guarantees), in such guarantees can result in the guarantor undertaking primary obligations, the guarantor’s liability will remain dependent on whether or not there has been a breach of the underlying contract. ii. An “on-demand” bond imposes a primary obligation on the guarantor to pay (the beneficiary of the bond) immediately upon receipt of a demand for payment. Payment by the guarantor is not contingent on performance of the underlying contract or proof of loss. Typically, but subject to the express requirements of the bond, a simple statement (usually in a prescribed form) detailing that an obligation in the underlying contract has been breached and that loss has been suffered by the beneficiary is sufficient to trigger payment. There is no need to prove either breach or loss. On-demand obligations are more typically assumed by banks or financial institutions who issue bonds. However, in this decision the Commercial Court has made clear that parent companies are able to give such “on-demand” bonds. Although there is a presumption against them doing so, that is merely a presumption that may be displaced by clear words in the instrument. As such, it is important that parent companies consider, with care, whether they are seeking to give a typical parent company guarantee – or to go further and create an obligation to pay a sum “on-demand” without any need to first satisfy that the sum is contractually due under the underlying (guaranteed) obligation. If a parent company chooses to assume such “on-demand” obligations then, as confirmed by this decision, there is no presumption that such rights should be interpreted narrowly or restrictively. Although this was not an issue in the current case, parent companies wishing to assume on-demand obligations should also be mindful of any regulatory regimes that may apply. For example, in the United Kingdom, a guarantee that contains primary, on-demand, payment obligations and that is issued in exchange for payment of a premium may constitute a ‘contract of insurance’ under the Financial Services and Markets Act (Regulated Activities) Order 2001 (SI 2001/544). In such circumstances, if the guarantor is not duly authorised by the relevant authorities, it could be exposed to criminal liability. Rubicon Vantage International PTE Ltd v Krisenergy Ltd [2019] EWHC 2012 (Comm) – Before Nicholas Vineall QC sitting as Deputy High Court Judge.
1 From the judgment in Marubeni Hong Kong v Mongolian Government [2005] EWCA Civ 395 ICRA Independent review and conflict management specialists