It is possible to exclude from the beginning the effect of the law on material change if a refund guarantee, properly construed, in fact imposes primary liability on the refund guarantor (generally known as a demand guarantee or performance bond). This means that such a guarantee operates autonomously from the underlying shipbuilding contract and so any amendments to that contract, consented to or not, are irrelevant to the refund guarantor’s liability under the relevant guarantee.
Whether a payment or refund guarantee issued in favour of a buyer or builder will be considered by the English courts to be a traditional “see to it” guarantee or an “on demand” guarantee will depend upon the court undertaking an examination of the “words actually used by the parties”3 and contained within the instrument itself and “construing the instrument in its factual and contractual context having regard to its commercial purpose”.4
In Wuhan Guoyu,the Court of Appeal identified four factors that create a presumption in favour of a demand guarantee. In particular, Longmore L.J. endorsed the statement in the eleventh edition of Paget’s Law of Banking5 that “where an instrument (i) relates to an underlying transaction between the 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, it will almost always be construed as a demand guarantee...” (the “Paget’s Presumption”).
The fourth factor giving rise to the presumption of a demand guarantee refers to the so-called “anti-avoidance” clauses (also called “anti-discharge” or “indulgence” clauses whereby amendments or variations to the shipbuilding contract are said not to discharge the guarantor from liability). However, case law has suggested that only the first three factors are important, and that the presence or absence of an anti-avoidance clause is neutral. In Gold Coast, a refund guarantee given in the context of the construction of a ship which included an anti-avoidance clause was held to be a performance bond by the Court of Appeal. The Court found that there could be a number of possible reasons for including such a clause; for example, “it could have been inserted simply to ensure that the rule applicable to true guarantees did not apply to this instrument”.6 The Wuhan and Gold Coast approaches were subsequently applied in Caterpillar Motoren GmbH & Co. KG v Mutual Benefits Assurance Co.7, where Teare J. held that, although the relevant bonds contained clauses that failed to satisfy the fourth condition of Paget’s Presumption, as a matter of construction this was not “fatal” to the application of the presumption.