Caterpillar Motoren GmbH & Co K.G. v Mutual Benefits Assurance Company

This is an application for summary judgment by the Claimant on its claims against the Defendant for US$3,176,397 said to be due pursuant to two Advance Payment Bonds and for US$1,623,711 said to be due pursuant to two Performance Bonds. The application raises a question of construction in relation to both forms of bonds, namely, are they “on demand” bonds or are they bonds in the nature of a true guarantee, such that the claimant has to prove that the defendant’s customer is in fact liable to the claimant.

The Claimant (“Caterpillar”) is a German company which manufactures and provides industrial equipment and services. It is a subsidiary of an American company. The Defendant (“MBAC”) is a Liberian insurance company. It is a subsidiary of a Nigerian company.

In late 2013 Caterpillar entered into contracts to deliver two power plants in Liberia, one at the port of Buchanan and the other at Tokadeh. Caterpillar also entered into two sub-contracts with International Construction & Engineering Inc. (“ICE”) for the provision of construction services at Buchanan and Tokadeh.

The sub-contracts were in materially identical terms. By clause 7.1 ICE was required to procure an Advance Payment Bond and a Performance Bond in favour of Caterpillar. The Advance Payment Bond (“APB”) was defined as “an instrument offered by a surety acceptable to [Caterpillar]” in the amount of US$1,460,235 in respect of the Buchanan contract and in the amount of US$1,716,162 in respect of the Tokadeh contract “that guarantees the due performance by [ICE] for an advance payment made by [Caterpillar] to [ICE] for sundry activities and/or task.” The Performance Bond (“PB”) was defined as “an instrument offered by a surety acceptable to [Caterpillar] in the amount of 10% of the Contract price…that guarantees the due performance of all Work by [ICE]”. The forms of the bonds were exhibits to the sub-contracts.

Thus the APBs were intended to provide security to Caterpillar in the event that activities intended to be financed by an advance payment were not carried out by ICE and the PBs were intended to provide security to Caterpillar in the event that the further obligations of ICE were not performed.

On 10 January 2014 the required bonds were issued by MBAC.

MBAC has a license from the Central Bank of Liberia to “function as a non-bank financial institution and to carry out composite insurance business in Liberia.” The website of its parent company notes that “bond insurance” is provided. “Bond insurance” is defined as “a financial guarantee that is usually taken by contractors to indemnify their principals (owner of the contract) against any default. It is a strict liability policy.” The cover provided is said to include advance payment bonds and performance bonds. Mr. Momo Fortune, the general manager/CEO of MBAC has stated that all products sold by MBAC, the subsidiary company, are provided by the parent company. He has further stated that the reference to bond insurance in the website of the parent company is “mere marketing” and that he is unaware of the parent company selling “on-demand bonds”. Whether the bonds in question are “on demand bonds” is a question of construction but the bonds, whatever their construction, appear to have been provided by MBAC in the ordinary course of its business. A letter dated 24 January 2014 from Mr. Fortune informed Caterpillar that the bonds (described as performance and advance payment bonds) had been provided and that MBAC’s liabilities under them were insured and reinsured. I have therefore concluded that the website of the parent company is truthful as opposed to being “mere marketing.”

It is necessary to set out in full the terms of one of each type of bond.

IRREVOCABLE AND UNCONDITIONAL ADVANCE PAYMENT GUARANTEE

No.: MBA/APB/2/0228/A/014

This IRREVOCABLE AND UNCONDITIONAL ADVANCE PAYMENT GUARANTEE, executed this 10^th day of January, 2014, by MUTUAL BENEFITS ASSURANCE COMPANY with address at 17^th Street and Tubman Boulevard, Sinkor, Monrovia, Liberia, hereinafter the “GUARANTOR” in favor of CATERPILLAR MOTOREN GmbH & Co. K.G., Liberian Branch, with address at c/o Voscon Inc., 80 Broad Street, 3^rd Floor, Monrovia, Liberia, hereinafter the “BENIFECIARY” on behalf of International Construction & Engineering, Inc. having its principal address at Monrovia, Liberia, hereinafter the “CONTRACTOR” hereby:

WITNESSETH:

WHEREAS, the CONTRACTOR has represented to the GUARANTOR that on the 10^th day of January, 2014 the BENEFICIARY and the CONTRACTOR have entered into and executed Contract No. POB 267161 C116A (SC1) General Terms and Conditions of Contract for Construction Services for the performance, by the CONTRACTOR for the BENEFICIARY. The Said Contract No. POB 267161 C116A (SC1) is hereby incorporated into, and made an integral part of this instrument by reference; and

