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The main prerequisite to the present study is presupposition that English law finely establishes the dividing line between legal instrument which is characterized as either a demand guarantee or surety guarantee. Taking into consideration the aforesaid prescribed statement, it has been decided to conduct a comprehensive research in order to verify whether the English law truly differentiates between the two concepts – a demand guarantee and a surety guarantee. Also, the present study aims at detecting the peculiarities of such differentiation.

Given this, the research question must be formulated as follows: Does the English law finely differentiate between a demand guarantee and a suretyship guarantee?

Additionally, a mental note should be made that the current study will be conducted as the analysis of two pertinent law cases. This analysis is going to be augmented with the explication of theoretical dimensions of a demand guarantee and suretyship guarantee. From the theoretical perspective, there are definite discrepancies between a surety guarantee and a demand guarantee. In its broad sense, the term guarantee implies a payment assurance. To elaborate further, guarantee as a payment assurance relates to the domain of legal obligations. Moreover, the obligation which gives birth to the right to guarantee is always some sort of agreement. In this connection, guarantees may be expressed as either the guarantee clause of the main agreement or a separate document.

To continue, it is widely accepted among theorists of law that a suretyship guarantee and a demand guarantee are two different types of guarantees. The core distinction between the two kinds of guarantees lies in the fact that a suretyship guarantee is a secondary obligation which supports the primary obligation, whereas a demand guarantee is a different kind of promise or, in other words, an independent primary obligation, which does not depend on any other primary obligation. The following analysis of pertinent law cases is about to shed more light on the disparity between the two types of guarantees. 

The differentiation between a suretyship guarantee and a demand guarantee in Marubeni case

First and foremost, it is necessary to clarify that the cases of Marubeni Hong Kong and South China Ltd v Mongolian Government (hereinafter referred to as Marubeni case) and Meritz Fire & Marine v Jan de Nul N.V. (hereinafter referred to as Meritz case) directly regulate issues concerning the nature and applicability of the two types of guarantees – a demand guarantee or a surety guarantee.

As far as Marubeni case is concerned, it needs to be outlined that the case is triggered by the claim of Hong King Company which conducts business practices as an import/export and general trading company. As the case stands, the claim of Marubeni Company is based on the letter of guarantee which was issued to the claimant and signed by the Minister of Finance. The content of the letter is articulated in Paragraph 4 of the case. Thus, according to Marubeni case, the letter in dispute provides that Marubeni Hong Kong Ltd. has entered the Deferred Payment Sales Contract No. 258599 with Buyan Holding Company Ltd. and, thus,  the undersigned Ministry of Finance of Mongolia has become unconditionally obliged to pay to the claimant upon its simple demand all amounts payable under the aforementioned Deferred Payment Sales Contract ‘when the same becomes due […], and further pledges the full and timely performance and observance by the Buyer of all the terms and conditions of the Agreement’.

Taking into consideration the aforesaid formulation of the obligation under the letter in dispute, the court formulates two important issues, as follows: a) ‘whether the defendant is bound by issue of the Ministry of Finance Letter 11 May 1996[…]’; b) ‘Subsequent discharge of the MMOF Letter’. The core issue in question is whether the MMOF Letter could bind the defendant in the situation when refinancing agreements between the claimant and Buyan were concluded. Given this, the court makes insight into the genuine construction of the MMOF Letter in order to ascertain, whether the defendant has undertaken a primary liability to the claimant. If the defendant has truly undertaken a primary liability to the claimant, then the issues in dispute should not be regulated in accordance with the rule which has been established in Home v Brunskill case. The general rule of Holme v Brunskill articulates that the material variation of the principle which underlies the contract may discharge a guarantee if the variation has taken place without the consent of the guarantor.

After the profound consideration of all issues in question, the court arrives at the conclusion that the defendant has not undertaken a primary liability to the claimant and, therefore, the rule in Holme v Brunskill applies to the analyzed MMOF Letter. This conclusion is substantiated with a series of evidence. First, the MMOF Letter delineates the defendant’s obligation as derivative from the liabilities of Buyan. Second, it is incumbent on the defendant under the MMOF Letter to pay all sums payable under the main agreement of sales only under the condition, when the same becomes due. Third, the complete and timely execution by the Buyer of all provisions of the main agreement is guaranteed by the defendant under the MMOF Letter. On these grounds, the court makes inference that the letter in question imposes on the defendant a secondary liability.

