Shanghai Shipyard, What Now for the English Guarantee?

The historical challenges of suretyship in English law, emphasizing the need for modernizing guarantee forms. Recent cases, like Shanghai Shipyard, underscore the importance of clarity.

Shanghai Shipyard, What Now for the English Guarantee?

The history of suretyship in English law and an understanding of the development and categorisation of its various undertakings to provide security for the performance of a payment obligation – from the traditional guarantee by way of suretyship to “answer for” the debt or obligation of another if that other defaults, to the “see-to-it” guarantee and, in more recent years, to the on- demand guarantee – have been, and still are, bedeviled by wording.

Early background
To enhance the value of their security, changes were made to the early suretyship undertakings by removing various equitable defences available to the surety. But the drafter’s method was usually to add provisions rather than to alter or remove existing ones, seemingly with little appreciation of their effect on the obligation the undertaking created. Accordingly, many archaic provisions, doubtless designed for lawful reasons at the time, were retained in later suretyship undertakings even where those reasons no longer existed. The result has been that finding where any of these undertakings (which commonly became termed guarantees) are positioned in the wide spectrum of liability, ranging from secondary or primary or surety-type or demand-type, calls for fine judgment.

The fine judgment
This arises because these provisions invariably pointed in different directions and actually disguised what is the defining characteristic of the guarantee itself. In some guarantees this characteristic was that the nature of the obligation the guarantor undertook was “to see to it that the debtor performed its own obligation to the creditor”.1 The essential feature of such a guarantee, therefore, was that the guarantor’s liability depended upon there being a liability of the debtor to the creditor. Confusion possibly arose because the guarantor’s obligation was often described as that of a “primary obligor”. This description was used to make it clear that the default of the debtor gave rise to an independent and primary liability of the guarantor by the very fact of the debtor being in default. As a consequence, the guarantor was then instantly in breach of its own obligation because it had not “seen to it” that the debtor paid. But the obligation of the guarantor remained a secondary one in the sense that it was contingent on there actually being a continuing liability of the debtor.

By contrast, the defining characteristic of other undertakings, which became known as on-demand guarantees, differed. This was because, and crucially, the guarantor’s liability was to arise on or by reference to an event, this being the making of a demand,2 and without the beneficiary having to establish the debtor’s liability. The demand may have to be in a prescribed form and accompanied by stipulated documents, but it is the demand which triggers the liability to pay.

Criticism and change
These linguistic obstacles did not escape criticism. Textbooks and judges lamented the persistent practice of entering into considerable obligations using 18th century English jargon. In a 1995 case,3 the House of Lords enquired why it was still necessary to embody what was a simple obligation in a document which was quite unnecessarily lengthy, obfuscated its true purpose, and was likely to give rise to unnecessary arguments and litigation as to its meaning. Some of the industry’s legal experts have often expressed bewilderment at having to read voluminous English judgments analysing numerous authorities to resolve a comparatively simple question of construction. On more than one occasion, Professor James Byrne expressed dismay when he said that to find the meaning of an English guarantee “you might just as well flip a coin”.

In Wunhan,4 a case involving a shipbuilding guarantee, Longmore LJ candidly acknowledged that “Something has surely gone wrong” and that “the commercial community deserves better than this, if better can be done”.

There have always been in English law aids to construction as to what a contract means – contra proferentem and ejusdem generis are examples. As Lord Devlin explained in his book, SAMPLES OF LAW MAKING, “the lawyer starts by telling himself that he construes contracts so as to ascertain the intention of the parties; but before long he has invented cannons of construction and other rules which make things easier for himself”.

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