WHEREAS, pursuit to the reference Contract No. POB 267161 C116A (SC1), the CONTRACTOR raised and submitted to the BENEFICIARY its request for advance payment in the amount of One Million Four Hundred Sixty Thousand Two Hundred Thirty Five United States Dollars (US$1,460.235.00) against the project cost/contract price for sundry activities and/or tasks to be performed by the CONTRACTOR; and listed as per said request; and

WHEREAS, in keeping with the agreement of the parties, a condition precedent to the BENEFICIARY’S disbursing the requested advance payment is the posting and/ or issuance of an Advance Payment Guarantee Bond on behalf of the CONTRACTOR’S and in favor of the BENEFICIARY by a reputable third party institution engaged in the insurance or banking business; and

WHEREAS, the CONTRACTOR has requested, and the guarantor has agreed to issue an Advance Payment Guarantee Bond on the CONTRACTOR’S behalf and in favor of the BENEFICIARY as herein provided and in keeping with the agreement of the BENEFICIARY and the CONTRACTOR on the terms and conditions herein set forth and contained;

NOW THEREFORE, THESE PRESENTS:

1.

We, Mutual Benefits Assurance Company, as GUARANTOR of the CONTRACTOR, do hereby guarantee and undertake to pay, without reference to the CONTRACTOR, the BENEFICIARY herein forthwith on demand at any time no later than the dates and maximum amounts stated herein below as may be claimed by the BENEFICIARY to be due from the CONTRACTOR on account of the failure of the CONTRACTOR in observance and performance of the terms and conditions of the contract No. POB 267161 C116A (SC1), and in particular, the CONTRACTOR’S failure to fully satisfactorily and timely execute the tasks for advance payment and in respect of which the sum of USD1,460.235.00 is paid by the BENEFICIARY to the CONTRACTOR in advance.

2.

The GUARANTOR hereby acknowledges and agrees that the decision of the BENEFICIARY as to whether any money is payable by the CONTRACTOR to the BENEFICIARY or whether the CONTRACTOR has made any such default or defaults as aforesaid and the amount or amounts to which the BENEFICIARY is entitled by reason thereof will be binding on the GUARANTOR and the GUARANTOR shall not be entitled to as[k] the BENEFICIARY to establish its claims or claims under this GUARANTOR or to claim any such amount from the CONTRACTOR its first instance but shall pay the same to the BENEFICIARY forthwith on demand without any demur, reservation, recourse, contest, or protest and/or without any reference to the CONTRACTOR.

Any such demand made by the BENEFICIARY on the GUARANTOR shall be conclusive and binding notwithstanding any difference between the BENEFICIARY and the CONTRACTOR or any dispute pending before any court, tribunal, arbitrator(s) or any other authority - judicial, quasi-judicial or administrative.

3.

The GUARANTOR further undertakes not to revoke this Guarantee during its currency except with the prior written consent of the BENEFICIARY and this Guarantee shall continue to be enforceable until the date of its expiry or the last date of an extended period, if any, agreed upon by the GUARANTOR and the BENEFICIARY in writing, unless during the currency of the Guarantee all amounts due the BENEFICIARY have been duly paid and its claims satisfied or discharged or the BENEFICIARY certifies that the tasks enumerated as per the CONTRACTOR’S request for advance payment have been fully carried out by the CONTRACTOR and the Guarantee is thereby discharged.

4.

This Guarantee shall not be affected by any change in the constitution of the CONTRACTOR or any extension or forbearance to the CONTRACTOR by the BENEFICIARY and GUARANTOR.

5.

The amount herein Guarantee is the sum of US$1,460,235.00 (One Million Four Hundred Sixty Thousand Two Hundred Thirty Five United States Dollars), advance[d] or to be advance[d] the CONTRACTOR by the BENEFICIARY, subject of this Advance Payment Guarantee Bond.

6.

That for and in consideration of the Advance Payment Guarantee herein given the BENEFICIARY for and on behalf of the CONTRACTOR, the CONTRACTOR hereby agrees and undertakes to pay or cause to be paid to the GUARANTOR a Guarantee Bond Premium of US$4,380.71 (Four Thousand Three Hundred Eighty United States Dollars Seventy- One Cents) same being 0.6% of the value of the bond.

7.

The validity of this Advance Payment Guarantee Bond shall commence from the date of payment of the advance payment by the BENEFICIARY and receipt of same by the CONTRACTOR and continue in full force and effect until and up to June 30, 2014

8.

