Marubeni Hong Kong and South China Ltd. v Mongolian Government

A governmental guarantee is construed as a whole. Clear language is required before an instrument is treated as imposing primary liability or as a first-demand bond. Where the instrument is a guarantee, the surety assumes secondary liability and the rule in Holme v Brunskill applies.

A surety must be consulted about an agreement between creditor and debtor concerning the guaranteed contract. The surety is discharged if the alteration is not self-evidently insubstantial or incapable of prejudice. This is assessed objectively, and the court does not investigate the actual extent of prejudice. The rule applies to the combined effect of refinancing, releases, extensions of time and changes to security arrangements.

The claimant supplied machinery to Buyan Holding Company Ltd under a deferred-payment sales contract. The Mongolian Ministry of Finance issued a letter undertaking to pay amounts due if Buyan failed to pay and to ensure Buyan’s performance. A legal opinion from the Ministry of Justice confirmed the guarantee’s authority and validity.

The Mongolian Government disputed the Minister of Finance’s authority, the legal character of the letter and its continuing liability after refinancing arrangements in 1998 and 1999. The court considered whether the Cabinet minutes evidenced governmental approval, whether English or Mongolian law governed apparent authority, whether the letter imposed primary liability, and whether the subsequent variations discharged the surety.

1. Authority. The court was entitled to look behind the Cabinet minutes, subject to restraint when adjudicating on the internal affairs of a friendly foreign government. The Government failed to establish that the minutes inaccurately recorded the relevant decision. Article 14(2) of the Budget Law of Mongolia required governmental approval but prescribed no particular form. Approval could therefore be recorded in Cabinet minutes. The Minister of Finance had express actual authority to issue the MMOF Letter, provided it was properly characterised as a guarantee.
2. Alternative apparent authority finding. If express actual authority were absent, Dicey Rule 198 applied to governmental and private entities alike. Questions concerning the principal’s liability to third parties were governed, in general, by the law applicable to the contract between agent and third party. The Ministry of Justice had actual or apparent authority to issue legal opinions, and the legal opinion represented that the guarantee had been duly authorised. The claimant reasonably relied on it and was not put on enquiry. The opinion did not represent authority to undertake primary liability.
3. Construction. The MMOF Letter was a guarantee, not a Hyundai-type instrument or a first-demand bond. Its obligations were expressed by reference to Buyan’s liabilities and performance. The defendant therefore assumed secondary liability. The indemnity wording did not alter that conclusion, although it could give the instrument hybrid features. The rule in Holme v Brunskill applied.
4. Discharge. The 1998 and 1999 refinancing arrangements were entered into without the defendant’s consent. They included a wide release of potential claims, extensions and refinancing of Buyan’s payment obligations, new and competing security rights, and altered collateral-account requirements. These alterations were not self-evidently insubstantial or incapable of prejudice. Their combined effect was objectively prejudicial, so the defendant was discharged from liability under the guarantee.
5. The claim therefore failed.