Commercial Court applies the Paget Presumption to demand bonds issued by an insurer

31/07/15

Mr. Justice Teare has today granted summary judgment on claims by Caterpillar Motoren GmbH & Co K.G. (“Caterpillar”) against Mutual Benefits Assurance Company (“MBAC”) for US$4.8 million, together with interest, pursuant to two performance bonds and two advance payment bonds  (“Bonds”). Caterpillar is a German subsidiary of Caterpillar Inc., the well-known American corporation, and MBAC is a Liberian insurance company.

The case raised issues of construction as to whether, as Caterpillar argued, the Bonds were “on demand bonds” (such that Caterpillar was entitled to payment from MBAC simply upon presentation of compliant demands) or whether, as MBAC argued, they were “true guarantees” (such that Caterpillar was required to establish the default of the underlying debtor before it was entitled to be paid).

Caterpillar relied upon the decision of the Court of Appeal in Wuhan Guoyu Logistics Group Co. Ltd. v. Emporiki Bank of Greece S.A. [2012] EWCA Civ 1629  and Longmore L.J.’s endorsement of the statement in the eleventh edition of Paget’s Law of Banking 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 ...” (“Paget Presumption”). MBAC argued that the Paget Presumption did not apply to MBAC because it was an insurance company and not a bank.

Teare J. held that it was “clear beyond doubt” from the wording of the Bonds that they were intended to take effect as on demand bonds as opposed to true guarantees and that he reached the same conclusion by applying the Paget Presumption. The fact that MBAC was an insurance company and not a bank was “not a material distinction.” The judge accepted that it was not unusual for on demand bonds to be issued by financial institutions other than banks and the Paget Presumption was therefore applicable where bonds had been issued by an insurance company in the ordinary course of its business. Likewise, the fact that each of the Bonds contained clauses that purported to exclude or limit the defences available to the guarantor was “not fatal” to the application of the presumption. The courts had applied the presumption in a number of previous cases (including Wuhan Guoyu) in which the fourth condition had not been satisfied and there were a number of possible explanations for the inclusion of such clauses in an on demand bond.

The judgment is here.