On 29 March 1996, the claimant (“MHK”) entered into a Deferred Payment Sales Contract (the “DPS1 Contract”) with Buyan Holding Company Limited (“Buyan”), a Mongolian company. The contract was for the purchase by Buyan of machinery, equipment and materials for a cashmere processing plant. The purchase price was US$18,811,670. The first instalment of the price was to be paid within 60 days of the signature of the contract, and the remaining amount was to be paid in 12 equal semi-annual instalments. The first of these was due on 19 October 1998.

The defendant is the Government of Mongolia. Its involvement arises in this way. The contract provided for a document described as a “guarantee” to be issued by the Mongolian central bank on behalf of the Mongolian Government (“the Government”), in the form set out in a Schedule to the contract. In the event, a letter in somewhat modified form was issued by the Minister of Finance, dated 11^th May 1996 (“the MMOF Letter”). On the same date, the Deputy Minister of Justice of Mongolia signed a document addressed to MHK, entitled "Legal Opinion of the Minister of Justice of the Government of Mongolia", referring to the “guarantee given by the Ministry of Finance, acting for and on behalf of the Government of Mongolia”, and stating his opinion that the “guarantor” had “full power and authority” to enter into the guarantee.

The appeal concerns the effect of that letter as between MHK and the Government, in the dispute which has since arisen as to performance of the contract. For the background to the dispute it is sufficient to quote the judgment:

The material parts of the letter are in the following terms:

The judge was presented with an agreed list of 5 issues, the hearing of which took 10 days, including expert evidence on both sides on Mongolian law. Group A (Issues 1 to 4) was concerned with whether the Government was bound by the letter. The judge decided this question in favour of MHK. He held, in summary, that the guarantee was issued with express actual authority of the Government; that the authorisation was valid as a matter of Mongolian law; that, if it was not actually authorised, the Minister of Finance had apparent authority to enter into the guarantee on behalf of the Government; and that the Deputy Minister of Justice had actual or apparent authority to issue an opinion letter in relation to such a transaction.

This part of the judgment is not directly subject to appeal. However, some of the discussion is relevant to the issues which are raised by the appeal. In particular, the judge made clear that his findings as to both actual and apparent authority depended on the letter being correctly characterised as a “guarantee”, that is as imposing a secondary rather than a primary liability. The significance of this distinction lies at the heart of the appeal.

Group B (Issues 5(1) and (2)) was concerned with whether the letter had been subsequently discharged. The agreed issues were:

The judge decided both issues against MHK, with the result that MHK’s claim failed. His final comment was:

For MHK, Mr Howard helpfully summarised the central issue in the appeal. It turns on the correct characterisation of the MMOF Letter: was it an unconditional independent promise by the Mongolian Government to pay on demand all amounts payable under the sales contract (that is a demand bond), or was it a secondary or conditional promise to act as a surety? In the former case, the obligation to pay arises upon a simple demand or demand supported by a specified document. In the latter case, not only must the claimant prove the actual indebtedness of the debtor, but the guarantor has all the defences available to the debtor, and is discharged automatically (under the rule in Holme v Brunskill) if there is any variation of the arrangements with the principal debtor without his consent which might prejudice his interests.

Procedurally, MHK applied to the Court of Appeal for permission to appeal, initially only on the ground that the MMOF Letter was, on its true construction, “a demand guarantee or demand bond” creating primary obligations. (For simplicity, I shall use the single term “demand bond”.) Jacob LJ. adjourned the application for further written submissions, noting that the judge had found that there was no actual or apparent authority for the Minister of Finance to undertake a primary liability. MHK then applied to amend its grounds of appeal to challenge that finding. Waller LJ. granted MHK permission to amend the grounds of appeal, and to appeal on the grounds as so amended.

By a respondent’s notice, the Government asks for the appeal to be dismissed on the ground that MHK should not have been permitted to advance the case that the instrument was a demand bond, having expressly disclaimed it in opening. It submits, further, that, even if the MMOF Letter did create primary obligations, the result under the rule in Holme v Brunskill should be the same.

It is unfortunate that the clarity of the issues, so carefully agreed by the parties, became obscured by uncertainty as to the precise nature of MHK’s case at different stages. However, it will be convenient to consider first the case as now put, before considering, if it becomes necessary to do so, whether it is a case which it should be permitted to advance.

Mr Howard says that the wording of the letter is to be interpreted against the background of previous authorities which have treated similar wording as giving rise to an independent obligation. They are Esal Commodities v. Oriental Credit CA [1985] 2 Lloyd's Rep. 546; Siporex Trade SA v. Banque Indosuez [1986] 2 Lloyd's Rep. 146; and IE Contractors v. Lloyd's Bank CA [1990] 2 Lloyd's Rep. 496. The same approach has been confirmed more recently by this court in Gold Coast Ltd v. Caja de Ahorros del Mediterraneo [2001] EWCA Civ 1806. Those authorities show, it is said, that:

In relation to the MMOF Letter he relies in particular on the wording of the first promise, under which the obligation of the Mongolian Government is expressed to be “unconditional”, and the trigger is a "simple demand". Further, the express waiver of any right to require MHK to proceed against the buyer or against any security is inconsistent with the idea that the Government should be able to avail itself of defences available to the buyer. Further, it is unlikely that the parties intended the rights under a letter governed by English law to be dependent on the resolution of issues, which under the main contract were to be determined by Japanese arbitration.