Also, it is reasonable to mention that the MMOF Letter provides an abstract specification of the conditions, in which the guarantee has effect. The Letter particularly stipulates that the defendant is obliged to prevent harm or any other cost and damage which may be inflicted or asserted in relation to ‘any obligation of the Buyer to pay any amount under the Agreement when the same becomes due and payable […] or to perform or observe any term or condition of the Agreement’. The court expresses confidence that the above-mentioned formulation is intrinsic to the secondary liability only. The fact is that a ‘clear language’ is necessary for creation of primary liability. In other words, the reliance on such words as ‘any invalidity or enforceability of or impossibility of performance of any such obligations of the Buyer’ is characteristic to an indemnity rather than to a primary obligation. Hence, it follows that the MMOF Letter has a hybrid nature: on the one hand, it has the nature of a guarantee, and, on the other, it contains the elements of indemnity.

Following the rationale of the court, it needs to be clarified that salient features of the indemnity manifest themselves in the formulations about the compensatory essence of the Letter as an insurance against future losses and damages. This essence of indemnity is visible from such phrases as ‘in connection with any invalidity’, ‘enforceability’, ‘impossibility’, whereas the Letter as a secondary obligation (guarantee) is analyzed through such words as ‘unconditionally pledges to pay to you upon your simple demand’.

In summary, the court in Marubeni case holds that the MMOF Letter is a secondary guarantee, or, in other words, a suretyship guarantee, because of three reasons. First, the Letter as a guarantee, describes the obligation of the guarantor as derivative from liabilities of the Buyer. Second, the Letter binds the guarantor to pay all the required sums only if the buyer has failed to do so when the same becomes due. Third, the Letter, as a guarantee, insures that the Buyer will completely and timely execute all the terms and conditions of the main agreement.

The court’s consideration of the MMOF Letter as a secondary obligation (a suretyship guarantee) makes the basic rule of Holme v Brunskill applicable. In this sense, the court concludes that refinancing agreements should be deemed substantial material variations which discharge a guarantee, because they ‘cannot be seen without enquiry to be an alteration which could not be prejudicial to the guarantor’. Hence, in Marubeni case, the court formulates another salient feature of a suretyship guarantee by postulating that this type of guarantees can be discharged if the main obligation has been substantially altered without consent of the guarantor.

Distinction between a suretyship guarantee and a demand guarantee in Meritz case

According to Meritz case, the claimant, Meritz Fire and Marine Insurance Co Ltd. ‘seeks a declaration that it is not liable under Advance Payment Guarantees (‘APGs’) it issued to the defendants guaranteeing the repayment of payments made by the defendants under three shipbuilding contracts and is discharged as a surety’. The Advance Payment Guarantees were issued under three particular shipbuilding contracts. Nevertheless, the three guarantees were deemed materially the same.

Given this, the main issue in question is the claimant’s assertion that it is not liable under those APGs which insure obligations of a defendant ‘and not those of its corporate successors’. As the matter of fact, the defender, whose payments were insured with two of three APGs, subsequently merged with another corporation into a newly incorporated company. Furthermore, the shipbuilding business of the defender was transferred to another company. In this connection, the claimant makes attempts to convince the court that the defender conducted material variations to the guaranteed shipbuilding contracts without the consent of the guarantor.

Alternatively, the defendant counter-argues that ‘the APGs are unconditional performance bonds and it is irrelevant which corporate entity failed to make the refund or whether there have been material variations to the shipbuilding contracts’. Thus, in order to properly settle the dispute between Meritz and Jan de Nul, the court is forced to ascertain the nature of the Advance Payment Guarantees (Letters of Guarantee) as an issue in question.

In that vein, it should be clarified that the material terms of the guarantees should be enumerated as follows: a) advance payment guarantee has been issued irrevocably; b) the guarantee has been issued in connection with the shipbuilding contract; c) the guarantee means unconditional and irrevocable assurance of the repayment after the demand has been made; d) this advance payment guarantee is subject to the Uniform Rules for Demand Guarantee of the International Chamber of Commerce (ICC), ICC Publication No. 458.

