1. Introduction

A recent unanimous decision by the court of Appeal of England on the interpretation of a parent guarantee1 has caused quite a stir in shipbuilding and project industry.

The decision found a parent guarantee to be a guarantee on first demand ( also referred to as 'demand bond' or 'demand guarantee'), rather than a surety (also referred to as 'see-to-it' guarantee). The guarantor was therefore found liable to pay under the parent guarantee, even if it had commenced arbitration proceedings concerning the deliverable condition of the vessel.

Crucially, the opinion of the decision distinguishes the case against a presumption that a guarantee granted by a non-bank is presumed to be a 'see-to-it' rather than a 'demand' guarantee. As this presumption (also in Belgium) is often rather too easily taken for granted or ignored by (industry) parent guarantors, it would be worthwhile to have a closer look at the opinion and look at what we can learn from it in a Belgian context.

For the avoidance of doubt, this note has been written by and from the perspective of a Belgian law qualified lawyer.

2. Key take-aways

  • Under both Belgian and English law, guarantors and beneficiaries should not assume the scope of their obligations on the basis of the capacity of the issuer (i.e. whether or not it is a bank) or any presumption. Instead, their obligations are determined by wording of the document (and, in Belgium to a lesser extent, context).
  • Whether a guarantee is granted for a group company (e.g a parent guarantee) or an external entity (e.g. a bank guarantee) is of little relevance to its interpretation.
  • The title or name used for the document is of limited relevance to its interpretation, and is sometimes even misleading. Courts, both in the UK and in Belgium, look at the actual wording of the guarantee to construe the scope of the obligations.

3. Factual background and question

Shanghai Shipyard had agreed to build an offshore drilling vessel for an SPV (the "buyer"). An investment firm ("Reignwood") acquired an indirect shareholding in the buyer to participate in the project as a financier. Reignwood delivered a parent guarantee to secure the buyer's payment obligations under the shipbuilding contract. After payment default by the buyer, the shipyard called Reignwood under the parent guarantee. Reignwood refused to pay, commencing arbitration proceedings on whether the Vessel was in a deliverable condition. The court was asked to determine whether the parent guarantee is a surety or a guarantee on first demand, and whether the arbitration proceedings had been raised in a timely manner to suspend payment.2 We will focus on the first question, as it is the most relevant one from a Belgian perspective.

4. Surety vs. guarantee on first demand

It might be good to briefly review the difference between a surety and a guarantee, as discussed by Justice Popplewell.

  • Under a surety (a 'see-to-it' guarantee), the nature of the guarantor's obligation is 'to see to it that the primary debtor performs its own obligation to the beneficiary'.[3] The guarantor must only perform if there is an outstanding liability of the primary debtor. Its obligations are secondary.
  • According to Justice Popplewell, the usual purpose of a surety is to provide protection against counterparty risk, which is particularly important where the counterparty is an SPV.4
  • Under a guarantee on first demand (a 'demand guarantee' or 'demand bond'), the guarantor undertakes to pay a sum on demand (or within x days following a demand). This is irrespective of whether a liability of the 'primary' debtor has arisen. A mere demand is sufficient condition to trigger a payment obligation and the beneficiary does not need to establish a liability of the 'primary' debtor. The obligation of the guarantor is an independent obligation.
  • Demand guarantees are a subcategory of conditional guarantees, in which performance of the guarantor is linked to the simple occurrence of an event (eg. a demand, an arbitral award). Conditional guarantees are often referred to as 'pay first, argue later' guarantees. As Justice Popplewell correctly notes, this does not mean that one cannot argue at all, but rather that any argument should occur after payment and cannot suspend payment.5 This is the very essence of a conditional guarantee.
  • In addition to protecting against counterparty risk, Justice Popplewell argues, a demand guarantee also ensures cashflow to both buyer (who has financing obligations) and builder (whose ability to fund building of vessels depends upon timeous receipt of instalments).

5. Relevance of guarantor capacity

In practice, most industry guarantors (contrary to industry beneficiaries) assume that their guarantees are 'see-to-it' (and hence sureties rather than demand guarantees). They consider it unreasonable that they would be liable to pay for their subsidiaries if the subsidiaries dispute the claim, especially in light of group interest. Only if a guarantee is issued by a bank (in which case they would often be beneficiaries), they would assume it to be 'on first demand'.