He criticises the judgment for disregarding these authorities, and for giving too much weight to the description of the MMOF Letter as a “guarantee” in the Legal Opinion letter. Such a description was not regarded as conclusive in the Gold Coast case (see paras 18 and 21). Further, the judge failed to recognise that the commercial purpose of the MMOF Letter was to provide security which was readily and easily realisable, on a failure by Buyan to meet its payment obligations. This purpose would be frustrated by a construction requiring MHK to prove default before making demand under the MMOF Letter.

He also relies on the terms of the DPS1 contract, referred to in the terms of the MMOF Letter, which required (by Article 7.1) the procurement of a letter of guarantee, the stated purpose being “in order to secure the due and punctual payment” by Buyan of the contract sums. In the context of international trade, security provided by a government, whose credit standing is likely to be superior, should not be treated in English law as less extensive than that provided by a bank.

Mr White, for the Government, says that reliance on Esal, and the cases following it, is misconceived. They all relate to irrevocable instruments issued by banks. The Government is not a bank, and is not in the business of providing irrevocable financial instruments in return for a fee or commission. Outside the field of first demand instruments or performance bonds issued by banks, the courts have not been willing, in the absence of clear words, to interpret documents in which a party undertakes obligations in relation to an agreement between two other parties as imposing unconditional primary liability. The mere fact that the obligation of the guarantor is expressed to be to pay “on demand”, and without conditions, is insufficient to create primary liability.

In support of this submission, he refers to three cases relating to very different contexts, one to hire purchase, and the others to building contracts. The first, also relied on by the judge, was Stadium Finance Limited -v- Helm [1965] 109 SJ 471 (CA transcript 25/5/65). The document in question was described as an “indemnity form”, signed by the mother of an infant purchaser under a hire purchase agreement, which contained the following:

Similarly, in the building context, in General Surety and Guarantee Co -v- Frances Parker Limited (1977) 6 Bld LR 16, Donaldson J declined to read the words “will forthwith pay on demand”, in a counter-guarantee provided by the parent of a building contractor, as creating a primary liability. In Trafalgar House Construction (Regions) Limited -v- General Surety & Guarantee Co. Limited [1996] AC 199, the House of Lords reversed the ruling of the Court of Appeal that a bond provided jointly by a building sub-contractor and a surety company was an on-demand guarantee comparable to the performance bond in Esal (Commodities) Limited -v- Oriental Credit Limited. Mr White relies on the words of Lord Jauncey at p. 208:

One of the problems in cases of this kind is terminology. In ordinary legal language, a “guarantee”, in contrast with an “indemnity” imposes a secondary liability:

The different usages are referred to by Andrews and Millett, Law of Guarantees (4^th Ed) p 14, in a section headed “Performance bonds”:

Chitty, Law of Contracts (29^th Ed) vol 2 para 44-014 discusses the development of the law of “performance guarantees”, starting with Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159:

Those passages provide the context for discussing the cases relied on by Mr Howard. They show that “demand bonds” (however described) are a specialised form of irrevocable instrument, developed by the banking world for its commercial customers. They have been accepted by the courts as the equivalent of irrevocable letters of credit. As such, they have been described as part of “the lifeblood of commerce”; and, in the words of Donaldson LJ:

In Esal the instrument was issued by a bank; it was described on its face as a “performance bond”; and it was for a specified amount, being 10% of the purchase price. The only difficulty arose from the wording:

In Siporex Hirst J. applied the same approach to the interpretation of an instrument issued by a bank pursuant to an obligation in an international trade agreement to provide a performance bond. The instrument was described in correspondence between the parties and with the bank as a performance bond. The judge commented:

In I.E. Contractors, the documents again were issued by a bank; were described as (or assumed to be) “performance bonds” (see issue (1) p 498); and were for damages up to specified amounts. The difficulty arose from the unusual form and language of the documents (see p 501-2), and the wording of the operative clause:

The judgment of Staughton LJ contains some general discussion of the law relating to performance bonds. He discusses the possibility of different triggering events for payment under a performance bond: at one extreme, a simple demand “without requiring the presentation of any other document or the assertion of any fact”; and, at the other, a bond “conditioned upon the existence of facts rather than the production of a document asserting those facts” (p 499). He concludes, following Esal:

In all these cases the documents were issued by banks, and were described as, or assumed to be, performance bonds. Not surprisingly, the courts interpreted them against the background of the law relating to such instruments. They provide no useful analogy for interpreting a document which was not issued by a bank and which contains no overt indication of an intention to create a performance bond or anything analogous to it.

