Caterpillar Motoren GmbH & Co K.G. v Mutual Benefits Assurance Company

Where a bond issued by a bank or other financial institution relates to an underlying transaction and contains an undertaking to pay on demand, there is a rebuttable presumption that it is an on demand bond. The presumption must nevertheless yield to the words actually used and the relevant background. Clear provisions making the beneficiary’s demand, declaration of default or assessment of the amount due conclusive will ordinarily establish an on-demand obligation. Clauses commonly found in true guarantees do not necessarily rebut the presumption. The court may grant summary judgment where the bond’s construction leaves the issuer with no real prospect of defending the demand.

The claimant sought summary judgment for sums demanded under two advance payment bonds and two performance bonds issued by the defendant in connection with construction sub-contracts. The underlying contractor disputed liability, and the defendant argued that it was liable only if the contractor’s liability to the claimant were established by admission, concession or arbitration award.

The claimant argued that the bonds were payable on demand. The central issue was whether, on their true construction, the bonds were on-demand instruments or true guarantees requiring proof of the contractor’s default and liability.

1. Construction principles. The court applied the ordinary contractual approach of identifying the meaning conveyed to a reasonable person with the relevant background knowledge. That approach was consistent with the guidance concerning Paget’s presumption.
2. Paget’s presumption. Where an instrument relates to an underlying transaction between parties in different jurisdictions, is issued by a bank or other financial institution, contains an undertaking to pay on demand, and lacks clauses excluding or limiting guarantor defences, there is a rebuttable presumption that it is an on-demand bond. The fourth factor is not indispensable. The instrument must still be construed by reference to its language and background. The presumption may apply to an insurance company issuing bonds in the ordinary course of its business.
3. Advance payment bonds. The wording requiring payment forthwith on demand, without reference to the contractor, and of sums claimed by the beneficiary strongly indicated an on-demand obligation. Clause 2 made the position conclusive: the beneficiary’s decision as to default, entitlement and amount was binding, the beneficiary was not required to establish its claim, and its demand was conclusive notwithstanding disputes with the contractor. The advance payment bonds were therefore on-demand bonds.
4. Performance bonds. Although clause 3 contained language suggestive of a true guarantee, clause 4 required prompt unconditional payment of damages claimed following the beneficiary’s declaration of default and made the demand conclusive as to the amount due. Clause 5 was consistent with liability arising from the demand rather than proof of the contractor’s liability. The performance bonds were also on-demand bonds.
5. Since the bonds were on demand, the defendant had no real prospect of defending the claims. Summary judgment was entered for the claimant.

First-instance decision. No prior appellate decision is stated in the judgment.