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Parent company guarantee: trouble on demand?

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Rubicon Vantage International Pte Ltd v. Krisenergy Ltd [2019] EWHC 2012 (Comm)

The Commercial Court recently considered the scope of a parent company guarantee given with regard to a bareboat charterparty, which the parties agreed was, at least in part, an on-demand guarantee imposing an autonomous obligation on the guarantor to pay.

The background facts

The Claimant (“Rubicon”) was the owner of a Floating Storage and Offloading Facility called Rubicon Vantage (the “FSO”). By a bareboat charterparty dated 13 October 2014 (the “Charterparty”), Rubicon chartered the FSO to Krisenergy (Gulf of Thailand) Ltd (“Kegot”), a wholly-owned subsidiary of the Defendant (“Krisenergy”), and Krisenergy provided a guarantee to Rubicon (the “Guarantee”).

Pursuant to the terms of the Charterparty, Rubicon was to organise various works on the FSO prior to the commencement of the charter. Rubicon was to be responsible for the cost of such works, and a variation order regime was put in place providing that any additional costs resulting from variations to the works could be claimed from Kegot.

On 3 June 2015, Rubicon issued a series of invoices to Kegot, four of which related to variation orders totalling US$1,827,901 (the “Outstanding Sum”), and which were disputed. On 3 September 2018, Rubicon made a demand on Krisenergy under the Guarantee for the Outstanding Sum. Krisenergy declined to pay and a second demand was made on 29 January 2019, for the Outstanding Sum plus interest.

The terms of the Guarantee

The relevant provisions of the Guarantee were as follows. Kegot is referred to as ‘the Company’, Krisenergy as ‘the Guarantor’ and Rubicon as ‘the Contractor’.

“4. In circumstances where the amount(s) demanded under this Guarantee are not in dispute between the Company and the Contractor, the Guarantor shall be obliged to pay the amount(s) demanded within forty-eight (48) hours from receipt of the demand.

5. In the event of dispute(s) between the Company and the Contractor as to the Company’s liability in respect of any amount(s) demanded under this Guarantee:

  • (a) the Guarantor shall be obliged to pay any amount(s) demanded up to a maximum amount of United States Dollars Three Million (US$3,000,000) on demand notwithstanding any dispute between the Company and the Contractor;
  • (b) the Guarantor shall be entitled to withhold and defer payment of the balance of the sum demanded in excess of United States Dollars Three Million (US$3,000,000); and
  • The Guarantor shall be entitled to withhold and defer payment of any other disputed amounts claimed under this Guarantee,

Until a final judgment or final non-appealable award is published or agreement is reached between Company and contractor as to the liability for the disputed amount(s). ”

The Commercial Court decision

The parties agreed that the Guarantee was, in part, an on-demand guarantee, meaning that Krisenergy as the guarantor had, in part, an autonomous obligation to pay irrespective of the actual liability of the primary obligor, Kegot.

However, there was a dispute as to the extent of this obligation. Rubicon contended that as a compliant demand had been made under the Guarantee, Krisenergy was liable to pay irrespective of whether the underlying claims against Kegot were in dispute. On the other hand, Krisenergy argued that the Guarantee was on-demand only where liability had been admitted by Kegot, even if quantum remained in dispute. The parties also disagreed as to whether: (i) there had been an admission of liability by Kegot; and (ii) the demand made by Rubicon complied with the terms of the Guarantee. If it did not comply, the parties agreed that no liability would arise under it.

As to the extent of the autonomous obligation under the Guarantee, Krisenergy argued that the Court should apply the principle set out in Marubeni Hong Kong v. Mongolian Government[2005] EWCA Civ 395. In Marubeni, the Court of Appeal held that in a transaction outside the banking context, the absence of language describing an instrument as a demand bond or something of similar effect created a strong presumption against construing the document as an on-demand bond.

The Court rejected Krisenergy’s argument and held that once it is accepted that, to some extent, an instrument imposes autonomous liabilities, the Marubeni principle has no bearing on the extent of the autonomous obligation. In those circumstances, the proper approach in determining the extent of the autonomous obligation is “to begin simply by considering the words the parties chose to use to record their agreement, free from any antecedent presumption as to what meaning they are likely to have, or as towards a wide or narrow construction”.

The Court further rejected Krisenergy’s arguments that clause 5 was limited to disputes relating to the quantum of the demand, and that references to “disputed amounts” suggested that clause 5 was directed to liabilities which were disputed only as to quantum.

Accordingly, the Court found as follows:

  1. Pursuant to clause 4, if the amounts demanded were not in dispute between Rubicon and Kegot, Krisenergy would have to pay them within 48 hours of receipt of the demand under the Guarantee.
  2. Pursuant to clause 5, if there was a dispute between Rubicon and Kegot as to Kegot’s liability, which may or may not be a dispute as to quantum, Krisenergy would be obliged to pay up to a maximum of US$3,000,000.

On the facts of the case, Krisenergy also claimed that a valid demand had not been served under the Guarantee, which was also rejected by the Court, finding that both demands were valid.

Comment

The interpretation of guarantees has long been a difficult subject under English law, with various presumptions existing as to whether a particular instrument is an on-demand guarantee, imposing an autonomous obligation on the guarantor to pay, or whether it imposes a secondary obligation on the guarantor, to ‘see-to-it’ that the principal obligor will meet its obligations.  

In this case, the Court held that the proper method of construction was to look at what the parties meant by the language used, free from any presumptions as to the meaning of the words used or the scope of construction. While the Court’s decision was particular to the fact of the case, as it concerned the unusual situation of a guarantee imposing an autonomous obligation on the guarantor only in part, it is also a useful reminder that in circumstances where there are no industry standard form instruments, parties need to think carefully about the words they use when agreeing the terms of a security, whether in the form of a bond or a guarantee.

Jamila Khan

Jamila Khan Partner and Head of Office, Piraeus

Lida Logotheti

Lida Logotheti Senior Associate

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