To guarantee, or not to guarantee, that is the question

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Ever given a guarantee? Many a company director has likely been asked to give one and most, given the choice, would probably rather not.

Sadly life isn’t always that easy. Some companies struggle to borrow without their directors offering some kind of guarantee in return for the company’s obligations. Many regard guarantees in the pure sense of a ‘see to it’ obligation alone – in other words, a reassurance that if the principal fails to perform under the main contract, the guarantor will be in breach too but with all the benefit of the defences available to the principal. A recent case in the High Court (Ultrabulk A/S v Jagatramka [2017] EWHC 2792) has poured cold water on such assumptions and provides a cautionary tale for any individual considering acting as a guarantor.

1. A quick re-cap

Before turning to the facts of the Ultrabulk case, it’s worth noting that sureties – i.e., those who promise to answer to a beneficiary for the obligations of a main contracting party (the ‘principal’) – can incur primary or secondary liability. By ‘primary liability’ we mean liabilities under instruments such as an indemnity or a performance bond which are independent of the main contracting party’s obligations. Under these instruments, the surety remains liable even if the underlying transaction is set aside for whatever reason. By contrast, a ‘secondary liability’ stands and falls with the primary contract and the extent of the liability of such a surety mirrors and should not exceed that of the principal.

These days clever lawyers try and draft guarantees to contain both primary and secondary liability elements. However traditionally there has been a presumption against construing a guarantee from an individual as an on-demand guarantee or performance bond. The Ultrabulk case shows that this will not always be the case.

2. Case background

Ultrabulk concerned two Cooperation Agreements dating from 2007 between a Danish shipping company, Ultrabulk, and an Indian coke producer, Gujarat NRE Coke Limited (“Gujarat”), of which the defendant, Mr. Jagatramka, was chairman and managing director. By early 2013, Gujarat owed debts of around US$4,259,395 (the “Gujarat Liabilities”) to Ultrabulk and the parties agreed that Gujarat would repay this amount in instalments by December 2013. In addition, Mr. Jagatramka provided a personal guarantee under which he agreed as follows:

I hereby unconditionally and irrevocably guarantee that, if for any reason Gujarat do not repay the Gujarat Liabilities latest by 31 December 2013 then I will on [Ultrabulk’s] first written demand…pay a sum equivalent to the Gujarat Liabilities plus the interest”.

Ultrabulk failed to pay the Gujarat Liabilities by 31 December 2013 and in June 2015 Ultrabulk demanded that Mr. Jagatramka pay US$4.25m under his guarantee, notwithstanding that Gujarat had by the time the case came before the High Court already paid US$1.95m towards the guaranteed liabilities. That said, at the time of trial the outstanding liabilities of Gujarat under the Cooperation Agreements exceeded US$20m and so Ultrabulk sought the entire amount of US$4.25m from Mr. Jagatramka.

3.High Court’s conclusions

Despite Mr. Jagatramka’s document being called a personal guarantee, owing to the document’s wording it was held to be an on demand bond. The wording in question included the following:

a) a statement that Mr. Jagatramka would pay “a sum equivalent to” the Gujarat Liabilities, which were defined as $4.25m – rather than a sum of money determined by reference to the company’s actual liability at the material time;

b) a statement that he “unconditionally and irrevocably” guaranteed that if the company did not pay the Gujarat liabilities by 31 December 2013, he would on demand pay an amount equivalent to those liabilities – wording that was indicative of a primary liability; and

c) a statement that he “irrevocably confirm[ed] that he [would] not contest and/or defend any application and/or proceedings to enforce” the guarantee – again wording indicative of a primary liability and inconsistent with the liability being coexistent with that of the company.

By interpreting the guarantee to be an on demand bond, and therefore a primary obligation, the bond was held to be independent to and not contingent on the obligations of the company. Consequently, Mr. Jagatramka was liable to Ultrabulk for the full $4.25m specified under his personal guarantee and he was unsuccessful in attempting to reduce this by the amount ($1.95m) already paid by the company to its creditor.

4.Insight

Many will regard the Ultrabulk case as a surprising outcome. However it provides a useful illustration of how the courts will look at the wording of a guarantee carefully and they will not be swayed by the label attached to it.

In another related recent case, Autoridad del Canal de Panama v Sacyr SA [2017] EWHC 2228, the High Court set out some useful guidance for determining when a guarantee is an ‘on demand’ instrument that creates primary liability or alternatively a ‘see to it’ instrument that creates only secondary liability. In particular, whilst with individual guarantees there is a presumption against construing the document as an on-demand bond, with guarantees given by banks the presumption tends to go the other way and favours on demand liability. According to Blair J in Autoridad, this latter approach will almost always apply where the guarantee (i) relates to an underlying transaction between parties in different jurisdictions, (ii) is issued by a bank or other financial institution, (iii) contains an undertaking to pay “on demand” and (iv) omits to include any clauses excluding or limiting certain defences otherwise available to a guarantor.

In Ultrabulk the guarantee contained all the elements of (i), (iii) and (iv) above and the High Court felt able to conclude that the document was in fact an on demand instrument notwithstanding that the guarantor was an individual.

It’s also worth noting that Mr. Jagatramka was not absolved from his obligations by reason of his failure to obtain independent legal advice on the transaction. Having been given ample opportunity to employ lawyers, and his views having been taken into account during the course of negotiations on the guarantee, the court determined this was sufficient so as not to call into question his consent to the guarantee. 

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