UK: Court Concludes Advance Payment Guarantees Were Performance Bonds

Last Updated: 7 January 2011
Article by Chris Kidd, Kijong Nam and Reema Shour

Meritz Fire and Marine Insurance Co Ltd v (1) Jan de Nul NV and(2) Codralux SA [2010] EWHC 3362 (Comm)

It is not always evident on the face of an instrument whether it is a demand guarantee imposing a primary obligation on the guarantor or whether it is a contract of suretyship that brings with it only a secondary obligation. The terminology used in an instrument is not conclusive as to its nature. Absent fraud, a demand guarantee must be honoured by the party issuing it without regard to the relations between the beneficiary and the counterparty to the underlying transaction. On the other hand, where the guarantor's liability is merely secondary in nature, it will be contingent on the liability of the debtor pursuant to the underlying transaction.


The claimant insurance company issued three Advance Payment Guarantees ("APGs") to the defendants. The APGs guaranteed the refund of advance payments made by the defendants to a Korean shipbuilding company, HWS, pursuant to the terms of three shipbuilding contracts. The claimant had issued the APGs for the account of HWS as a commercial transaction for a fee.

HWS subsequently merged with another company and the new company, Buyoung Heavy Industries, thereafter transferred its shipbuilding business to Asia Heavy Industries Co. Ltd ("Asia Heavy"). In due course, the defendants issued notices of default under the shipbuilding contracts based on alternative grounds including contractually impermissible delays and builder's insolvency. The defendants subsequently terminated the contracts and demanded the refund of advance payments made under them. When Asia Heavy did not pay any of these demands, the defendants demanded payment from the claimant under the three APGs.

The claimant sought a declaration of non-liability from the court. Amongst other things, it argued that it guaranteed the obligations of HWS and not those of its corporate successors; and that, alternatively, it had been discharged from liability under the APGs as a result of alleged material variations in the shipbuilding contracts by reason of the changes in the builder's corporate identity and extensions of the delivery time of the vessels which it claims were agreed between Asia Heavy and the defendants. The defendants counterclaimed the amounts owing to them, together with interest, arguing that the APGs were unconditional performance bonds and it was therefore irrelevant which corporate entity failed to make the refund or whether there had been material variations to the shipbuilding contracts. In the alternative, if the APGs were classic contracts of suretyship in which the claimant's obligation as guarantor is secondary to the primary obligation of the principal debtor, the defendants argued that there had been no material variations to the shipbuilding contracts. The judge found in favour of the defendants.

Commercial Court decision

Three principal issues fell for decision by Mr Justice Beatson in the Commercial Court:

Issue 1 – were the APGs performance bonds?

The judge concluded that the APGs were performance bonds or demand guarantees. In particular, he emphasised the following attributes which tipped the balance in favour of construing the APGs as demand guarantees: (i) payment was triggered by a demand on presentation of specified documents; (ii) the guarantees were stated to be irrevocable and unconditional, and (iii) they were stated to be subject to the ICC Uniform Rules for Demand Guarantees. In the judge's view, subjecting the APGs to the Uniform Rules was an indication that the parties regarded them as demand guarantees, particularly where he found no inconsistency between the terms of the APGs and the Uniform Rules.

The judge also rejected the claimant's submission that for an instrument to be construed as a demand guarantee, it would have to be issued by a bank. In this case, whilst the claimant was primarily an insurance company, it was also in the business of providing financial instruments in return for a fee. Additionally, the definition of a demand guarantee under the Uniform Rules encompassed a guarantee issued by an insurance company.

Furthermore, "although the point was not without difficulty", the judge concluded that the provision in the APGs whereby the claimant did not have to pay a refund amount demanded by the defendants but disputed by the builder and referred to arbitration until the arbitration award had been issued, did not condition the obligation to pay on the default of the builder. Under the APGs, it was not the fact of builder's default which triggered the claimant's obligation to pay. Rather, in the judge's view, the obligation to pay under the APGs was triggered either on the defendants' demand being made in the specified form or by the arbitrator's award, neither of which involved a determination of whether the builder was in default.

2. If the APGs were contracts of suretyship, was the claimant discharged from liability?

The judge went on to consider the following: if he was wrong and the APGs imposed only secondary rather than primary obligations on the claimant, was the claimant discharged from liability under them as a result of material variations to the shipbuilding contracts? The variations relied on by the claimant were twofold: (i) the changes in the corporate identity of the shipbuilder and (ii) extensions of the delivery time of the vessels which were alleged to have been agreed between Asia Heavy and the defendants and which would have extended the claimant's period of liability under the APGs.

Regarding the changes in the builder's corporate identity, the judge found that the defendants had not agreed to what were unilateral actions, firstly by HWS and subsequently by Buyoung. Absent such an agreement between the principals with reference to the shipbuilding contracts guaranteed, the judge stated that the claimant was not discharged under the APGs.

Mr Justice Beatson also concluded that the claimant was not discharged from the APGs on the grounds of alleged changes to the delivery dates under the contract. This part of his decision did not rest on a finding that there was no such variation of the contracts or that there was only a contemplated variation which was never agreed. Rather, the judge said that his conclusion was based on a finding of affirmation by the claimant of the APGs after the exchange of relevant correspondence relating to delivery dates.

3. Once HWS ceased to exist, could the defendants make a contractual demand triggering liability under the APGs?

The judge's short answer was that, irrespective of whether the APGs were performance bonds or contracts of suretyship, the shipbuilding contracts gave the defendants the right to terminate the contracts and demand repayment on an insolvency event, in this case the dissolution of HWS. The judge said it could not make any difference that HWS was dissolved as part of a reorganisation which put a new corporate entity in its place as the shipbuilder. Otherwise, the APGs would not be available when they were most needed.


The instruments in this case contained features which gave rise to different constructions relied on by both parties. Mr Justice Beatson stated, "the authorities show that the presence or absence of these features are factors which are indicative and not decisive". Indeed, it was a common ground in the case that the terminology used in an instrument is not conclusive and it is necessary to look beyond the terminology to the substance of the instrument as a whole. Having looked at the APGs as a whole as commercial documents, the judge in the instant case concluded that they were performance bonds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.