Shanghai Shipyard Co Ltd v Reignwood International Investment (Group) Company Ltd

A guarantee’s label, primary-obligor wording and reference to payment on demand do not determine whether it is autonomous. The court must construe the instrument as a whole, in its commercial context.

The Paget presumption favouring a demand guarantee is principally engaged where the instrument is issued by a bank, financial institution or insurer in the ordinary course of business. In its absence, cogent indications are required. A clause allowing payment to be withheld pending an arbitration concerning the underlying liability may materially indicate a conditional, “see to it” obligation.

Where such a clause contains no temporal limitation, its protection applies regardless of whether arbitration began before or after the demand.

The Builder claimed the final instalment under a shipbuilding contract and demanded payment from the Guarantor under an irrevocable payment guarantee. The Buyer disputed liability and arbitration was commenced under the shipbuilding contract.

The Commercial Court tried two preliminary issues: whether the Guarantee was an autonomous demand guarantee or a conditional “see to it” guarantee, and whether the Guarantor could withhold payment pending arbitration only where arbitration had begun before demand.

1. Nature of the Guarantee. The Guarantee was a conditional “see to it” guarantee. The court construed the instrument as a whole, having regard to its language, background and context. Clauses 1 and 3 described the Guarantor as a primary obligor, and clause 4 required immediate payment on written demand. Those features were not decisive because primary-obligation wording and demand language commonly appear in guarantees of different kinds.
2. Clause 4 linked payment to the Buyer’s failure to pay the Final Instalment under the Contract and provided that, where a dispute about liability and entitlement was submitted to arbitration, the Guarantor could withhold payment until the award. Clause 7(a), which preserved the Guarantor’s obligations despite disputes under the Contract, was read subject to that specific provision. The arbitration mechanism therefore materially qualified the demand wording.
3. The Paget presumption did not assist the Builder. The Guarantee was issued by a parent company, not a bank, financial institution or insurer acting in the ordinary course of business, and the transaction was not squarely within a banking context. The remaining features of the presumption were insufficient. The language of the Guarantee did not otherwise provide the cogent indications required for a demand guarantee.
4. Timing of arbitration. Clause 4 entitled the Guarantor to withhold and defer payment pending and subject to the outcome of arbitration concerning the Buyer’s liability and the Builder’s entitlement. Nothing in its language limited that arrangement to arbitration commenced before the demand. The parties’ concern was the existence and submission of the underlying dispute, not which party proceeded first to arbitration or demand.
5. The court accordingly determined both preliminary issues in favour of the Guarantor and indicated that an order would be made on the preliminary issues and the application to stay the proceedings pending resolution of the arbitration.

Not stated in the judgment.