The most recent authority relied on by Mr Howard, decided since the date of the MMOF Letter, is the Gold Coast case. It concerned the interpretation of a refund guarantee issued by a bank pursuant to an obligation in a shipbuilding contract. Payment of specified amounts was to be made on “your first written demand”, subject (under condition 1) to receipt of a certificate issued by Lloyds Bank that the refund had become due. The Court of Appeal held the instrument “had all the hallmarks of a first demand guarantee”:

Turning to the MMOF Letter, the starting-point in my view is that it is not a banking instrument, and it is not described, either on its face or in the supporting Legal Opinion letter, in terms appropriate to a demand bond or something having similar legal effect. The Legal Opinion describes it as a guarantee. The terminology is not of course conclusive. However, I agree with Cresswell J that, if MHK had wanted the additional security of a demand bond, one would have expected them to have insisted on appropriate language to describe it, in both the instrument itself, and in the Legal Opinion. The absence of such language, in a transaction outside the banking context, creates in my view a strong presumption against MHK’s interpretation. (Since the letter did not follow the contractual form, I do not think that Mr Howard can find support in the words of Article 7.1 of the DPS contract.)

The question then becomes whether there are sufficient indications in the wording of the instrument to displace that presumption. Mr Howard relies on the words “unconditionally pledges” and “simple demand”. However, they are qualified by the following words, which indicate that the obligation only arises if “the amounts payable under the agreement (are) not paid when the same becomes due”. As Cresswell J said, this is wording appropriate to a secondary obligation, that is one conditional upon default by the buyer. It is true that in Esal similar wording was held insufficient to displace the ordinary effect of what was admittedly a performance bond. However, here the starting-point is different, and there is no reason for reading the words in other than their ordinary meaning.

That sense is reinforced by the following pledge of –

Finally, Mr Howard relies on the clause under which the Government waives “any right” to require MHK to proceed against the buyer, or to pursue any other remedy. He suggests that this indicates the commercial purpose of the instrument, analogous to that of a performance bond, to provide security which is readily and easily realisable. If that was the intention, it seems to me a round-about way of indicating the purpose. In any event, it is at best a neutral indication. In a normal performance bond there would be no need for such a waiver, because there would be no question of the issuing party having any such right. Nor am I impressed by the fact that establishing a default under the main contract may require recourse to Japanese arbitration. Whatever the reasons which led the parties to the respective contracts to choose different systems of law, that by itself cannot in my view be a reason for altering the natural interpretation of the MMOF Letter.

I conclude, therefore, that the judge was correct to reject the submission that the MMOF Letter was to be treated as a demand bond or its equivalent.

This is sufficient to dispose of the single ground of appeal. I record that Mr Howard also hinted at an alternative submission that, even if not a demand bond, the instrument should be construed as creating some form of primary liability, sufficient to displace the rule in Holme v Brunskill. A variation of such an argument (based on Hyundai v Pournaras [1978] 2 Lloyd’s Rep 502) was rejected by the judge (para 131-136), and was not expressly subject to appeal. Mr Howard did not himself rely on that case, and there was no application to amend the grounds of appeal to indicate any alternative interpretation.

The conclusion I have reached on the interpretation of the MMOF Letter makes it unnecessary to consider MHK’s appeal against the judge’s finding that the Minister of Finance had no authority, actual or apparent, to undertake a primary liability.

It also makes it unnecessary to consider Mr White’s submission that MHK should not have been permitted, in its closing argument, to advance the argument that this was a demand bond. However, it may be appropriate to make two comments:

Mr White appears to have had legitimate cause for complaint at MHK’s apparent change of position on the demand bond issue. The authority of the Minister of Finance to issue the instrument on behalf of the Government was directly in issue. This depended on examination of conflicting expert evidence on Mongolian law and practice, including the interpretation of Article 14(2) of the Mongolian Budget Law, under which the instrument was allegedly authorised. For that exercise to be manageable and useful, it was important for both parties and the judge to know at the outset of the hearing what interpretations of the instrument were still in play (whether or not, as Mr Howard suggests, the contention was covered by the pleadings.)

On the other hand, I can understand why the judge did not make a specific ruling. The transcript does not suggest that Mr White articulated very clearly the nature of his objection, or the ruling (if any) he was asking the judge to make. Where a new point is sought to be raised in closing, the objection may take a number of forms, and the court’s response will differ accordingly. If the objection is that the new point is not covered by the pleadings, the court can insist on an application to amend, and rule accordingly. If the problem is that the witnesses have not had an opportunity to deal with the new point, it may be possible to recall them. It might have been open to Mr White to make a more fundamental objection: that a complex and expensive case had been conducted for 10 days by each party on a particular basis, and that it would be contrary to the overriding objectives of the CPR to allow a change. It is unnecessary for us to consider how, if such an objection had been made, the judge should have dealt with it.

For these reasons, I would dismiss the appeal, and confirm the judge’s order.

I agree.

I also agree.