England’s Vexing Guarantee Legacy: Can Better be Done?

Did English courts finally define the difference between a surety guarantee versus a demand guarantee?

In his recent article on the SalamAir case (Nov/Dec 2021 DCW 37), DCW Editorial Advisory Board member Roger Fayers alluded to Shanghai Shipyard Co Ltd v. Reignwood International Investment (Group) Co Ltd and now informs that the UK’s Supreme Court has granted leave to hear an appeal. A cautiously optimistic Fayers reports that this means (hopefully) that the surety guarantee versus demand guarantee issue, which has so vexed many industry specialists and English judges, may be, if not settled, at least clarified. Although the appeal will not be heard for some time (no sooner than mid-2022), Fayers adds “I’m sure DCW readers will be interested to learn that the issue will be addressed by our highest court.”

DCW has published analysis in the past regarding the manner in which English judges approach the task of differentiating a demand guarantee from a surety guarantee and the related question of “independence” (see, for instance, “My Views on the Two Significant Aspects of the Spliethoff’s English Court Case” by James G. Barnes, June 2015 DCW 40).

Fayers has sought to explain the different position in England and the contrasting approach taken by a US judge to a standby LC from that taken by an English judge to a guarantee (see “Independence: Is England’s Approach to Bank Guarantees Different from America’s?”, Sept. 2016 DCW 29). The 2012 English decision in Wuhan Guoyu Logistics Group v. Emporiki Bank of Greece SA did proffer some change. The court of appeal accepted that the position in England was unsatisfactory and acknowledged that “something has surely gone wrong”. In the judgment, Longmore LJ suggested that certain presumptions be applied in the process of construction so as to relieve the court from having to consider numerous exhausting judgments and examining lengthy, often conflicting citations in them.

Longmore concluded that “the commercial community deserves better” but, and perhaps significantly, he added “if better can be done”. This because, absent a provision in a code such as US UCC Section 5-108(g), there may be little beyond laying down presumptions that an English court can do. Its task is to determine liability as between the parties under the instrument it has before it, so what matters is the wording they have used to express that liability.

All the court can do is to construe that wording to interpret its meaning in accordance with the established principles of construction. What makes this task more difficult is that the provisions in guarantees (often between non-English parties) sometimes conflict and are still couched in 19th Century language using terminology which unfortunately overlaps with that used in other types of guarantees. This, in turn, can leave the court with no alternative but to resort to the underlying contract itself. In the end, the liability or not of the guarantor will be determined by the court, but it is the means of doing so that needs to be looked at and, if possible, simplified. It is to be hoped the Supreme Court can do so.

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