Yuanda (UK) Company Ltd v Multiplex Construction Europe Ltd & Anor

A guarantee must be construed according to its wording and as a whole. A bond framed as a performance guarantee, requiring breach and contractual establishment and ascertainment of damages, creates secondary rather than primary liability. A beneficiary cannot make a valid call merely by asserting that money is due. The underlying contract’s dispute-resolution machinery may establish and ascertain the sum, including through an adjudicator’s decision. A fixed expiry clause releasing and discharging the guarantor absolutely upon expiry is effective according to its terms. A pre-expiry claim remains valid only to the limited extent necessary to permit payment shortly after expiry where the claim was otherwise validly made before the deadline.

The claimant subcontractor obtained urgent injunctive relief restraining the contractor and its bank from acting on a demand under a performance guarantee. The guarantee secured the claimant’s obligations under a construction subcontract and was due to expire on 4 April 2020.

The contractor had claimed liquidated damages and referred the dispute to adjudication. The court had to determine whether the instrument was an on-demand bond or a performance bond, what contractual steps were required for a valid call, whether an adjudicator’s decision could establish and ascertain the relevant sum, and whether the expiry clause permitted enforcement after expiry.

1. Nature of the instrument. The guarantee was a performance bond creating secondary liability. Its wording guaranteed performance of the subcontractor’s obligations, required breach, and contained no language characteristic of an on-demand instrument. The autonomy principle applicable to primary obligations therefore did not govern the substantive construction.
2. Clause 1. A valid call required damages sustained by the contractor to be established and ascertained pursuant to or by reference to the subcontract, taking account of sums due or to become due to the subcontractor. A unilateral assertion by the contractor was insufficient and could not be treated as a contractual certificate. The subcontract contained machinery under which liability could be determined, including adjudication.
3. An adjudicator’s decision awarding the contractor a sum for liquidated damages would establish and ascertain that sum under the subcontract. The contractor could then call on the guarantee for the amount decided, subject to the guarantee’s cap. The subcontract’s payment and debt provisions did not require waiting for determination of the subcontractor’s entire final account.
4. Clause 4. The words releasing and discharging the guarantor absolutely upon expiry were clear. They did not preserve an open-ended obligation to pay demands made before expiry. The requirement that a claim containing particulars of breach be made before expiry addressed the possibility that payment of a valid pre-expiry claim might occur shortly afterwards.
5. Injunction. The claimant was entitled on 20 January 2020 to restrain the contractor because the contractor had acted as though the guarantee were an on-demand bond. Fraud was no longer pursued, so continuation against the bank was unjustified. Any continuation against the contractor was narrow and potentially unnecessary in light of the court’s construction and the contractor’s open offer.