According to the special condition of the ICC Publication No. 458, it is incumbent on the guarantor to pay the beneficiary any amount, but not exceeding the guarantee amount. Also, special condition provides that obligation to pay the guarantee amount is irrevocable and depends on the beneficiary’s complying demand, coupled with supporting documents. Besides, the special condition regulates that any demand under the aforesaid type of guarantee must be received by the guarantor either on or before the expiry. Finally, the special condition stipulates that the aforementioned guarantee is subject to the Uniform Rules for Demand Guarantees (URDG) 2010 revision.

Taking into consideration the above-captioned arguments, it is possible to notice that the Advance Payment Guarantees look like demand guarantees rather than suretyship guarantees. The analysis of the case makes evident that guarantees in dispute seem to be regulated by the Uniform Rules for Demand Guarantees. Also, they are unconditional and irrevocable.

The aforesaid circumstances complicate rather than facilitate the argument concerning nature and influence of the Advance Payment Guarantees. In Meritz case, the court assumes that if the APGs are viewed as performance binds or demand guarantees they will oblige the issuer irrespective of ‘the relations between the party to whom the instrument is issued (here the defendants) and the counterparty to the underling transactions (here the shipbuilder)’. In such situation it is incumbent on the guarantor to fulfil its obligations under the demand guarantee without regard to the changes in parties of the agreement which is assured by guarantee. In other words, the alterations and amendments to the assured agreement have no effect on the validity of the demand guarantee, because the latter is an independent type of guarantees and not a secondary agreement.

In Meritz case, the court analyzing the terminology and essence of the APGs involves the rationale which has been previously elaborated in Marubeni case. Thus, the court postulates that the APGs were not issued by bank or the other financial institution and, thus, they did a priori create performance bonds. In this case, it is impossible to make any immediate conclusion concerning the primary and independent significance of the APGs. Moreover, the APGs provide no precise expression that the claimant’s commitment is a principal ‘and not a surety as the guarantee in IIG Cpital LLC v Van der Merwe [2008] 2 Lloyds Rep 187 did’.

Taking this into account, the court in Meritz case brings into light two characteristics always attributed to the demand guarantees: 1) this type of guarantees is usually issued by bank or another financial institution; 2) such guarantees must contain an accurate expression that the guarantor’s obligation is not a surety.

Apart from the above, the court in Meritz case questions the legal power of such expressions as ‘irrevocable and unconditional pledges’ and ‘simple demand’ by arguing that these terms do not directly imply that the APGs are demand bonds. Also, the court maintains that the usage of the word ‘if’ signifies that the APGs establish secondary liability of the guarantor. It is possible to agree with the arguments of the court, because the word ‘if’ usually indicates on a certain condition whereby the main statement is valid. Existence of the condition evinces that there is always a primary and secondary (conditional) obligation.

Besides, the court provides that the phrase ‘shall become null and void’ is pertinent to a secondary rather than a primary commitment. Taking into consideration the aforesaid arguments, the court arrives at the conclusion that the APGs are classic contracts of suretyship rather than performance bonds.


After everything has been given due consideration, it should be generalized that the English law does not provide clear and precisely defined dividing line between a suretyship guarantee and a demand guarantee. The analyzed cases make evident that the participants of international business relationships are sometimes incapable to distinguish between the aforesaid types of guarantees without having recourse to the judiciary.

Certainly, the conducted research unravels that courts are consistent and logical in their interpretations and differentiations between two types of guarantees. Nevertheless, there are no black letter law principles which help to make immediate ascertainment of the correct guarantee. Regardless, the two cases – Marubeni and Meritz – establish the widely accepted legal approaches to a suretyship guarantee and a demand guarantee. According to the cases, a suretyship guarantee is always a conditional and secondary type of obligations which can be discharged upon the material variations in terms of the main agreement. In contrast to it, a demand guarantee is always a primary obligation which allows no conditions and manifests a precise intent of a bank or any other financial institution to gain profit by way of issuing the guarantee.

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