Under UK Law, this assumption has in earlier cases distilled into a presumption that where an instrument (i) relates to an underlying transaction, (ii) is issued by a bank, (iii) contains an undertaking to pay on demand, and (iv) does not contain clauses excluding or limiting the defence available to a guarantor, it will almost always be construed a as a demand guarantee. In reverse, if either of these conditions is not fulfilled, the document would be construed as a surety. Hence, as in Belgium, in practice a document is (too easily) presumed to be a surety ('see-to-it') if certain conditions are not met.

However, such presumption cannot be relied upon. Justice Popplewell rightly concludes that (i) it is irrelevant to risk coverage whether a guarantee is provided by a bank or a parent company, as long as the guarantor is financially sound, (ii) the binary distinction between 'parent company' and 'bank' does not work (Reignwood in the case at hand is parent for the purpose of acting as a financier), and (iii) it would be unreasonable that the same wording entered into by a bank or non-bank would give a different outcome.6

In conclusion, courts (should) rely on the wording and the commercial context of the contract to construe obligations of the parties under a contract, rather than the capacity of the parties or a general presumption.7 Therefore, parent guarantors cannot simply assume their guarantee will be read as a surety on the basis of a presumption.

6. Demand guarantee language

The opinion also lists a number of pointers to determine whether a document is a demand guarantee or a surety. 8 It amongst others refers to the inclusion of 'absolutely', 'unconditionally', 'obligation is triggered on first demand', 'immediate payment', 'obligations are unaffected by a dispute', 'interest payable is limited to 60 day's worth'9 and the fact that the document does not include a clear indication of secondary liability.

It is the combination of such pointers that will eventually lead to a qualification. For example, the mere inclusion of a 'payment on first demand' would not be sufficient, as a demand might also be a trigger under a surety (in addition to the condition of liability of the primary debtor).10

7. Impact of conditions

As indicated above, one of the main differences between a conditional guarantee and a surety is the independent nature of the conditional guarantee.

Taking this into account, it is interesting that Justice Popplewell interprets a 'payment suspension' in case of arbitration proceedings as turning the demand guarantee into a conditional guarantee linked to the obtention of an arbitral award - rather than as turning the demand guarantee into a surety.

One could assume that such condition leaves the door open for disputes in the underlying relationship to suspend payment under the guarantee, thereby substantially dampening the obligations under the guarantee. However, in the case at hand, (i) the payment was suspended only if arbitration proceedings were commenced, and (ii) the payment obligation arises at the very moment an award is granted, irrespective of any subsequent challenge of such award.

On this basis, Justice Popplewell considered the independent nature of the guarantees to be conserved. Indeed, 'no arbitral proceedings have commenced at the moment a demand is made under the guarantee' and 'in case of arbitral proceedings, grant of an arbitral award' are independently verifiable conditions to payment. They are not linked to the underlying contractual relationship, but to the (non-) existence of an arbitral proceeding or award.

8. Re-cap under Belgian law

Guarantee on first demand ("garantie op eerste verzoek"/"garantie à première demande") and surety ("borgtocht"/"cautionnement") are Belgian law concepts very similar to those described in the opinion discussed above. Indeed, the traits of Belgian sureties11 and guarantees on first demand12 are substantially the same as those discussed above.13

Belgian courts will generally presume that a document is a surety, except if explicitly indicated that it is a guarantee on first demand. However, as is the case under English law, relying on such assumption is not without risk. Parent guarantees will in many cases constitute a guarantee on first demand:

