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Was a guarantee payable on demand or was the guarantor only required to pay if the contractor had a liability to the pursuer?

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In the Scottish case of Buchan Biogas Limited  v BSG Civil Engineering Limited [2020] CSOH 42 the Court was faced with a conundrum.  

The bond contained a myriad of on demand and guarantee type wording and the Court had the unenviable task of deciding what it was.

The case contains a very informative analysis of the case law relevant to the issues being decided.

Background Facts 

The pursuer wished to build an anaerobic digestion plant in Aberdeenshire, for the generation of biogas from waste and entered into a contract with Williams Industrial Services Limited, the contractor, to engineer, procure and construct the plant.

The contractor entered into administration.

The pursuer served a demand under the Guarantee issued by the defender seeking payment of £2,019,603.28 on demand based on the contractor’s insolvency.

The Wording of the Guarantee

The Guarantee included the following provisions: 

  • “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, 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.
  • “the Contractor is Insolvent … shall be conclusive evidence for the purposes of this Guarantee of the Contractor's default in the performance of the Obligations.
  • “As between the Guarantor and the Client … the Guarantor shall remain liable under this Guarantee as if it were the sole principal obligor and not merely a surety.
  • “Where the Contractor is Insolvent … the Guarantor shall indemnify the Client … on the Client's first written demand for all claims … arising from the Contractor being Insolvent... The Employer's written demand shall constitute conclusive proof … of the Guarantor's obligation to pay such sums.
  • “In any action … 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”.

The Issue

It can be seen from the wording set out above that the guarantee contained the type of wording normally seen in both on demand and conditional documents.

The pursuer’s position was that the defender was obliged to pay on demand; a valid demand had been made;  the guarantee stated that if the Contractor were insolvent, that would be conclusive evidence for the purposes of this guarantee of the contractor’s default.

The defender’s position was that the document was a guarantee, not an on demand bond; you had to read guarantee as a whole and when you did it “has suretyship written all over it”; the wording did not say that it was irrevocable or that the guarantor was unconditionally liable; so it was necessary for the pursuer to establish a breach of contract by the Contractor.

Further, the sum claimed had to arise from a breach of contract by the Contractor whereas in this case, the money sought included legal costs and expenses arising out of litigation between the pursuer and the contractor in relation to a separate bond issued by Allied Irish Bank. 

The Decision 

The Court said that the issue was one of construction of the terms of the guarantee and the principal focus was on the natural and ordinary meaning of the language used.

It was an unusual feature of the case that each side, for the construction it proffered, required the language of the document to be disturbed.  So the Court had to assess what degree of disturbance to the wording (if any) was required.

The Court decided that the conclusive evidence clause should be upheld.   That meant that the issue of whether or not there had been a default by the contractor no longer arose;  the existence of the stated circumstance, namely, insolvency, was conclusive evidence of default and the obligation to make payment.

The next issue was to decide what sum then became due and it was any sum payable in consequence of the default, but only in order to indemnify (that is, compensate) the pursuer. The Court confirmed that defences, counterclaims and rights of set off would be available to the defender, in the same way as they would have been available to the contractor.

The Court found that the guarantee was a hybrid, having language suggestive of an on-demand element, but also, allowing that on-demand feature only to go the distance of allowing recovery in an insolvency context, but subject to the invocation of defences and the like which will preclude over-compensation. 

Implications

Parties may agree hybrid bond wordings instead of either an on demand bond or a pure guarantee, however, in agreeing to a hybrid, confusion may arise in relation to the parties’ rights and obligations.

It is always better to set out the intentions of the parties in clear and unambiguous language.

The case has some interesting parallels with the case of Ziggurat (Claremont Place) LLP v HCC International Insurance Co Plc [2017] EWHC 3286.

Sureties may find this case helpful because of the Judge’s comments about the commercial purpose of bonds extracts from which are set out below.

It was also stated that it was 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”

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