The last date for invocation of this Advance Payment Guarantee bond or assertion of any claim arising in connection therewith by the BENEFICIARY shall be no later than thirty (30) days from the last date of the validity of the Guarantee.

9.

This bond shall be governed by the laws of England and any disputes under this Bond shall be settled by any competent court in London, England.

PERFORMANCE BOND

WHEREAS, Caterpillar Motoren GmbH & Co. K.G., Liberian Branch, a company organized under the laws of Liberia (“Obligee”), has awarded to International Construction & Engineering, Inc., a company organized under the laws of Liberia (“Principal”), a comprehensive General Terms and Conditions of Contract for Construction Services, duly executed and delivered on the 10^th day of January, 2014 (the “contract”), on the terms and conditions set forth therein; and

WHEREAS, as a condition to Obligee’s payment of any payment under the Contract, Principal is required to furnish a bond (this “Bond”) guaranteeing the faithful performance of its obligations under the Contract, including payment of claims by Subcontractors and suppliers.

NOW, THEREFORE, Principal and Mutual Benefits Assurance Company (“Surety”), an admitted surety and International Construction & Engineering Inc., are held and firmly bound unto Obligee the amount of Seven Hundred Thousand Six Hundred Twenty Seven United States Dollars ($700,627.00) (the “Bonded Sum”), for payment of which sum Principal and Surety jointly and [severally] firmly bind themselves and their successors and assigns.

This Bond shall remain in full force and effect, it being expressly understood and agreed that the liability of Surety for any and all claims hereunder shall in no event exceed the Bonded Sum.

The following terms and conditions shall apply with respect to this bond;

1.

The Contract is incorporated by referenced herein, Capitalized terms not separately defined herein have the meanings assigned such terms in the Contract;

2.

The guarantees contained herein shall survive Final Acceptance;

3.

Whenever Principal shall fail to pay the lawful claims of any Person with respect to the work, including Subcontractors and suppliers, they Surety shall pay the same in an amount not exceed the bonded Sum;

4.

Whenever Principal shall be, and is declared by the Obligee in writing to Surety to be in default with respect to its obligations under the Contract, Surety hereby unconditionally, without any demur, undertakes to promptly pay to the Obligee the amount of damages claimed by the Obligee resulting from the Principal’s default under the Contract, not to exceed the Bonded Sum. Any such demand made on Surety shall be conclusive as regards to the amount due and payment by Surety under this Bond.

5.

If Surety does not proceed as provided in Paragraphs 3 and 4 of this Bond with reasonable promptness, Surety shall be deemed to be in default on this bond fifteen (15) days after receipt of an additional written notice from the Obligee to Surety demanding that Surety perform its obligations under this bond, and the Obligee shall be entitled to enforce any remedy available to the Obligee.

6.

No alteration, modification or supplement to the Contract or the nature of the work to be performed thereunder, including without limitation any extension of time for performance, shall in any way affect the obligations of Surety under this Bond. Surety waives notice of any alteration, modification, supplement or extension of time other than Change Orders for Principal directed changes in excess of such amount.

7.

This bond shall be governed by the laws of England and any disputes under this Bond shall be settled by any competent court in London, England.

8.

Correspondence or claims relating to this Bond should be sent to Surety at the following address; 17^th, STREET, TUBMAN BOULEVARD SINKOR, MONROVIA, LIBERIA.

This Bond and all obligations of surety shall terminate on June 3, 2015, unless expressly extended in writing by Principal and Obligee.

Between 5 February and 14 March 2014 Caterpillar made advance payments to ICE. In April and May 2014 disputes arose between Caterpillar and ICE. On 10 May 2014 Caterpillar purported to terminate the sub-contracts and demanded from ICE the return of the advance payments and a further sum by way of liquidated damages. ICE disputed Caterpillar’s claims.

By letters dated 22 May 2014 to MBAC Caterpillar demanded payment from MBAC under the bonds. With regard to the APBs Caterpillar declared that ICE had failed to execute the tasks for which an advance payment had been made and demanded payment in the sums set out in the bond. With regard to the PBs Caterpillar declared that ICE had not met its obligations under the sub-contracts and demanded payment in the sums set out in the bonds, adding that the damages caused by ICE exceeded the sums claimed.