  • A guarantee on first demand can take many forms (eg. payment guarantee, performance bonds, tender guarantees, advance payment guarantees, etc.). From a Belgian perspective, a 'bank guarantee' is merely a form of guarantee on first demand. Even if mainly used in a banking context (granted by a bank), guarantees on first demand are also used in other contexts (eg. vendor or parent guarantees in M&A transactions or project finance). Even more so than under English law, the capacity of the grantor is of little relevance to the construction of the guarantee or surety. Hence, industry actors should be aware that they might carry the exact same obligations under a parent guarantee as a bank under a bank guarantee.
  • In addition, courts will draw a clear line between the subsidiary and the parent as being different and distinct entities. Belgian law does not consider group companies to be 'acting as one entity'.1.] Whether or not a guarantee or surety is granted for a group company (e.g a parent guarantee) or an external entity (e.g. a bank guarantee) will be of little relevance to its interpretation. Hence, parent entities will not be able to rely on the rights of their subsidiaries to withhold payment under a parent guarantee.
  • Finally, the title of the document is not specifically decisive either. Merely including the word 'guarantee' or 'surety' in the title or name of the document is not sufficient to make the distinction, and even the inclusion of 'on first demand' would not be sufficient, if not fully supported by its contents. Even documents that are envisaged to be mere comfort letters (eg. labelled 'patronaatsverklaring') may in fact contain far reaching obligations which end up to be strong ammunition for the contractual counterparty of the group, or in certain cases even a third party creditor of the initial counterparty.

In light of the above, it is important to closely watch the drafting of the document and not assume a document will be interpreted one way or another on the basis of superficial indicators such as parties or title.


1. See CoA England and Wales 23 July 2021, Shanghai Shipyard Co. Ltd. V. Reignwood International Investment (Group) Company Limited, [2021] EWCA Civ 1147. Full judgment (which includes recital of the relevant contractual provisions) is available on https://www.judiciary.uk/judgments/shanghai-shipyard-v-reignwood-international-investment/

2. Note: this is a simplification of the questions.

3. §22 of the opinion, with reference to Moschi v Lep Air Services Ltd [1973] AC 331, 348.

4. See §27 of the opinion

5. See §25 of the opinion. Depending on the specifics of the case, such discussion will be with the beneficiary of the guarantee, or with the primary debtor. For more on the Belgian interpretation of this principle, see J. Baeck, "De bankgarantie op eerste verzoek: eerst betalen, dan reclameren en recupereren", TBH 2013/3, 189 ev.

6. Less relevant from a Belgian perspective, but very much relevant from a UK one (where context and distinguishing is crucial), is that Justice Popplewell also adds that in the shipbuilding context it has long been established that payment and refund guarantees may be demand guarantees – even if not granted by a bank. In this regard, he refers to a.o. Hyundai Shipbuilding and Heavy Industries Co Ltd v Pournaras [1978] 2 Lloyd's Rep 502 and distinguishes with earlier cases, such as Wuhan GUoyo Logistics Croup Co Ltd v Emporiki Bank of Greece SA [2013] 1 All ER (Comm) 1191 and Spliethoff's BV v Bank of China Ltd [2016] 1 All ER (Comm) 1034.

7. § 35 of the opinion. Interestingly, he first discusses the context, and as the commercial context of the guarantee points (in his view) in neither direction, he turns to its language. It can be wondered whether this would point towards a primacy of context.

8. § 49 of the opinion.

9. Such short interest period envisages prompt payment on demand rather than lengthy delay where a dispute must be resolved.

10. See also §23 of the opinion.

11. On the characteristics of a surety, see in particular M. Van Quickenborne, Borgtocht in APR, 1999, E. Dirix, "Borgtocht" in X. Overeenkomstenrecht, 497-520 and M. Storme, Persoonlijke zekerheden, 2020, pg. 27, available on Storme.be. Specific rules apply to surety free of charge (kosteloze borgtocht) which will not be further considered in this note.

12. On the characteristics of a guarantee on first demand, see in particular E. Nordin, "Het abstract, autonoom en letterlijk karakter van de bankgarantie op eerste verzoek", RW 2010-11, Pg. 1282 and further, Storme, pg. 219 and further and J. Baeck, "De bankgarantie op eerste verzoek: eerst betalen, dan reclameren en recupereren", TBH 2013/3, 189 ev.

13. Note that the line between the two can often be a very thin one. Constructions which balance this line, such as 'borgtocht op eerste verzoek', further complicate things.

14. Contrary to what may in certain cases be the case in eg. tax law.

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.