GOLD COAST LTD. v. CAJA DE AHORROS DEL MEDITERRANEO AND OTHERS [2002] EWCA Civ 1806

A bank instrument must be construed as a whole, in its factual and contractual context and with regard to its commercial purpose, to determine whether it is an autonomous demand guarantee or a secondary guarantee.

An irrevocable and unconditional undertaking to pay upon a first written demand and a specified certificate may create an autonomous obligation. References to the circumstances in which the underlying payment becomes refundable do not necessarily make the bank’s liability dependent upon establishing the principal debtor’s liability. A compliant certificate issued bona fide may trigger immediate payment notwithstanding an unresolved underlying dispute.

Ten Spanish banks appealed, with the judge’s permission, from summary judgment for the buyer under refund guarantees issued for seven stage payments made under a shipbuilding contract. The buyer had rescinded for delayed delivery and demanded repayment. The builder disputed the rescission, and the underlying dispute had been referred to arbitration.

Thomas J held that the banks became liable when the buyer’s financing bank issued the certificate required by condition 1 of each guarantee. It was accepted on appeal that the certificate complied with that condition and had been issued bona fide upon reasonable grounds.

The central issue was whether the instruments were autonomous demand guarantees or true guarantees under which the banks’ liability depended upon the builder’s liability first being established.

1. Appeal dismissed unanimously. Tuckey LJ delivered the leading judgment. Hale LJ and Simon Brown LJ agreed.

2. The nature of the instrument had to be determined by construing it as a whole, without preconceptions, in its factual and contractual context and with regard to its commercial purpose. Tuckey LJ was inclined to regard the competing commercial considerations as favouring the buyer, but proceeded on the assumption that they were neutral.

3. The instruments had the characteristics of first-demand guarantees. Each contained an irrevocable and unconditional undertaking that the banks would pay within five days of the first written demand. The word “guarantee” was only a label. The instruments did not employ the language of suretyship, and their only express condition of payment was receipt of the certificate specified in condition 1.

4. Condition 1 required Lloyds Bank to certify that the buyer had become entitled to a refund and that the builder had not made it. Lloyds could issue that certificate only in good faith. Once a compliant certificate was received, the defendant banks had to pay without awaiting determination of the underlying dispute. If Lloyds did not feel able to certify entitlement, a call would have to await arbitration or settlement.

5. The words “if and when the instalment becomes refundable” identified the contractual events intended to trigger a call. They did not make payment dependent upon prior proof or adjudication of the builder’s liability. The reference to arbitration in condition 2 concerned the duration of the guarantees and did not qualify the payment obligation.

6. The words “subject to any arbitration” in article 11 of the shipbuilding contract did not postpone the buyer’s contractual options until an award. They preserved the builder’s right to refer a dispute about accrued rights to arbitration. Construing them as requiring a prior award would deprive the contractual rights of practical operation.

7. Condition 5, which preserved liability despite variations of the underlying agreement, did not convert the instruments into true guarantees. Although such a term may indicate suretyship, it was not decisive and could sensibly protect an autonomous undertaking against arguments based on later contractual variations.

1. Court of Appeal (Civil Division): The ten defendant banks’ appeal was dismissed unanimously. The banks were ordered to pay the respondent’s costs, and permission to appeal to the House of Lords was refused.

2. High Court, Queen’s Bench Division, Commercial Court: Thomas J gave summary judgment for the claimant under the refund guarantees on 2 May 2001. No citation for that decision is stated.