MBAC has refused to pay the sums demanded under the bonds and in consequence Caterpillar has issued these proceedings. Caterpillar maintains that the bonds are “on demand” bonds such that MBAC’s liability to pay arises on the making of a demand by Caterpillar. MBAC maintains that it is only liable to pay Caterpillar if it is established (by an admission by ICE, concession by MBAC or by an arbitration award pursuant to the sub-contracts) that ICE is liable to Caterpillar in the sums claimed. That dispute raises a question as to the true construction of the bonds and it is common ground that the court can determine such question on this application for summary judgment.

The general principles governing the construction of contracts are well known. The court must identify the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

The Court of Appeal has given guidance to “commercial men” as to how documents of the type in question are to be construed. In Wuhan Guoyu v Emporiki Bank [2012] EWCA Civ 1629 [2013] 1 AER (Comm) 1191 Longmore LJ referred to “Paget’s presumption” (derived from Paget’s Law of Banking) namely, that where an instrument (i) relates to an underlying transaction between parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor there will be a presumption that it will be construed as an “on demand” bond or guarantee.

Counsel for Caterpillar submitted that the court should construe the bonds in the present case by application of Paget’s presumption. Counsel for MBAC submitted that the court should follow the general principles governing the construction of contracts and should therefore seek to identify the meaning which the document would convey to a reasonable person.

In my judgment there is no conflict between the general principles governing the construction of contracts and the guidance of Longmore LJ in Wuhan Guoyu v Emporiki Bank. Where the four factors identified in Paget’s presumption exist (of which two relate to background and two relate to the text of the financial instrument) the court has, in effect, explained that there is a presumption (which, like all presumptions, is rebuttable) that the reasonable man would understand the instrument to be an “on demand” bond. In such circumstances it will be necessary to examine the background and the language of the instrument to see whether the reasonable man would consider the presumption to have been rebutted. As Longmore LJ said, “everything must in the end depend on the words actually used by the parties.”

I prefer to start with the words used by the parties rather than with Paget’s presumption. Clauses 1 and 2 describe the nature of the obligation undertaken by MBAC.

By clause 1 MBAC

“guarantees and undertakes to pay, without reference to the CONTRACTOR [“ICE”], the BENEFICIARY herein [“Caterpillar”] forthwith on demand …….as may be claimed by the BENEFICIARY to be due from the Contractor on account of the failure of the CONTRACTOR in observance and performance of the terms and conditions of the contract No. POB 267161 C116A (SC1), and in particular, the CONTRACTOR’S failure to fully satisfactorily and timely execute the tasks for advance payment and in respect of which the sum of USD1,460.235.00 is paid by the BENEFICIARY to the CONTRACTOR in advance.”

It is to be noted that the undertaking is to “pay forthwith on demand” and “without reference to the Contractor”. That which is to be paid is that which is “claimed by the Beneficiary to be due from the Contractor.” These phrases strongly suggest that MBAC’s liability is to pay that which is demanded by Caterpillar rather than that which is proved or admitted to be due from ICE to Caterpillar. On the other hand the use of the word “guarantee” (which appears not only in the clause but also in the title and opening section of the instrument) and the reference to a failure by ICE to perform its obligations can be said to suggest that the parties intended that MBAC would only pay where ICE had actually failed to perform its obligations.

However, clause 2 puts the matter beyond doubt. MBAC agrees that the decision of Caterpillar “as to whether any money is payable by the Contractor to the Beneficiary or whether the Contractor has made any such default or defaults as aforesaid and the amount or amounts to which the Beneficiary is entitled by reason thereof will be binding” on MBAC. Further, MBAC is not entitled to “as[k] the Beneficiary to establish its claims” but “shall pay the same to the Beneficiary forthwith on demand”. Finally it is agreed that “any such demand …shall be conclusive and binding notwithstanding any difference” between Caterpillar and ICE. In my judgment this clause makes it clear beyond doubt that MBAC is obliged to pay on demand by Caterpillar. There is nothing in the remaining clauses which undermines the clear meaning and effect of clause 2.

