Refund Guarantees: On-demand bond or true guarantee?

Abstract

In the modern commercial world guarantees have become an important instrument. Guarantees are not limited to those given by a bank in the commercial world. Guarantees may also be issued by a parent company on behalf of a subsidiary, or by an individual(s) in personal transactions. The question then is what is a contract of guarantee? A guarantee is an assurance or security issued by one party (the guarantor ) at the request of the party with the liability (the principal ) to the party the liability is owed to (the beneficiary ). Guarantees are discussed in this paper in the context of bank issued guarantees in shipbuilding contract. In shipbuilding contracts there are two types of guarantees issued – (i) refund guarantees, and (ii) payment guarantees. When payment is due under a guarantee, irrespective of if it is a refund guarantee or a payment guarantee, is dependent upon if it is a traditional guarantee type, or an on-demand bond type. The aim of this thesis is to examine the distinction between the true guarantee type and the on-demand bond type under English law. At the same time the objective of this thesis is to analyse the legal literature and the English common law cases to understand how a refund guarantee issued in shipbuilding contracts is conceived by the English courts to be either an on-demand bond or true guarantee. What are true guarantees and on-demand bonds? What are the distinguishing characteristics of each type of guarantee?