In a recently published article, Colleen Hanley looks at Shanghai Shipyard v Reignwood International Investment (Group) Company Ltd  EWHC 803 (Comm) and its implications on ‘demand’ guarantees.
The court decided two preliminary issues of construction of a guarantee (the guarantee) under which Shanghai Shipyard was the builder and Reignwood International the guarantor (Reignwood). The first was whether the guarantee was a ‘demand guarantee’ and not a ‘performance’ or, as the court termed it throughout, a ‘see to it’ guarantee. If it was a ‘demand’ guarantee then Reignwood’s liability arose automatically simply by reason of the demand itself and regardless of whether or not the buyer had failed to perform in any way under the underlying shipbuilding contract. The court decided it was not a ‘demand’ guarantee but rather instead a ‘see to it’ guarantee. The second issue was whether Reignwood, under the terms of the guarantee, was entitled to refuse to pay out under the guarantee pending and subject to the outcome of the arbitration commenced between Shanghai Shipyard and the buyer under the underlying contract, only if the arbitration had been commenced when the guarantee demand had already been made. The court decided Reignwood was entitled to refuse payment regardless of when any such arbitration was commenced.
The case confirms the threshold test for an ‘on demand’, as opposed to a ‘performance’ or ‘see to it’ guarantee, remains high.
This article was first published by Lexis®PSL on 8/04/2020.