the Contractor being Insolvent or otherwise legally

extinct”. This therefore results in a removal of the need for the precursor steps, but it is still a

duty to indemnify (that is, compensate) and to do so “in accordance with Clause 2.1”. Also,

the indemnity is in respect of claims “arising from” the Contractor being insolvent or legally

extinct, so again there must be a link between the insolvency or being extinct and the sum

claimed. In relation to the final sentence, I accept the submission for the pursuer, which I

did not understand to be questioned by the defender, that the reference to “Employer” is an

error and that it should be taken to mean the pursuer. The pursuer founds very heavily on

the fact that this sentence states that the pursuer’s written demand for all claims in excess of

£1,000,000 “shall constitute conclusive proof (and be admissible as such) of the [defender’s]

obligation to pay such sums”. Such is the apparent force of that final sentence, that the

defender submits that it must be rejected and ignored. However, I was given no clear basis

as to why I should ignore this final sentence, other than that senior counsel for the defender

did not regard it as reconcilable with what was otherwise, in his submission, the proper

construction of the Guarantee. Giving the words their ordinary and natural meaning, the

written demand constitutes conclusive proof of an obligation to make payment. However,

clause 5.4 is of crucial importance and casts substantial light on the nature of the instrument.

It begins with the words “In any action by the [pursuer] for breach of this Guarantee” and

then refers to the defender having “available to it all defences, counterclaims and set offs as

may have been available to the Contractor under the Works Contract”. Of major

significance is that the clause applies in any action for breach of the Guarantee. This clearly

relates to the earlier references (including in clause 5.2) to the defender’s obligation to pay

sums due under the Guarantee. A failure to comply with such an obligation is a breach of

Page 21 ⇓

the Guarantee (and there may of course be other forms of breach). Clause 5.4 thus applies to

any action brought in which breach of the Guarantee is alleged, including a failure to

comply with the obligation stated in clause 5.2.

[25] In summary, the key clauses in the instrument begin (in clause 2.1) by creating an

obligation of indemnity on the defender only when the Contractor is in default of its

obligations under the Works Contract and only in respect of losses etc. incurred by reason

of that failure. Clause 3.1 takes that point forward by stating that the defender will pay any

sum or sums that may be payable in consequence of that default, once the pursuer has

informed the defender of the default. Clauses 4.1 and 4.2 make clear that the defender is

liable as if it were the sole principal obligor and not merely as surety and that its liability

will not be affected by anything which would not affect its liability if it were the sole

principal obligor. Clause 5.1 provides for the precursor steps to be taken, including making

a demand to the Contractor. However, when the Contractor is insolvent or extinct, as

clauses 3.2 and 5.2 make clear, there is an obligation to make payment on first written

demand, although the sums claimed must be linked to the insolvency or extinction of the

Contractor. Properly construed therefore, when the Contractor becomes insolvent or extinct,

there is an obligation on the part of, and a direct right against, the defender for payment,

without proof of default. To that extent, the instrument can be regarded as creating an

obligation to pay on-demand, but clause 5.4 makes it absolutely clear that the defender can,

if alleged to be in breach of that obligation, invoke the available defences and the like. It is

quite correct that the final sentence of clause 5.2 provides that the written demand shall

constitute conclusive proof of the defender’s obligation to pay such sums. Thus, the

obligation on the defender to make payment is constituted or proved. As a result, the

precursor steps are not required (as clause 5. 2 states) and proof of default is not required

Page 22 ⇓

(clause 3.2). The reference in clause 5.2 to indemnifying the pursuer “in accordance with

Clause 2.1” is, however, also relevant. As noted, clause 2.1 is subject always to the

limitations in clause 5, including clause 5.4. The mere existence of an obligation to make

payment on-demand does not stop that obligation being subject to the qualification clearly

set out in clause 5.4, so that when it is sought to be enforced, defences and the like available

to the Contractor can be invoked.

[26] In simple terms, the possibilities available to parties creating a contract of this sort

are not limited to what could be described as a pure on-demand bond or a pure cautionary

or secondary obligation. The instrument can plainly be something of a hybrid, having

features of both. It can have scattered within it certain language which is suggestive of an

on-demand element, but it can, as is the position here, allow that on-demand feature only to

go the distance of allowing recovery in an insolvency or extinction context, but subject to the

invocation of defences and the like which will preclude over-compensation.

