Marubeni Hong Kong & South China Ltd v Ministry of Finance of Mongolia

A promise to pay upon a simple demand does not, by itself, create an independent demand bond. Demand bonds are specialised instruments developed principally in banking transactions. Outside that context, clear indications are required before an undertaking connected with another party’s obligations will be construed as creating independent primary liability.

Where payment is promised only if sums payable under the underlying agreement remain unpaid when due, the language ordinarily creates a secondary obligation conditional upon the debtor’s default. Describing the undertaking as unconditional, or waiving any requirement to proceed first against the debtor, does not necessarily alter that character.

A Mongolian company agreed to purchase equipment from MHK under a deferred payment contract. The Mongolian Ministry of Finance subsequently issued a letter which unconditionally pledged payment upon simple demand of amounts payable under the contract but unpaid when due.

After the purchaser defaulted, MHK sought payment from the Government. Cresswell J held in [2004] EWHC 472 (Comm) that the letter imposed secondary liability and that later refinancing arrangements discharged the Government under the rule in Holme v Brunskill.

MHK appealed on the ground that the letter was an independent demand bond creating primary liability. The central issue was whether the letter constituted an unconditional promise to pay upon demand or a conditional promise to answer for the purchaser’s default.

1. Appeal dismissed. Carnwath LJ, with whom Sir Martin Nourse and Waller LJ agreed, held that the Ministry’s letter was a guarantee imposing secondary liability. It was not a demand bond or an equivalent independent instrument. The judge’s order was therefore confirmed.

2. Demand bonds are specialised irrevocable instruments developed by the banking world and treated as analogous to letters of credit. Authorities concerning instruments issued by banks and described as performance bonds provide no useful analogy for construing a non-bank document which contains no overt indication that it is intended to have that effect. The absence of language appropriate to a demand bond created a strong presumption against MHK’s construction.

3. The words “unconditionally pledges” and “simple demand” did not displace that presumption. They were qualified by language requiring amounts payable under the underlying agreement to have remained unpaid when due. That was language appropriate to a secondary obligation conditional upon the purchaser’s default. The accompanying pledge of the purchaser’s full and timely performance reinforced that construction.

4. The letter’s separate indemnity against loss caused by the purchaser’s default created a primary obligation, but it did not change the character of the preceding promise. Nor did the Government’s waiver of any right to require MHK to proceed first against the purchaser establish an independent payment obligation. Such a waiver was, at best, neutral.

5. The banking authorities, including Esal Commodities v Oriental Credit, IE Contractors v Lloyd’s Bank and Gold Coast Ltd v Caja de Ahorros del Mediterraneo, were distinguishable. Their instruments had been issued by banks and bore the characteristics of performance bonds. In Gold Coast, the prescribed bank certificate was a particularly clear indication that payment was independent of proof of default.

6. The construction adopted made it unnecessary to determine the Minister’s authority to undertake primary liability or the respondent’s objection that MHK had changed its case in closing submissions. The Court nevertheless observed that a party wishing to introduce a new point in closing may need to amend its pleadings, permit witnesses to be recalled, or answer an objection based on the overriding objective.

1. Court of Appeal (Civil Division): The appeal was dismissed and the order below was confirmed: [2005] EWCA Civ 395.

2. High Court, Commercial Court: Cresswell J held that the Government was bound by the letter, but that it imposed secondary liability and had been discharged by material variations arising from the refinancing arrangements. MHK’s claim therefore failed: [2004] EWHC 472 (Comm).