If one were to construe the APB by reference to Paget’s presumption one would reach the same conclusion. The instrument relates to an underlying transaction between parties in different jurisdictions and contains an undertaking to pay on demand. It is true that MBAC is not a bank but it is a financial or insurance institution engaged in the business of providing bonds to its customers. In Meritz Fire v Jan de Nul [2011] 1 All ER Comm 1049 at paragraph 66 Beatson J. was of the view that this was not a material distinction. I respectfully agree. It is not unusual for financial institutions other than banks to issue bonds; see the Law of Guarantees by Andrews and Millett 6^th.ed at para.16-001, Jack on Documentary Credits 4^th.ed at para.12.55 and the ICC Uniform Rules for Demand Guarantees which refer to guarantees by a bank, insurance company or other body (as quoted in Meritz Fire v Jan de Nul). This is also reflected in the preamble to the APB which refers to the bond being provided by “a reputable third party institution engaged in the insurance or banking business.” I therefore do not consider that Paget’s presumption is inapplicable where the bond is issued by an insurance company in the ordinary course of its business, particularly where the language of the instrument (see clauses 1 and 2) so clearly indicates an intention to create an “on demand bond”. By contrast the presumption will not be applicable where the instrument is not issued by a bank or other financial institution and there is no overt indication in the language of the instrument of an intention to create an on demand bond; see Marubeni v Mongolian Government [2005] 1 WLR 2497 at paragraphs 28 and 30 (and the discussion of that case in Meritz Fire v Jan de Nul at paragraph 65) and Vossloh v Alpha Trains [2010] EWHC 2443 (Ch) at paragraphs 6, 28-30 and 36.

It is true that the fourth condition required by Paget’s presumption, the absence of clauses excluding or limiting the defences available to a guarantor, is not satisfied. For clause 4 is such a clause. But this is not fatal; the fourth condition was not satisfied in Wuhan Guoyu v Emporiki Bank and yet the presumption applied. The explanation is that the clause may well have been inserted to put beyond doubt that the rule applicable to true guarantees did not apply; see Gold Coast v Caja de Ahorros [2002] 1 Lloyd’s Rep. 617 at paragraph 25 per Tuckey LJ and Spiethoff’s Bevrachtingskantoor BV v Bank of China [2015] EWHC 999 (Comm) at paragraph 81 per Carr J. In the present case there is nothing in the background or in the language of the instrument which is capable of rebutting Paget’s presumption. On the contrary clauses 1 and 2 show that the instrument was undoubtedly intended to be an “on demand” bond.

I have considered carefully the submissions made by counsel for MBAC to the effect that the APB is a true guarantee and which are summarised at paragraphs 44-56 of his Skeleton Argument but I am not persuaded by them.

This bond is in a different form. Clause 3 provides as follows:

“Whenever Principal shall fail to pay the lawful claims of any Person with respect to the work, including Subcontractors and suppliers, the[y] Surety shall pay the same in an amount not exceed the bonded Sum.”

That language is suggestive of a true guarantee in that it provides that MBAC will be liable to pay when ICE fails to pay lawful claims against it. However, that suggestion is inconsistent with clause 4 which provides:

“Whenever Principal shall be, and is declared by the Obligee in writing to Surety to be in default with respect to its obligations under the Contract, Surety hereby unconditionally, without any demur, undertakes to promptly pay to the Obligee the amount of damages claimed by the Obligee resulting from the Principal’s default under the Contract, not to exceed the Bonded Sum. Any such demand made on Surety shall be conclusive as regards to the amount due and payment by Surety under this Bond.”

Thus, MBAC is to pay Caterpillar once Caterpillar has “declared” that ICE is in default. MBAC is to pay “unconditionally” and without demur “the amount of damages claimed by” Caterpillar. Any such declaration is referred to in the second sentence as a “demand”. If there were any doubt that such words manifested an intention to create an “on demand” bond such doubt is displaced by the second sentence which states that any such demand shall be “conclusive” as regards the amount due and payment by MBAC.

Clause 5 provides that if MBAC does not pay with reasonable promptness MBAC will be deemed to be in default 15 days after an additional notice demanding performance of MBAC’s obligations. That clause is consistent with MBAC’s liability being derived from Caterpillar’s demand, rather than from proof that ICE is in fact liable to Caterpillar.

I have therefore concluded that the PB is an “on demand” bond. I would have reached the same conclusion had I construed the bond by considering whether Paget’s presumption applies (it would) and then considering whether there was any reason either in the background or in the wording of the clause to rebut that presumption (there is not). Clause 6 is the type of clause usually found in true guarantees and so the fourth condition said to be required for Paget’s presumption is not satisfied but that, for the reasons explained in the context of the APB, is not fatal. Clause 4 shows that the instrument was undoubtedly intended to be an “on demand” bond.

Again, I have considered carefully the submissions made by counsel for MBAC to the effect that the PB is a true guarantee and which are summarised at paragraphs 57-64 of his Skeleton Argument but I am not persuaded by them.

Both the Advance Payment Bonds and the Performance Bonds are “on demand” bonds on their true construction. In those circumstances MBAC has no real prospect of a defence and so Caterpillar is entitled to summary judgment on its claims.