[27] I reach that conclusion on the proper interpretation of the language in the

instrument. I also note that this approach fits with what is, in my view, often the logical and

commercially sensible aim of these arrangements, whether cautionary obligations or on-

demand, that the payee is compensated (and not over-compensated) by the guarantor for

losses. In order that there is no over-compensation, if the guarantor in an on-demand bond

makes payment which turns out to constitute overpayment to the payee, then the guarantor

would very probably be able to seek recovery from the principal debtor (in this case the

Contactor) who then could seek recompense from the payee (the pursuer) on the basis of an

implied term (as in Speirsbridge Property Developments Ltd v Muir Construction Ltd) or perhaps

on other grounds, such as unjustified enrichment. This would achieve the result of there

being no windfall. In the present case, in the context of insolvency or extinction there is no

Page 23 ⇓

need to constitute the obligation of the Contractor, because clause 3.2 and the final sentence

of clause 5.2 create the obligation, but to achieve the avoidance of over-compensation

(especially in an insolvency or extinction situation which places the guarantor in serious risk

of not being able to recover any over-compensation) clause 5.4 also applies. The distinction

between non-insolvency and insolvency simply concerns constitution of the obligation and

in fact clause 5.4 has a greater relevance in an insolvency context in avoiding overpayment.

[28] I acknowledge that this conclusion differs from the submissions made by both

parties, but of course the question of construction is one for the court. Moreover, as I have

noted, each construction offered on behalf of the parties involved substantial disruption to

the contractual terms, whether by requiring specific terms to be wholly ignored or rejected

or clear wording (“if any”) to be read down by, in effect, adding in words restricting it to a

non-insolvency context. I accept that senior counsel for the defender, in response to a

question from the court about whether clause 3.2 and the final sentence in clause 5.2 could

be reconciled with the construction he was proposing, expressly stated that was not possible.

But the conclusion I have reached fits largely with the defender’s overall line of argument.

The idea that the pursuer could achieve a windfall or indeed simply a payment just based on

a claim itself seems odd, given the wording of clause 5.4. Equally, the idea that two

provisions in a reasonably clear and refined contractual document require to be completely

ignored is also odd. A construction that gives effect to each and every sentence and word in

the Guarantee is a much more desirable outcome. It makes straightforward commercial

sense to avoid-over-compensation by allowing the defender to access defences which would

have been available to the Contractor, rather than having to take the longer route of making

payment and then suing the Contractor (through the administrator or liquidator), who then

(if able to make payment to the defender) seeks recovery from the pursuer. Of course, I also

Page 24 ⇓

recognise that there may be strong commercial reasons for an immediate payment to be

made in certain commercial contexts, particularly to assist with cash flow. However, the

avoidance of over-compensation remains important. Among the difficulties that arise with

the construction advanced by the pursuer is that very substantial sums would become

payable solely on the basis of a claim being made, with that claim wholly unable to be

defended by the defender, leaving the defender unable to recover all or at least some of the

amount it pays out from the insolvent Contractor, or in another situation the now extinct

Contractor. On the construction I have adopted, the parties would indeed have a different

solution in an insolvency context. There would be no need on the part of the pursuer to

show any default by the Contractor or go through the preliminary steps in clause 5.1, but if

need be clause 5.4 would operate to obviate any windfall. On that approach the parties

have in the Guarantee selected a reasonably sophisticated and commercially sensible route.

[30] The conclusions I have reached simply rely upon the proper construction of the

Guarantee. I have taken into account the factor of commercial common sense, but it adds

nothing of significance to the natural and ordinary meaning of the language used. The same

result would have followed by applying the Marubeni presumption, which does apply in

light of the absence of cogent indications capable of rebutting it. The Guarantee was not

granted by a financial institution, but by a private limited company in the construction

sector acting as a sub-contractor. The pursuer contended that if the court does not reject the

provisions in clauses 3.2 and 5.2 to which the defender referred, it would be difficult to

apply the Marubeni presumption because the wording of those provisions would appear to

strongly contradict it and indeed may well suffice to rebut it. The provisions do not have

that effect. On the contrary, the language used in the Guarantee leads to the same outcome

as the presumption.

Page 25 ⇓

Disposal

[31] Given that I have reached a view which does not directly accord with either party’s

submissions, I do not grant either of the motions made. I shall put the case out by-order to

discuss further procedure.

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